**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

**x****          ****Quarterly reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934For the quarterly period ended March 31, 2008.**

** **

**OR**

** **

**o****             ****Transitionreport pursuant to section 13 or 15(d) of the Securities Exchange Act of1934Commission file number 001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                     | ** ** | **63 0780521**      |
|--------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                  |       | (I.R.S. Employer    |
| incorporation or organization)                   |       | Identification No.) |
|                                             |       |                |
| **4909 SE International Way,  Portland, Oregon** | ** ** | **97222-4679**      |
| (Address of principal executive offices)         |       | (Zip Code)          |

 

**(503) 653-8881**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 
|   | Yes x | No o |
|--------|------------|-----------|

 

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

 

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

 

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

 

The number of shares outstanding of $0.01 par value commonstock as of April 28, 2008 was 47,385,482 shares.

 

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| ** **   | ** **                                                                                           | ** **                                                                                                                  | ** ** | **Page** |
|--------------|------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------|
|         |                                                                                                 |                                                                                                                        |       |     |
| Part I  |                                                                                                 | Financial Information                                                                                                       |       |     |
|         |                                                                                                 |                                                                                                                        |
|         | Item 1.  Consolidated Financial Statements                                                           |                                                                                                                        |       |
|         |                                                                                                 |                                                                                                                        |
|         |                                                                                                 | Unaudited  Consolidated Statements of Income  Three months ended March 31, 2008 and 2007                               |       | 3        |
|         |                                                                                                 |                                                                                                                        |       |     |
|         |                                                                                                 | Unaudited  Consolidated Balance Sheets  March 31, 2008 and December 31, 2007                                      |       | 4        |
|         |                                                                                                 |                                                                                                                        |       |     |
|         |                                                                                                 | Unaudited  Consolidated Statements of Cash Flows  Three months ended March 31, 2008 and 2007                           |       | 5        |
|         |                                                                                                 |                                                                                                                        |       |     |
|         |                                                                                                 | Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit)  Three months ended March 31, 2008 |       | 6        |
|         |                                                                                                 |                                                                                                                        |       |     |
|         |                                                                                                 | Notes to  Unaudited Consolidated Financial Statements                                                                       |       | 7        |
|         |                                                                                                 |                                                                                                                        |
|         | Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                                        | 18         |
|         |                                                                                                 |                                                                                                                        |       |     |
|         | Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                  |                                                                                                                        | 25         |
|         |                                                                                                 |                                                                                                                        |       |     |
|         | Item 4. Controls and Procedures                                                                      |                                                                                                                        | 25         |
|         |                                                                                                 |                                                                                                                        |
| Part II |                                                                                                 | Other Information                                                                                                           |       |     |
|         |                                                                                                 |                                                                                                                        |
|         | Item 6.  Exhibits                                                                                    |                                                                                                                        | 26         |
|         |                                                                                                 |                                                                                                                        |
| Signatures   |                                                                                                 | 27                                                                                                                          |
|              |                                                                                                      |                                                                                                                             |            |          |  |  |

 

2

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** **

**PART I       FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                                            |       |                                             |       |   |   |
| Sales                                                                           |       | $                                                | 133,207    |   | $ | 118,316 |   |
| Cost of sales                                                                   |       | 90,729                                           |       | 78,261 |   |
| Gross profit                                                                    |       | 42,478                                           |       | 40,055 |   |
| Selling, general and administrative  expenses                                   |       | 25,809                                           |       | 23,860 |   |
| Operating income                                                                |       | 16,669                                           |       | 16,195 |   |
| Interest income                                                                 |       | 342                                              |       | 219 |   |
| Interest expense                                                                |       | (6,812                                           | )          | (8,276 | ) |
| Other income, net                                                               |       | 87                                               |       | 72 |   |
| Income from continuing operations before  income taxes                          |       | 10,286                                           |       | 8,210 |   |
| Provision for income taxes                                                      |       | 3,397                                            |       | 3,046 |   |
| Income from continuing operations                                               |       | 6,889                                            |       | 5,164 |   |
| Discontinued operations:                                                        |       |                                             |       |   |   |
| Loss before taxes from discontinued  operations                                 |       | (85                                              | )          | (806 | ) |
| Income tax benefit                                                              |       | (32                                              | )          | (308 | ) |
| Loss from discontinued operations                                               |       | (53                                              | )          | (498 | ) |
| Net income                                                                      |       | $                                                | 6,836      |   | $ | 4,666 |   |
|                                                                            |       |                                             |       |   |   |
| Basic income (loss) per share:                                                  |       |                                             |       |   |   |
| Continuing operations                                                           |       | $                                                | 0.14       |   | $ | 0.11 |   |
| Discontinued operations                                                         |       | —                                           |       | (0.01 | ) |
| Net income                                                                      |       | $                                                | 0.14       |   | $ | 0.10 |   |
| ** **                                                                      | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Diluted income (loss) per share:                                                |       |                                             |       |   |   |
| Continuing operations                                                           |       | $                                                | 0.14       |   | $ | 0.11 |   |
| Discontinued operations                                                         |       | —                                           |       | (0.01 | ) |
| Net income                                                                      |       | $                                                | 0.14       |   | $ | 0.10 |   |
|                                                                            |       |                                             |       |   |   |
| Weighted average shares used in per share  calculations:                        |       |                                             |       |   |   |
| Basic                                                                           |       | 47,303                                           |       | 47,273 |   |
| Diluted                                                                         |       | 48,096                                           |       | 48,015 |   |
|                                                                            |       |                                             |       |   |   |

 

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

 

3

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**UNAUDITED CONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                        | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                          |       |               |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                     |       | $                  | 42,455     |                  | $          | 57,589 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $2,408 and $2,181, respectively                               |       | 73,374             |       | 67,818                |       |
| Inventories, net                                                                                                              |       | 75,370             |       | 70,273                |       |
| Deferred income taxes                                                                                                         |       | 6,000              |       | 5,536                 |       |
| Other current assets                                                                                                          |       | 15,490             |       | 16,393                |       |
| Total current assets                                                                                                          |       | 212,689            |       | 217,609               |       |
| Property, plant and equipment, net                                                                                            |       | 90,684             |       | 89,729                |       |
| Goodwill                                                                                                                      |       | 48,984             |       | 48,984                |       |
| Deferred financing costs                                                                                                      |       | 9,693              |       | 10,698                |       |
| Deferred income taxes                                                                                                         |       | 15,289             |       | 14,849                |       |
| Other assets                                                                                                                  |       | 30,141             |       | 30,080                |       |
| Total Assets                                                                                                                  |       | $                  | 407,480    |                  | $          | 411,949 |   |
|                                                                                                                          |       |               |       |                  |       |
| **Liabilities and Stockholders’ Deficit**                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                          |       |               |       |                  |       |
| Current maturities of long-term debt                                                                                          |       | $                  | 1,242      |                  | $          | 1,242 |   |
| Accounts payable                                                                                                              |       | 26,459             |       | 29,799                |       |
| Accrued expenses                                                                                                              |       | 46,296             |       | 57,447                |       |
| Deferred income taxes                                                                                                         |       | 571                |       | 533                   |       |
| Total current liabilities                                                                                                     |       | 74,568             |       | 89,021                |       |
| Long-term debt, excluding current  maturities                                                                                 |       | 295,448            |       | 295,758               |       |
| Employee benefit obligations                                                                                                  |       | 48,784             |       | 48,948                |       |
| Other liabilities                                                                                                             |       | 32,486             |       | 32,368                |       |
| Total liabilities                                                                                                             |       | 451,286            |       | 466,095               |       |
| Commitments and contingent liabilities                                                                                        |       |               |       |                  |       |
| Stockholders’ equity (deficit):                                                                                          |       |               |       |                  |       |
| Common stock: par value $0.01 per share,  100,000,000 shares authorized, 47,332,749 and 47,291,647 outstanding,  respectively |       | 473                |       | 473                   |       |
| Capital in excess of par value of stock                                                                                       |       | 577,559            |       | 575,595               |       |
| Accumulated deficit                                                                                                           |       | (611,311           | )          | (618,147              | )          |
| Accumulated other comprehensive loss                                                                                          |       | (10,527            | )          | (12,067               | )          |
| Total stockholders’ deficit                                                                                              |       | (43,806            | )          | (54,146               | )          |
| Total Liabilities and Stockholders’ Deficit                                                                              |       | $                  | 407,480    |                  | $          | 411,949 |   |

 

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

 

4

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**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                  | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                                             |       |                                                 |       |   |   |
| Income from continuing operations                                                                     |       | $                                                    | 6,889      |   | $ | 5,164 |   |
| Adjustments to reconcile income from  continuing operations to net cash used in operating activities: |       |                                                 |       |   |   |
| Depreciation of property, plant and  equipment                                                        |       | 4,964                                                |       | 3,958 |   |
| Amortization, stock compensation and other  non-cash charges                                          |       | 2,779                                                |       | 2,747 |   |
| Excess tax benefit from share-based  compensation                                                     |       | (76                                                  | )          | (39 | ) |
| Deferred income taxes                                                                                 |       | 15                                                   |       | 641 |   |
| Loss on disposal of property, plant, and  equipment                                                   |       | 4                                                    |       | 3 |   |
| Changes in assets and liabilities:                                                                    |       |                                                 |       |   |   |
| (Increase) decrease in accounts receivable                                                            |       | (8,662                                               | )          | 2,982 |   |
| (Increase) decrease in inventories                                                                    |       | (5,097                                               | )          | (10,553 | ) |
| (Increase) decrease in other assets                                                                   |       | 757                                                  |       | 1,877 |   |
| Increase (decrease) in accounts payable                                                               |       | (3,340                                               | )          | 126 |   |
| Increase (decrease) in accrued expenses                                                               |       | (9,675                                               | )          | (10,508 | ) |
| Increase (decrease) in other liabilities                                                              |       | 1,496                                                |       | (1,230 | ) |
| Discontinued operations                                                                               |       | (907                                                 | )          | (7,722 | ) |
| Net cash used in operating activities                                                                 |       | (10,853                                              | )          | (12,554 | ) |
|                                                                                                  |       |                                                 |       |   |   |
| **Cash flows from investing activities:**                                                             |       |                                                 |       |   |   |
| Proceeds from sale of property, plant and  equipment                                                  |       | —                                               |       | 3 |   |
| Purchases of property, plant and equipment                                                            |       | (5,886                                               | )          | (5,272 | ) |
| Discontinued operations                                                                               |       | 1,725                                                |       | (228 | ) |
| Net cash used in investing activities                                                                 |       | (4,161                                               | )          | (5,497 | ) |
|                                                                                                  |       |                                                 |       |   |   |
| **Cash flows from financing activities:**                                                             |       |                                                 |       |   |   |
| Net borrowings under revolving credit  facility                                                       |       | —                                               |       | 17,025 |   |
| Repayment of term loan principal                                                                      |       | (310                                                 | )          | (375 | ) |
| Excess tax benefit from share-based  compensation                                                     |       | 76                                                   |       | 39 |   |
| Proceeds from exercise of stock options                                                               |       | 114                                                  |       | 139 |   |
| Net cash (used in) provided by financing  activities                                                  |       | (120                                                 | )          | 16,828 |   |
|                                                                                                  |       |                                                 |       |   |   |
| Net decrease in cash and cash equivalents                                                             |       | (15,134                                              | )          | (1,223 | ) |
| Cash and cash equivalents at beginning of  period                                                     |       | 57,589                                               |       | 27,636 |   |
| Cash and cash equivalents at end of period                                                            |       | $                                                    | 42,455     |   | $ | 26,413 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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

**BlountInternational, Inc. and Subsidiaries**

** **
| **(Amounts in thousands)**                           | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
|                                                           |       |       |       |              |       |                                     |       |                     |       |                                                  |       |      |       |
| Balance December 31, 2007                                 |       | 47,292     |       | $                 | 473        |                                     | $          | 575,595                  |       | $                                                     | (618,147   | )         | $          | (12,067 | ) | $ | (54,146 | ) |
|                                                           |       |       |       |              |       |                                     |       |                     |       |                                                  |       |      |       |
| Net income                                                     |       |       |       |              |       |                                     |       | 6,836                    |       |                                                  |       | 6,836     |       |
| Other comprehensive income (loss):                             |       |       |       |              |       |                                     |       |                     |       |                                                  |       |      |       |
| Foreign currency translation adjustment                        |       |       |       |              |       |                                     |       |                     |       | 1,577                                                 |       | 1,577     |       |
| Unrealized losses                                              |       |       |       |              |       |                                     |       |                     |       | (36                                                   | )          | (36       | )          |
| Pension liability adjustment                                   |       |       |       |              |       |                                     |       |                     |       | (1                                                    | )          | (1        | )          |
| Comprehensive income, net                                      |       |       |       |              |       |                                     |       |                     |       |                                                  |       | 8,376     |       |
| Stock options, stock appreciation rights  and restricted stock |       | 41         |       |              |       | 191                                      |       |                     |       |                                                  |       | 191       |       |
| Stock compensation expense                                     |       |       |       |              |       | 1,773                                    |       |                     |       |                                                  |       | 1,773     |       |
| Balance March 31, 2008                                    |       | 47,333     |       | $                 | 473        |                                     | $          | 577,559                  |       | $                                                     | (611,311   | )         | $          | (10,527 | ) | $ | (43,806 | ) |

 

Other comprehensive income was $1.5 million for the threemonths ended March 31, 2008 and $39 thousand for the three months ended March 31,2007.

 

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

 

6

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**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.  All significant intercompany balances andtransactions have been eliminated.  Inthe opinion 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, 2008 andfor the three months ended March 31, 2008 and 2007 has been prepared bythe Company, without audit, pursuant to the rules and regulations of theUnited States Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations. The December 31,2007 consolidated balance sheet was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America. These consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2007.

 

***Use of Estimates.******* The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires that management make certain estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities as of the dates of the financial statements,as well as the reported amounts of revenues and expenses during the reportingperiods.  The Company bases its estimateson various assumptions that are believed to be reasonable 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 period presentation.  Such reclassifications have no effect onpreviously reported net income or net stockholders’ deficit.

 

**NOTE 2: DISCONTINUED OPERATIONS**

 

***Discontinued Forestry Division.***  On November 5, 2007, we sold ourForestry Division, which constituted the majority of our Industrial and PowerEquipment segment, to Caterpillar Forest Products Inc., a subsidiary ofCaterpillar Inc., for gross proceeds of $79.1 million.  Under the terms of the related purchaseagreement, $8.8 million of the gross proceeds are initially held in escrow forup to three years from the transaction date. We recognized a pretax gain of $26.0 million net of related transactionexpenses on the sale in 2007.  Prior toits treatment as discontinued operations, this division accounted for 18% ofour consolidated sales for the first three months of 2007.  The Forestry Division is reported asdiscontinued operations for all periods presented.  This division was headquartered in Zebulon,North Carolina and manufactured and marketed timber harvesting and handlingequipment and industrial tractors and loaders. The division had manufacturing facilities in Owatonna, Minnesota;Prentice, Wisconsin; and Söderhamn, Sweden.  The sale included the disposition of theForestry Division’s recorded goodwill in the amount of $22.9 million.  The Company retained certain liabilitiesrelated to the business, as well as an idle manufacturing facility located inMenominee, Michigan.  In December 2007,the land and building in Menominee, Michigan were sold for net cash proceeds of$0.5 million.

 

7

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Discontinued operations are summarized as follows:

 
| ** **                                                | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Sales                                                     |       | $                                                | —     |   | $ | 26,252 |   |
| Operating loss before taxes from  discontinued operations |       | (85                                              | )          | (806 | ) |
| Income tax benefit                                        |       | (32                                              | )          | (308 | ) |
| Loss from discontinued operations                         |       | $                                                | (53        | ) | $ | (498 | ) |

 

**NOTE 3: INVENTORIES, NET**

 

Inventories consisted of the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Raw materials and supplies           |       | $                  | 9,674      |                  | $          | 9,297 |   |
| Work in progress                     |       | 13,341             |       | 14,701                |       |
| Finished goods                       |       | 52,355             |       | 46,275                |       |
| Total inventories                    |       | $                  | 75,370     |                  | $          | 70,273 |   |

 

**NOTE 4: LONG TERM DEBT**

 

Long-term debt consisted of the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Revolving credit facility            |       | $                  | —     |                  | $          | — |   |
| Term loans                           |       |               | 121,690    |                  |       | 122,000 |   |
| 8 7/8% senior subordinated notes     |       | 175,000            |       | 175,000               |       |
| Total debt                           |       | 296,690            |       | 297,000               |       |
| Less current maturities              |       | (1,242             | )          | (1,242                | )          |
| Long-term debt                       |       | $                  | 295,448    |                  | $          | 295,758 |   |

 

The weighted average interest rate on outstanding debt as of March 31, 2008 was 7.23%.

 

**8 7/8% Senior Subordinated Notes.**  The Company has one registered debt security,the 8 7/8% senior subordinated notes.  Theinterest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at any time after August 1, 2008 at the option of the Company,in whole or in part, at redemption prices of 104.438% through July 31, 2009;102.219% from August 1, 2009 through July 31, 2010; and at 100.000% August 1,2010 and thereafter.  These notes areissued by the Company’s wholly-owned subsidiary, Blount, Inc., and arefully and unconditionally, jointly and severally, guaranteed by the Company andall of its domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8%senior subordinated notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all of itsdomestic subsidiaries guarantee these 8 7/8% senior subordinated notes, none ofBlount’s existing foreign subsidiaries (“non-guarantor subsidiaries”) guaranteethese notes.  See also Note 13.

 

**Senior Credit Facilities.** The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as Agent on May 15, 2003.  The agreement was amended and restated on August 9,2004, and has had several subsequent amendments.  The senior credit facilities consist of arevolving credit facility and a term loan facility.

 

8

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The revolving credit facility provides for total available borrowingsup to $150.0 million, reduced by outstanding letters of credit and furtherrestricted by a specific leverage ratio and first lien credit facilitiesleverage ratio. As of March 31,2008, the Company had the ability to borrow an additional $145.2 million underthe terms of the revolving credit agreement. The revolving credit facilitybears interest at the LIBOR rate plus 1.75%, or at the prime rate, depending onthe type of loan, and matures on August 9, 2009.  Interest is payable monthly in arrears on anyprime rate borrowing and at the individual maturity dates for any LIBOR-basedborrowing.  Any outstanding principal isdue 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 on August 9,2010.  The term loan facility requiresquarterly payments of $0.3 million, with a final payment of $118.6 million dueon the maturity date.  Once repaid,principal under the term loan facility may not be re-borrowed by the Company.

 

The amended and restated senior credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenants relating, among other categories, toinvestments, loans and advances, indebtedness, and the sale of stock orassets.  The Company was in compliancewith all debt covenants as of March 31, 2008.

 

The amended and restated senior credit facilities may be prepaid at anytime.  There can also be additionalmandatory repayment requirements related to the sale of Company assets, theissuance of stock under certain circumstances, or upon the Company’s annualgeneration of excess cash flow, as determined under the credit agreement.

 

Blount International, Inc. and all of its domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’sobligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized bya first priority security interest in substantially all of the assets of Blount, Inc.and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock held by Blount International, Inc. and all of the stock ofdomestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of each of itsnon-domestic subsidiaries as additional collateral.

 

**NOTE 5: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS**

 

The Company sponsors defined benefit pensionplans covering substantially all of its employees in the U.S., Canada andBelgium.  The Company also sponsorsvarious other post-employment medical and benefit plans covering many of itscurrent and former employees.  Thecomponents of net periodic benefit cost for these plans, including amountsrecognized both in continuing and discontinued operations, are as follows:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                            | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                         |       | $                                                    | 996        |   | $ | 907 |   | $ | 72 |   | $ | 95 |   |
| Interest cost                        |       | 2,740                                                |       | 2,569 |   | 539 |   | 479 |   |
| Expected return on plan assets       |       | (3,565                                               | )          | (3,218 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (2                                                   | )          | (3 | ) | 2 |   | 2 |   |
| Amortization of net actuarial losses |       | 255                                                  |       | 384 |   | 222 |   | 188 |   |
| Total net periodic benefit cost      |       | $                                                    | 424        |   | $ | 639 |   | $ | 835 |   | $ | 764 |   |

 

As of December 31, 2006, the Companyimplemented a redesign of its domestic retirement plans, includinga freeze of its defined benefit pension plan and the associated nonqualifiedplan.  Effective January 1, 2007,employees who currently participate in the plans ceased accruing benefits andnew employees are not eligible to participate. All retirement benefits accrued up to the time of the freeze werepreserved.  The Company expects tocontribute a total of approximately $3 million to $4 million to its fundedpension plans during 2008.

 

9

----

 

The Company also sponsors a defined contribution 401(k) plancovering most employees in the U.S.  Inconjunction with the redesign of its domestic retirement plans, the definedcontribution 401 (k) plan was amended to provide for an additional annualCompany contribution of 3%, 4% or 5% of base compensation, depending upon theparticipant’s years of service.  The newcontribution is made whether or not the employee contributes to the plan.  In addition, the Company intends to continueto match employee contributions to 401(k) accounts up to 4.5% of basecompensation.

 

**NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES**

 

Guarantees and other commercial commitments are summarized inthe following table:

 
| ** **                                         | ** ** | **March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2008**           | ** ** |
| Warranty reserve                                   |       | $                  | 145        |   |
| Letters of credit outstanding                      |       | 4,800              |       |
| Third party financing agreements (1)               |       | 1,630              |       |
| Total guarantees and other commercial  commitments |       | $                  | 6,575      |   |

----

(1)  Represents contingentguarantees under various third party financing agreements.

 

Changes in the warranty reserve are as follows:

 
| ** **                           | ** ** | **March 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**           | ** ** |
| Balance at December 31, 2007    |       | $                  | 160        |   |
| Accrued warranty expense             |       | 87                 |       |
| Payments made (in cash or in-kind)   |       | (102               | )          |
| Balance at March 31, 2008       |       | $                  | 145        |   |

 

The warranty reserve is included in accrued expenses on theconsolidated balance sheet.  In additionto these amounts, the Company also guarantees certain debt of its subsidiaries(see Notes 4 and 13).

 

The Company is a defendant in a number of product liabilitylawsuits involving both continuing operations and certain discontinuedoperations, 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, includingsuits concerning commercial contracts, employee matters and intellectualproperty rights.  In some instances, theCompany is the plaintiff and is seeking recovery of damages. In others, theCompany is a defendant against whom 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 does notaccrue a charge to income for a matter deemed by management and its counsel tobe a reasonably possible loss contingency in light of all of the currentcircumstances.

 

10

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**NOTE 7: EARNINGS PER SHARE DATA**

 

Shares used in thedenominators of the basic and diluted earnings per share computations were asfollows:

 
| ** **                                                                                                          | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Shares in thousands)**                                                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Shares for basic per share computation –  weighted average common shares outstanding                           |       | 47,303                                           |       | 47,273 |   |
| Dilutive effect of common stock equivalents                                                                         |       | 793                                              |       | 742 |   |
| Shares for diluted per share computation                                                                            |       | 48,096                                           |       | 48,015 |   |
| Options and stock appreciation rights  excluded from computation as anti-dilutive because they are out-of-the-money |       | 2,101                                            |       | 1,766 |   |

 

**NOTE 8: STOCK-BASED COMPENSATION**

 

The Company accounts for stock-based compensation inaccordance with Statement of Financial Accounting Standards (“FAS”) No. 123(R),‘‘Share-Based Payment’’ (“FAS No. 123(R)”).  The fair value of options and StockAppreciation Rights (“SARs”) was estimated on the respective grant dates usingthe Black-Scholes option valuation model. The estimated average life of SARswas derived from the “simplified” method described in SEC Staff AccountingBulletin No. 107 (“SAB 107”).  Therisk-free interest rate is based on the implied yield available on U.S.Treasury zero-coupon issues with the remaining term equal to the averagelife.  The expected volatility factorsused are based on the historical volatility of the Company’s stock.  The expected dividend yield is based onhistorical information and management estimate.

 

The SARs, restrictedstock and Restricted Stock Units (“RSUs”) generally vest ratably over a threeyear period.  Under certain conditions,stock options, SARs, RSUs and restricted stock granted by the Company areeligible for continued vesting after retirement of the employee.  FAS No. 123(R) clarifies that thefair value of such stock-based compensation should be expensed based on anaccelerated service period, or immediately, rather than ratably over thevesting period stated in the grant, for employees who are retirement eligibleprior to the completion of the vesting period.

 

The Company made thefollowing awards during the periods indicated:

 
| ** **                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Stock appreciation rights granted                                                    |       | 305                                              |       | 378 |   |
| Shares of restricted stock granted                                                   |       | 54                                               |       | 45 |   |
| Restricted stock units granted                                                       |       | 118                                              |       | 136 |   |
|                                                                                 |       |                                             |       |   |   |
| Aggregate fair value of SARs granted                                                 |       | $                                                | 1,259      |   | $ | 1,605 |   |
| Aggregate fair value of restricted stock  and RSUs Granted                           |       | $                                                | 2,052      |   | $ | 2,138 |   |
| Effect of accelerated expense recognition  due to grantee retirement-eligible status |       | $                                                | 1,114      |   | $ | 1,378 |   |

 

11

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The following assumptions were used to estimate the fairvalue of SARs:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Estimated average life                 |       | 6 years                                              |       | 6 years |   |
| Risk-free interest rate                |       | 2.7                                                  | %          | 4.5 | % |
| Expected volatility                    |       | 32.4                                                 | %          | 29.1%-29.3 | % |
| Weighted average volatility            |       | 32.4                                                 | %          | 29.3 | % |
| Dividend yield                         |       | 0.0                                                  | %          | 0.0 | % |
| Weighted average grant date fair value |       | $                                                    | 4.37       |   | $ | 4.50 |   |
|                                        |            |                                                      |            |  |  |  |  |

 

As of March 31, 2008, the total unrecognized stock-basedcompensation expense related to previously granted awards was $3.3 million. Theweighted-average period over which this expense is expected to be recognized is1.3 years.  The Company’s policy upon theexercise of options, restricted stock awards, RSUs or SARs has been to issuenew shares into the market place.

 

**NOTE 9: SEGMENT INFORMATION**

 

The Company identifies operating segments primarily based onmanagement responsibility. The Company has one operating and reportablesegment: Outdoor Products.  The corporateand other category includes centralized administrative functions and a gearcomponents manufacturing business.  Seealso Note 2 regarding the disposition of the primary operating unit making upthe Company’s former Industrial and Power Equipment segment. Outdoor Productsmanufactures and markets cutting chain, bars, sprockets and accessories forchainsaw use, concrete-cutting equipment, lawnmower blades and accessories foryard care equipment.

 

The accounting policies of the segment 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)**      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Sales:**                                |       |                                             |       |   |   |
| Outdoor Products                          |       | $                                                | 126,227    |   | $ | 110,867 |   |
| Other                                     |       | 6,980                                            |       | 7,449 |   |
| Total sales                               |       | $                                                | 133,207    |   | $ | 118,316 |   |
|                                      |       |                                             |       |   |   |
| **Operating income:**                     |       |                                             |       |   |   |
| Outdoor Products                          |       | $                                                | 21,739     |   | $ | 21,070 |   |
| Other and central administration expenses |       | (5,070                                           | )          | (4,875 | ) |
| Operating income                          |       | $                                                | 16,669     |   | $ | 16,195 |   |

 

**NOTE 10: SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Interest paid                        |       | $                                                | 9,752      |   | $ | 11,000 |   |
| Income taxes paid, net               |       | 2,835                                            |       | 2,639 |   |
|                                      |            |                                                  |            |  |  |  |  |

 

12

----

 

**NOTE 11: RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issued FAS No. 157, “Fair ValueMeasurements” (“FAS No. 157”).  FAS No. 157defines 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 Company adoptedFAS No. 157 for financial assets and liabilities on January 1, 2008,with no immediate effect on the consolidated financial statements.  As permitted by FASB Staff Position No. FAS157-2, “Effective Date of FASB Statement No. 157”, the Company elected todefer the adoption of SFAS No. 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis.  In February 2008, FASB issued StaffPosition No. FAS 157-1, “Application of FASB Statement No. 157 toFASB Statement No. 13 and Other Accounting Pronouncements That AddressFair Value Measurements for Purposes of Lease Classification or Measurementunder Statement 13” (“FSP No. FAS 157-1”). The Company also adopted FSP No. FAS 157-1 on January 1, 2008,with no immediate effect on the consolidated financial statements.

 

In February 2007, the FASB issued FAS No. 159,“Fair Value Option for Financial Assets and Financial Liabilities-Including anamendment of FASB Statement No. 115” (“FAS No. 159”).  FAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value.  The Company chose not to elect the fair valueoption for its financial assets and liabilities existing at January 1,2008 and did not elect the fair value option on financial assets andliabilities transacted in the three months ended March 31, 2008.  Therefore, the adoption of  FAS No. 159 on January 1, 2008, hadno immediate effect on the Company’s consolidated financial statements.

 

In December 2007,the FASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”).  FAS No. 141(R) replaces FAS No. 141,Business Combinations, and improves the relevance, representationalfaithfulness, and comparability of the information that a reporting entityprovides in its financial reports about a business combination and its effects.  The provisions of FAS No. 141(R) areeffective for the Company on January 1, 2009.  The impact of adopting FAS No. 141(R) willdepend on the nature, terms and size of business combinations completed afterthe effective date.

 

In December 2007,the FASB issued FAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements” (“FAS No. 160”). FAS No 160 amends Accounting Research Bulletin No. 51, ConsolidatedFinancial Statements, and improves the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements for those entities that have anoutstanding non-controlling interest in one or more subsidiaries or thatdeconsolidate a subsidiary.  Theprovisions of FAS No. 160 are effective for the Company on January 1,2009.    Earlier adoption isprohibited.  The adoption of FAS No. 160is not anticipated to have a material impact on the financial position andresults of operations of the Company.

 

In March 2008, the FASB issued FAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof FASB Statement No. 133” (“FAS No. 161”).  FAS No. 161requires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting. The provisions of FAS No. 161 are effective for the Company on January 1,2009.

 

**NOTE 12: ACQUISITION OF CARLTON HOLDINGS, INC.**

 

On May 2, 2008, the Company acquired all of the votingand non-voting stock of Carlton Holdings, Inc. (“Carlton”) from itsprivate shareholders.  Blount paid $64.7million in cash for the stock, primarily funded through the Company’s revolvingcredit facility.  Carlton is a manufacturerof saw chain.  Carlton employsapproximately 400 employees, most at its Oregon manufacturing facility, anddistributes the majority of its products to international markets.  Carlton’s sales, operating income anddepreciation and amortization for the last twelve months were approximately$57.1 million, $4.9 million and $2.2 million, respectively.

 

**NOTE 13: CONSOLIDATING FINANCIAL INFORMATION**

 

SeeNote 4 for a discussion of the Company’s guarantor subsidiaries.  The following consolidating financialinformation sets forth condensed consolidating statements of operations,balance sheets and statements of cash flows of Blount International, Inc.,Blount, Inc., the guarantor subsidiaries and the non-guarantorsubsidiaries.

 

13

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**Condensed Consolidating Statement of OperationsInformation**

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended March 31, 2008**                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |              | $          | 94,683                      |       | $                                 | 10,444     |             | $          | 61,941           |       | $ | (33,861 | ) | $ | 133,207 |   |
| Cost of sales                                                 |       | —                           |       | 68,490            |       | 8,880                       |       | 46,387                            |       | (33,028          | )          | 90,729           |       |
| Gross profit                                                  |       | —                           |       | 26,193            |       | 1,564                       |       | 15,554                            |       | (833             | )          | 42,478           |       |
| Selling, general and administrative  expenses                 |       | —                           |       | 15,976            |       | 1,013                       |       | 8,820                             |       | —           |       | 25,809           |       |
| Operating income                                              |       | —                           |       | 10,217            |       | 551                         |       | 6,734                             |       | (833             | )          | 16,669           |       |
| Other, net                                                    |       | (4,550                           | )          | (1,788            | )          | 136                         |       | (181                              | )          | —           |       | (6,383           | )          |
| Income (loss) from continuing operations  before income taxes |       | (4,550                           | )          | 8,429             |       | 687                         |       | 6,553                             |       | (833             | )          | 10,286           |       |
| Provision (benefit) for income taxes                          |       | (2,162                           | )          | 3,754             |       | 326                         |       | 1,479                             |       | —           |       | 3,397            |       |
| Income (loss) from continuing operations                      |       | (2,388                           | )          | 4,675             |       | 361                         |       | 5,074                             |       | (833             | )          | 6,889            |       |
| Loss from discontinued operations                             |       | —                           |       | (53               | )          | —                      |       | —                            |       | —           |       | (53              | )          |
| Equity in earnings of affiliated companies                    |       | 9,224                            |       | 4,602             |       | 25                          |       | —                            |       | (13,851          | )          | —           |       |
| Net income                                                    |       | $                                | 6,836      |              | $          | 9,224                       |       | $                                 | 386        |             | $          | 5,074            |       | $ | (14,684 | ) | $ | 6,836 |   |

** **
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| **Three Months Ended March 31, 2007**                    |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |              | $          | 84,592                      |       | $                                       | 11,774     |             | $          | 74,799           |       | $ | (52,849 | ) | $ | 118,316 |   |
| Cost of sales                                                 |       | —                           |       | 61,321            |       | 9,728                       |       | 59,210                                  |       | (51,998          | )          | 78,261           |       |
| Gross profit                                                  |       | —                           |       | 23,271            |       | 2,046                       |       | 15,589                                  |       | (851             | )          | 40,055           |       |
| Selling, general and administrative  expenses                 |       | —                           |       | 15,159            |       | 1,129                       |       | 7,572                                   |       | —           |       | 23,860           |       |
| Operating income                                              |       | —                           |       | 8,112             |       | 917                         |       | 8,017                                   |       | (851             | )          | 16,195           |       |
| Other, net                                                    |       | (5,859                           | )          | (2,509            | )          | 144                         |       | 239                                     |       | —           |       | (7,985           | )          |
| Income (loss) from continuing operations  before income taxes |       | (5,859                           | )          | 5,603             |       | 1,061                       |       | 8,256                                   |       | (851             | )          | 8,210            |       |
| Provision (benefit) for income taxes                          |       | (2,168                           | )          | 2,741             |       | 399                         |       | 2,074                                   |       | —           |       | 3,046            |       |
| Income (loss) from continuing operations                      |       | (3,691                           | )          | 2,862             |       | 662                         |       | 6,182                                   |       | (851             | )          | 5,164            |       |
| Income (loss) from discontinued operations                    |       | —                           |       | (699              | )          | (34                         | )          | 235                                     |       | —           |       | (498             | )          |
| Equity in earnings of affiliated companies                    |       | 8,357                            |       | 6,194             |       | 68                          |       | —                                  |       | (14,619          | )          | —           |       |
| Net income                                                    |       | $                                | 4,666      |              | $          | 8,357                       |       | $                                       | 696        |             | $          | 6,417            |       | $ | (15,470 | ) | $ | 4,666 |   |

 

14

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**Condensed Consolidating Balance Sheet Information**

 
| **(Amounts in thousands)**                       | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **March 31, 2008**                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| ** **                                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $                                | —     |              | $          | 1,585                       |       | $                                 | —     |             | $          | 40,870           |       | $ | — |   | $ | 42,455 |   |
| Accounts receivable, net                                   |       | —                           |       | 35,193            |       | 5,683                       |       | 32,498                            |       | —           |       | 73,374           |       |
| Intercompany receivables                                   |       | —                           |       | 174,642           |       | 81,665                      |       | 11,035                            |       | (267,342         | )          | —           |       |
| Inventories                                                |       | —                           |       | 45,985            |       | 7,131                       |       | 23,434                            |       | (1,180           | )          | 75,370           |       |
| Other current assets                                       |       | —                           |       | 12,906            |       | 190                         |       | 8,394                             |       | —           |       | 21,490           |       |
| Total current assets                                       |       | —                           |       | 270,311           |       | 94,669                      |       | 116,231                           |       | (268,522         | )          | 212,689          |       |
| Investments in affiliated companies                        |       | 224,713                          |       | 250,464           |       | 827                         |       | —                            |       | (476,004         | )          | —           |       |
| Property, plant and equipment, net                         |       | —                           |       | 32,948            |       | 10,603                      |       | 47,133                            |       | —           |       | 90,684           |       |
| Goodwill and other assets                                  |       | —                           |       | 81,507            |       | 11,884                      |       | 12,632                            |       | (1,916           | )          | 104,107          |       |
| Total Assets                                               |       | $                                | 224,713    |              | $          | 635,230                     |       | $                                 | 117,983    |             | $          | 175,996          |       | $ | (746,442 | ) | $ | 407,480 |   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Current maturities of long-term debt                       |       | $                                | —     |              | $          | 1,242                       |       | $                                 | —     |             | $          | —           |       | $ | — |   | $ | 1,242 |   |
| Accounts payable                                           |       | —                           |       | 12,400            |       | 2,883                       |       | 11,176                            |       | —           |       | 26,459           |       |
| Intercompany payables                                      |       | 267,342                          |       | —            |       | —                      |       | —                            |       | (267,342         | )          | —           |       |
| Other current liabilities                                  |       | —                           |       | 29,851            |       | 3,333                       |       | 13,683                            |       | —           |       | 46,867           |       |
| Total current liabilities                                  |       | 267,342                          |       | 43,493            |       | 6,216                       |       | 24,859                            |       | (267,342         | )          | 74,568           |       |
| Long-term debt, excluding current  maturities              |       | —                           |       | 295,448           |       | —                      |       | —                            |       | —           |       | 295,448          |       |
| Other liabilities                                          |       | 1,177                            |       | 71,576            |       | —                      |       | 10,433                            |       | (1,916           | )          | 81,270           |       |
| Total liabilities                                          |       | 268,519                          |       | 410,517           |       | 6,216                       |       | 35,292                            |       | (269,258         | )          | 451,286          |       |
| Stockholders’ equity (deficit)                        |       | (43,806                          | )          | 224,713           |       | 111,767                     |       | 140,704                           |       | (477,184         | )          | (43,806          | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit) |       | $                                | 224,713    |              | $          | 635,230                     |       | $                                 | 117,983    |             | $          | 175,996          |       | $ | (746,442 | ) | $ | 407,480 |   |

 

15

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**Condensed Consolidating Balance Sheet Information**

 
| **(Amounts in thousands)**                       | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| **December 31, 2007**                                 |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $                                | —     |              | $          | 10,512                      |       | $                                       | 121        |             | $          | 46,956           |       | $ | — |   | $ | 57,589 |   |
| Accounts receivable, net                                   |       | —                           |       | 34,885            |       | 4,881                       |       | 28,052                                  |       | —           |       | 67,818           |       |
| Intercompany receivables                                   |       | —                           |       | 179,631           |       | 82,438                      |       | 4,838                                   |       | (266,907         | )          | —           |       |
| Inventories                                                |       | —                           |       | 41,877            |       | 6,860                       |       | 21,884                                  |       | (348             | )          | 70,273           |       |
| Other current assets                                       |       | —                           |       | 13,843            |       | 216                         |       | 7,870                                   |       | —           |       | 21,929           |       |
| Total current assets                                       |       | —                           |       | 280,748           |       | 94,516                      |       | 109,600                                 |       | (267,255         | )          | 217,609          |       |
| Investments in affiliated companies                        |       | 213,950                          |       | 243,745           |       | 852                         |       | 248                                     |       | (458,795         | )          | —           |       |
| Property, plant and equipment, net                         |       | —                           |       | 31,345            |       | 10,330                      |       | 48,054                                  |       | —           |       | 89,729           |       |
| Goodwill and other assets                                  |       | —                           |       | 82,046            |       | 11,893                      |       | 12,559                                  |       | (1,887           | )          | 104,611          |       |
| Total Assets                                               |       | $                                | 213,950    |              | $          | 637,884                     |       | $                                       | 117,591    |             | $          | 170,461          |       | $ | (727,937 | ) | $ | 411,949 |   |
|                                                       |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**   |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                                    |       |             |       |             |       |
| Current maturities of long-term debt                       |       | $                                | —     |              | $          | 1,242                       |       | $                                       | —     |             | $          | —           |       | $ | — |   | $ | 1,242 |   |
| Accounts payable                                           |       | —                           |       | 15,835            |       | 3,857                       |       | 10,107                                  |       | —           |       | 29,799           |       |
| Intercompany payables                                      |       | 266,907                          |       | —            |       | —                      |       | —                                  |       | (266,907         | )          | —           |       |
| Other current liabilities                                  |       | —                           |       | 39,264            |       | 3,568                       |       | 15,148                                  |       | —           |       | 57,980           |       |
| Total current liabilities                                  |       | 266,907                          |       | 56,341            |       | 7,425                       |       | 25,255                                  |       | (266,907         | )          | 89,021           |       |
| Long-term debt, excluding current  maturities              |       | —                           |       | 295,758           |       | —                      |       | —                                  |       | —           |       | 295,758          |       |
| Other liabilities                                          |       | 1,189                            |       | 71,835            |       | —                      |       | 10,179                                  |       | (1,887           | )          | 81,316           |       |
| Total liabilities                                          |       | 268,096                          |       | 423,934           |       | 7,425                       |       | 35,434                                  |       | (268,794         | )          | 466,095          |       |
| Stockholders equity (deficit)                              |       | (54,146                          | )          | 213,950           |       | 110,166                     |       | 135,027                                 |       | (459,143         | )          | (54,146          | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit) |       | $                                | 213,950    |              | $          | 637,884                     |       | $                                       | 117,591    |             | $          | 170,461          |       | $ | (727,937 | ) | $ | 411,949 |   |

 

16

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**Condensed Consolidating Cash Flows Information**

** **
| **(Amounts in thousands)**                  | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended March 31, 2008**            |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) operating  activities  |       | $                                | 2,151      |              | $          | (7,506                      | )          | $                                 | (91        | )                | $          | (5,407           | )          | $ | — |   | $ | (10,853 | ) |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Purchase of property, plant and equipment             |       | —                           |       | (3,676            | )          | (660                        | )          | (1,550                            | )          | —           |       | (5,886           | )          |
| Discontinued operations                               |       | —                           |       | 1,725             |       | —                      |       | —                            |       | —           |       | 1,725            |       |
| Net cash used in investing activities                 |       | —                           |       | (1,951            | )          | (660                        | )          | (1,550                            | )          | —           |       | (4,161           | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Repayment of term loan principal                      |       | —                           |       | (310              | )          | —                      |       | —                            |       | —           |       | (310             | )          |
| Advances from (to) affiliates                         |       | (2,341                           | )          | 840               |       | 630                         |       | 871                               |       | —           |       | —           |       |
| Other                                                 |       | 190                              |       | —            |       | —                      |       | —                            |       | —           |       | 190              |       |
| Net cash provided by (used in) financing  activities  |       | (2,151                           | )          | 530               |       | 630                         |       | 871                               |       | —           |       | (120             | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net decrease in cash and cash equivalents             |       | —                           |       | (8,927            | )          | (121                        | )          | (6,086                            | )          | —           |       | (15,134          | )          |
| Cash and cash equivalents at beginning of  period     |       | —                           |       | 10,512            |       | 121                         |       | 46,956                            |       | —           |       | 57,589           |       |
| Cash and cash equivalents at end of period            |       | $                                | —     |              | $          | 1,585                       |       | $                                 | —     |             | $          | 40,870           |       | $ | — |   | $ | 42,455 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **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             |       | —                           |       | (3,449            | )          | (274                        | )          | (1,549                            | )          | —           |       | (5,272           | )          |
| Discontinued operations                               |       | —                           |       | (191              | )          | —                      |       | (37                               | )          | —           |       | (228             | )          |
| 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 increase (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 |   |

 

17

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**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, 2008 (unaudited)compared to three months ended March 31, 2007 (unaudited).**

 

The table below provides a summary of results and the primarycontributing factors to the year over year change.

 
| ** **                                                           | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Amounts in millions)**                                  | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
|                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |
| Sales                                                                |       | $                                | 133.2      |       | $          | 118.3      |       | $          | 14.9       |   |   |   |   |   |
|                                                                 |       |                             |       |       |       |       |       | $          | 10.2       |   | Sales  volume |   |
|                                                                 |       |                             |       |       |       |       |       | 1.7        |       | Selling  price and mix |   |
|                                                                 |       |                             |       |       |       |       |       | 3.0        |       | Foreign  currency translation |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Gross profit                                                         |       | 42.5                             |       | 40.1       |       | 2.4        |       |       |       |   |   |
| *Gross margin*                                                       | * *   | *31.9*                           | *%*        | *33.9*     | %          |       |       | 5.0        |       | Sales  volume |   |
|                                                                 |       |                             |       |       |       |       |       | 1.7        |       | Selling  price and mix |   |
|                                                                 |       |                             |       |       |       |       |       | (3.6       | )          | Product  cost and mix |   |
|                                                                 |       |                             |       |       |       |       |       | 0.9        |       | Warehouse  consolidation costs |   |
|                                                                 |       |                             |       |       |       |       |       | (1.6       | )          | Foreign  currency translation |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Selling, general and administrative  expenses (“SG&A”) |       | 25.8                             |       | 23.9       |       | 1.9        |       |       |       |   |   |
|                                                                 |       |                             |       |       |       |       |       | 0.6        |       | Compensation  expense |   |
|                                                                 |       |                             |       |       |       |       |       | 0.9        |       | Severance  costs |   |
|                                                                 |       |                             |       |       |       |       |       | (0.8       | )          | Professional  services |   |
|                                                                 |       |                             |       |       |       |       |       | 1.2        |       | Foreign  currency translation |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Operating income                                                     |       | 16.7                             |       | 16.2       |       | 0.5        |       |       |       |   |   |
| *Operating margin*                                                   | * *   | *12.5*                           | *%*        | *13.7*     | %          |       |       | 2.4        |       | Increase  in gross profit |   |
|                                                                 |       |                             |       |       |       |       |       | (1.9       | )          | Increase  in SG&A |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Income from continuing operations                                    |       | 6.9                              |       | 5.2        |       | 1.7        |       |       |       |   |   |
|                                                                 |       |                             |       |       |       |       |       | 0.5        |       | Increase  in operating income |   |
|                                                                 |       |                             |       |       |       |       |       | 1.6        |       | Decrease  in net interest expense |   |
|                                                                 |       |                             |       |       |       |       |       | (0.4       | )          | Increase  in income tax provision |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Loss from discontinued operations                                    |       | (0.1                             | )          | (0.5       | )          | 0.4        |       |       |       |   |   |
|                                                                 |       |                             |       |       |       |       |       | 0.7        |       | Increase  in operating results |   |
|                                                                 |       |                             |       |       |       |       |       | (0.3       | )          | Decrease  in income tax benefit |   |
|                                                                 |       |                             |       |       |       |       |       |       |       |   |   |
| Net income                                                           |       | $                                | 6.8        |       | $          | 4.7        |       | $          | 2.1        |   |   |   |   |   |
|                                                                      |            |                                  |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

Sales in the three months ended March 31, 2008 increasedby $14.9 million (13%) from the same period in 2007.  This sales increase was primarily due toincreased sales volume, as well as price increases and the favorable effect oftranslation of foreign currency denominated sales transactions, given theweaker U.S. Dollar in comparison to 2007. The Outdoor Products segment experienced a $15.4 million (14%) increasein sales during the first quarter of 2008 compared to 2007, while sales of gearcomponents decreased $0.5 million (6%) during the same period.  International sales increased $12.7 million(17%) and domestic sales increased $2.1 million (5%).  The increase in 

 

18

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international sales reflected continued strength ininternational markets as well as the $3.0 million favorable impact frommovement in foreign currency exchange rates compared to 2007.  The increase in U.S. sales is attributed toincreased sales volume for chainsaw components and outdoor care products,partially offset by lower domestic sales of concrete cutting and gear-relatedproducts.

 

Consolidated order backlog at March 31, 2008 was $92.0million compared to $69.3 million at December 31, 2007 and $80.6 millionat March 31, 2007.  Backlog in theOutdoor Products segment increased $20.1 million, while the backlog for gearcomponents increased by $2.6 million during the first quarter of 2008.

 

Gross profit increased $2.4 million (6%) from the firstquarter of 2007 to the first quarter of 2008. Gross margin in 2008 was 31.9% of sales compared to 33.9% in 2007.  Higher sales volume and improved pricing werepartially offset by increases in product costs and the unfavorable net effectsof movement in foreign currency exchange rates. The higher product costs were attributable to higher steel costs,estimated at $0.7 million, as well as increased shipping and freight costsrelated to higher energy prices.  Inaddition, in the first quarter of 2007 we incurred $0.9 million of costs toconsolidate our North American distribution centers.

 

Fluctuations in currency exchange rates decreased our grossprofit in the first quarter of 2008 compared to 2007 by $1.6 million on aconsolidated basis.  The translation ofstronger foreign currencies into a weaker U.S. Dollar resulted in highermanufacturing costs in Brazil and Canada, where local currencies strengthenedcompared to the U.S. Dollar, which were only partially offset by highertranslated sales in Europe.

 

SG&A was $25.8 million in the first quarter of 2008,compared to $23.9 million in the first quarter of 2007, representing anincrease of $1.9 million (8%).  As apercentage of sales, SG&A dropped from 20.2% in 2007 to 19.4% in 2008.  Compensation expense increased by $0.6million year-over-year, reflecting annual merit increases for our employees.Stock-based compensation expense was relatively flat year-over-year.  During the first quarter of 2008, we incurred$0.9 million in severance costs and benefits related to a reorganization in ourPortland headquarters, as well as actions taken in Europe.  Professional services expense decreased $0.8million due to lower legal and audit costs. International operating expenses increased $1.2 million from the prioryear due to the weaker U.S. Dollar and its effect on the translation of foreignexpenses.

 

Operating income increased by $0.5 million from the firstquarter of 2007 to the first quarter of 2008, resulting in an operating marginfor 2008 of 12.5% of sales compared to 13.7% for 2007. The increase was due tohigher gross profit, partially offset by increased SG&A expenses.

 

Interestexpense was $6.8 million in the first quarter of 2008 compared to $8.3 millionin the first quarter of 2007.  Thedecrease was due to lower average outstanding debt balances and lower averageinterest rates.

 

Thefollowing table summarizes our income tax provision for continuing operationsin 2008 and 2007:

 
| ** **                                             | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                   |       |                                                 |       |   |   |
| Income from continuing operations before  income taxes |       | $                                                    | 10,286     |   | $ | 8,210 |   |
| Provision for income taxes                             |       | 3,397                                                |       | 3,046 |   |
| Income from continuing operations                      |       | $                                                    | 6,889      |   | $ | 5,164 |   |
| Effective tax rate                                     |       | 33.0                                                 | %          | 37.1 | % |

 

The decrease in our effective tax rate from 2007 to 2008 islargely due to the increase in proportionate pre-tax income earned at ourmanufacturing facility in China.  Ouroperation in China is currently operating under a tax holiday, resulting in aneffective tax rate for this operation of zero percent.  As we have increased production at thisfacility, now in its fourth year of operation, the proportion of our totalpre-tax income earned in China has increased, thus driving our consolidatedeffective tax rate lower.  The taxholiday for our facility in China is set to expire after 2008, at which timethe rate will increase to 12.5% for three years, and then to 25% thereafter.  We expect our consolidated effective tax rateto increase accordingly.

 

19

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Our U.S. federal Net Operating Loss (“NOL”) carryforward wasfully utilized during 2007.  We estimateour state NOL carryforwards were $30.3 million as of December 31,2007.  These carryforwards expire atvarious dates from 2008 through 2024. Additionally, we have a foreign tax credit carryforward of approximately$1.7 million that expires in 2010.  We alsohave state tax credit carryforwards of approximately $0.2 million that expireat various dates from 2008 through 2021. Our federal research credits and alternative minimum tax credits arefully utilized as of December 31, 2007. The state NOL and other carryforwards are available to reduce cash taxeson future domestic taxable income, although a portion of the state NOLcarryforwards are reduced by a valuation allowance reflecting the expectationthat the carryforward period will expire before they can all be fully utilized.

 

Incomefrom continuing operations in the first quarter of 2008 was $6.9 million, or$0.14 per diluted share, compared to $5.2 million, or $0.11 per diluted share,in the first quarter of 2007.

 

The loss from discontinued operations in the first quarter of2008 was $0.1 million compared to $0.5 million, or $0.01 per diluted share, inthe first quarter of 2007.  The 2008results consisted solely of wind-down and exit activities related to ourdiscontinued Forestry Division, which was sold on November 5, 2007.  Results for the first quarter of 2007 reflectthe activities of the Forestry Division prior to the sale, as well as wind-downand exit activities related to our discontinued Lawnmower segment.

 

Discontinued operations are summarized as follows:

 
| ** **                                                | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands)**                      | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Sales                                                     |       | $                                                | —     |   | $ | 26,252 |   |
| Operating loss before taxes from  discontinued operations |       | (85                                              | )          | (806 | ) |
| Income tax provision                                      |       | (32                                              | )          | (308 | ) |
| Loss from discontinued operations                         |       | $                                                | (53        | ) | $ | (498 | ) |

 

The Forestry Division reported $26.3 million of sales and a lossbefore taxes of $0.8 million in the first quarter of 2007.  The loss in the 2007 period was primarily dueto reduced sales volume amid a deepening of the cyclical downturn in the NorthAmerican timber harvesting equipment market in 2007.

 

***Segment Results. ***Thefollowing table reflects segment sales and operating results for 2008 and 2007:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008 as a  % of 2007** | ** ** |
| Sales:                                    |       |                                                 |       |   |   |   |   |
| Outdoor Products                          |       | $                                                    | 126,227    |   | $ | 110,867 |   | 114 | % |
| Other                                     |       | 6,980                                                |       | 7,449 |   | 94 | % |
| Total sales                               |       | $                                                    | 133,207    |   | $ | 118,316 |   | 113 | % |
| Operating income:                         |       |                                                 |       |   |   |   |   |
| Outdoor Products                          |       | $                                                    | 21,739     |   | $ | 21,070 |   | 103 | % |
| Other and central administration expenses |       | (5,070                                               | )          | (4,875 | ) | 104 | % |
| Operating income                          |       | $                                                    | 16,669     |   | $ | 16,195 |   | 103 | % |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment increased $15.4million (14%) in the first quarter of 2008 compared to the first quarter of2007.  Of this increase, $10.9 millionwas due to additional sales volume, primarily from an increase in sales ofwood-cutting saw chain and outdoor equipment parts.  Sales of concrete-cutting products wererelatively flat for the comparable periods. Improved price and product mix also contributed $1.4 million to theyear-over-year sales increase.  Fluctuationsin foreign currency exchange rates added another $3.0 million to segment salesin the first quarter of 2008 compared to 2007. International sales grew 17% for the three month comparable periods,while domestic sales increased 7%.  Salesto OEM customers decreased by 

 

20

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5%, while replacement sales increased 21%.  Order backlog increased by $20.1 million, to$83.4 million, at March 31, 2008.

 

Segment contribution to operating income increased $0.7million (3%) in the first quarter of 2008 compared to the first quarter of2007.  The favorable effects of increasedsales volume ($5.1 million), improved price and mix ($1.4 million) and thenon-recurrence of $0.9 million in warehouse consolidation costs incurred in thefirst quarter of 2007 were partially offset by higher product cost and mix($3.3 million), higher SG&A expenses ($0.8 million) and the net unfavorableeffect of fluctuations in foreign currency translation rates ($2.7 million).  The higher product cost and mix, excludingthe foreign currency exchange effect, includes inflationary pressures of higherwages and other conversion costs, higher freight and shipping costs, increasedenergy costs and $0.5 million in higher steel costs.  The operating margin of 17.2% in 2008compares to 19.0% in 2007.

 

***Other and Central Administration Expenses.***  The other and corporate expense categoryincludes the activity of our gear components business, as well as the costs ofcertain centralized management and administrative functions.  Sales of gear-related products decreased 6%from the first quarter of 2007 to the first quarter of 2008.  Lower volume of $0.8 million was partially offsetby the $0.3 million favorable effect of price increases. The contribution tooperating income from our gear components business decreased $0.1 million (16%)year-over-year due to the lower sales volume and revenue.  Central administrative expenses were up $0.1million (2%), with severance costs partially offset by lower legal and auditexpenses.

 

**Financial Condition, Liquidity and CapitalResources**

 

Totaldebt at March 31, 2008 was $296.7 million, compared to $297.0 million at December 31,2007 and to $350.9 million at December 31, 2006.  As of March 31, 2008, our debt consistedof the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Revolving credit facility            |       | $                  | —     |                  | $          | — |   |
| Term loans                           |       |               | 121,690    |                  |       | 122,000 |   |
| 8 7/8% senior subordinated notes     |       | 175,000            |       | 175,000               |       |
| Total debt                           |       | 296,690            |       | 297,000               |       |
| Less current maturities              |       | (1,242             | )          | (1,242                | )          |
| Long-term debt                       |       | $                  | 295,448    |                  | $          | 295,758 |   |

 

**8 7/8% Senior Subordinated Notes.**  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at any time after August 1, 2008 at the option of the Company,in whole or in part, at redemption prices of 104.438% through July 31,2009; 102.219% from August 1, 2009 through July 31, 2010; and at100.000% August 1, 2010 and thereafter. These notes are issued by Blount, Inc. and are fully andunconditionally, jointly and severally, guaranteed by the Company and all ofits domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc. All guarantor subsidiaries of these 87/8% senior subordinated notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all ofits domestic subsidiaries guarantee these 8 7/8% senior subordinated notes,none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”)guarantee these notes.

 

**Senior Credit Facilities.** The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as Agent on May 15, 2003.  The agreement was amended and restated on August 9,2004, and has had several subsequent amendments.  The senior credit facilities consist of arevolving credit facility and a term loan facility.

 

The revolving credit facility provides for total available borrowingsup to $150.0 million, reduced by outstanding letters of credit and furtherrestricted by a specific leverage ratio and first lien credit facilitiesleverage ratio. As of March 31,2008, the Company had the ability to borrow an additional $145.2 million underthe terms of the revolving credit agreement. The revolving credit facilitybears interest at the LIBOR rate plus 1.75%, or at the prime 

 

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rate, depending on the type of loan, andmatures on August 9, 2009.  Interestis payable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. Any outstanding 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 on August 9,2010.  The term loan facility requiresquarterly payments of $0.3 million, with a final payment of $118.6 million dueon the maturity date.  Once repaid,principal under the term loan facility may not be re-borrowed by the Company.

 

The amended and restated senior credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien 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. We were in compliance with all debtcovenants as of March 31, 2008.

 

The amended and restated senior credit facilities may be prepaid at anytime.  There can also be additionalmandatory repayment requirements related to the sale of Company assets, the issuanceof stock under certain circumstances, or upon the Company’s annual generationof excess cash flow, as determined under the credit agreement.

 

Blount International, Inc. and all of its domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’sobligations under the senior credit facilities. The obligations under the senior credit facilities are collateralized bya first priority security interest in substantially all of the assets of Blount, Inc.and its domestic subsidiaries, as well as a pledge of all of Blount, Inc.’scapital stock held by Blount International, Inc. and all of the stock ofdomestic subsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of its non-domesticsubsidiaries as additional collateral.

 

Interestexpense was $6.8 million in the first quarter of 2008, a decrease of $1.5million compared to the first quarter of 2007. The decrease reflects the favorable effect from a reduction in theaverage principal amount of debt outstanding, as well as reduced interest rateson our variable rate debt.  Our interestexpense may vary in the future because the revolving credit facility and termloan interest rates are variable. The interest rate is fixed on the seniorsubordinated notes.  Our weighted averageinterest rate on all debt was 7.23% as of March 31, 2008, compared to8.11% as of December 31, 2007.  Cashpaid for interest in the first three months of 2008 was $9.8 million, comparedto $11.0 million in the same period of 2007.

 

We havesignificantly reduced our debt outstanding over the past several years.  However, our debt continues to besignificant, and future debt service payments continue to represent substantialobligations.  This degree of leverage mayadversely affect our operations and could have important adverse consequences.

 

Weintend to fund working capital, capital expenditures and debt servicerequirements for the next twelve months through expected cash flows generatedfrom operations.  We expect our remainingresources will be sufficient to cover any additional increases in workingcapital and capital expenditures for at least the next twelve months.  There can be no assurance, however, thatthese resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs.

 

Cashand cash equivalents at March 31, 2008 were $42.5 million compared to$57.6 million at December 31, 2007. At March 31, 2008, $40.9 million of the cash balance was held atour foreign operations.

 

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Cashused in operating activities is summarized in the following table:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Income from continuing operations      |       | $                                                    | 6,889      |   | $ | 5,164 |   |
| Non-cash items                         |       | 7,686                                                |       | 7,310 |   |
| Subtotal                               |       | 14,575                                               |       | 12,474 |   |
| Changes in assets and liabilities, net |       | (24,521                                              | )          | (17,306 | ) |
| Discontinued operations, net           |       | (907                                                 | )          | (7,722 | ) |
| Cash used in operating activities      |       | $                                                    | (10,853    | ) | $ | (12,554 | ) |

 

Non-cashitems consist of expenses for depreciation of property, plant and equipment;amortization and other non-cash charges; stock compensation expense; the taxbenefit from exercise of stock options; deferred income taxes; and gain or losson disposal of property, plant and equipment.

 

Duringthe first three months of 2008, operating activities used $10.9 million ofcash.  Historically, our cash flows fromoperating activities have been negative in the first quarter, as first quarterincome is offset by the pay-down of year-end accrued liabilities and anincrease in working capital.  Income fromcontinuing operations plus non-cash items totaled $14.6 million in the firstquarter of 2008, reflecting improved operating results and higher depreciationexpense when compared with the first quarter of 2007.  Increased capital investment over the lastseveral years has resulted in increased depreciation charges.  The positive operating cash flow from theseitems was more than offset by the net increase in working capital and otherassets and liabilities during the period. An increase in accounts receivable of $8.7 million and an increase ininventories of $5.1 million, together with the reduction in accounts payableand accrued expenses of $13.0 million, resulted in the negative cash flow fromoperations for the first quarter of 2008. Discontinued operations used $0.9 million in cash during the firstquarter of 2008 as certain obligations and liabilities related to the sale werepaid in early 2008.  Cash payments duringthe quarter also included $9.8 million for interest and $2.8 million for incometaxes.

 

Duringthe first three months of 2007, operating activities used $12.6 million ofcash.  Income from continuing operationsplus non-cash items totaled $12.5 million in the first quarter of 2007.  The positive operating cash flow from these itemswas more than offset by the net increase in working capital and other assetsand liabilities during the period.  Anincrease in inventories of $10.6 million, together with reductions in accruedexpenses of $10.4 million and other liabilities of $1.2 million, used acombined total of $22.2 million in the first quarter of 2007.  These cash uses were partially offset by adecrease in accounts receivable of $3.0 million and in other assets of $1.9million. In addition, discontinued operations used $7.7 million in cash duringthe first quarter of 2007, reflecting an operating loss and increases inworking capital components.  Cashpayments during the quarter also included $11.0 million for interest, $2.6million for income taxes and $3.2 million for defined benefit pension plans.

 

Cashused in investing activities is summarized as follows:

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Proceeds from sale of property, plant and  equipment |       | $                                                    | —     |   | $ | 3 |   |
| Purchases of property, plant and equipment           |       | (5,886                                               | )          | (5,272 | ) |
| Discontinued operations                              |       | 1,725                                                |       | (228 | ) |
| Cash used in investing activities                    |       | $                                                    | (4,161     | ) | $ | (5,497 | ) |

 

Purchasesof property plant and equipment are primarily for productivity improvements andexpanded manufacturing capacity, but also include routine replacement of agingequipment, tooling and dies. For the three months ended March 31, 2007, wealso spent $1.4 million related to consolidation of North Americanlogistics in our Outdoor Products segment. During 2008, we expect to invest $24 millionto $26 million in available cash for capital expenditures, primarily forongoing productivity and cost improvements in our manufacturing processes, 

 

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routinereplacement of machinery and equipment, replacement of tooling that is consumedin the production process and incremental capacity expansion.

 

Discontinuedoperations provided net cash from investing activities of $1.7 million in thefirst quarter of 2008, as we collected the final purchase price adjustment fromthe sale of our Forestry Division.  Inthe first quarter of 2007, discontinued operations used $0.2 million ininvesting activities for the purchase of machinery and equipment.

 

Cashprovided by financing activities is summarized as follows:

 
| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                          | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Net increase (decrease) in debt principal  outstanding        |       | $                                                    | (310       | ) | $ | 16,650 |   |
| Proceeds and tax benefits from the exercise  of stock options |       | 190                                                  |       | 178 |   |
| Cash provided by (used in) financing  activities              |       | $                                                    | (120       | ) | $ | 16,828 |   |

 

Cashused in financing activities in the first quarter of 2008 consisted of thescheduled quarterly principal payment on our term debt facility, partiallyoffset by the net proceeds and tax benefits from the exercise of stockoptions.  Cash provided by financingactivities in the first three months of 2007 was $16.8 million, consisting ofnet borrowings of $17.0 million under our revolving credit facility, the scheduledquarterly principal payment of $0.4 million on our term debt facility and thenet proceeds and tax benefits from the exercise of stock options.

 

On May 2, 2008, we purchased Carlton Holdings, Inc.(“Carlton”) from its private shareholders. We paid $64.7 million in cash for the stock, primarily funded throughour revolving credit facility.  Carltonis a manufacturer of saw chain, located in Oregon.

 

**Critical Accounting Policies**

 

There have been no material changes to our critical accounting policiesand estimates from the information provided in Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations”, included in ourForm 10-K for the fiscal year ended December 31, 2007.

 

**RecentAccounting Pronouncements**

 

In September 2006, the FASB issued FAS No. 157, “Fair ValueMeasurements” (“FAS No. 157”).  FAS No. 157defines 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.  We adopted FAS No. 157for financial assets and liabilities on January 1, 2008, with no immediateeffect on the consolidated financial statements.  As permitted by FASB Staff Position No. FAS157-2, “Effective Date of FASB Statement No. 157”, we elected to defer theadoption of SFAS No. 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. In February 2008, FASB issued Staff Position No. FAS 157-1,“Application of FASB Statement No. 157 to FASB Statement No. 13 andOther Accounting Pronouncements That Address Fair Value Measurements forPurposes of Lease Classification or Measurement under Statement 13” (“FSP No. FAS157-1”).  We also adopted FSP No. FAS157-1 on January 1, 2008, with no immediate effect on the consolidatedfinancial statements.

 

In February 2007, the FASB issued FAS No. 159,“Fair Value Option for Financial Assets and Financial Liabilities-Including anamendment of FASB Statement No. 115” (“FAS No. 159”).  FAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value.  We chose not to elect the fair value optionfor our financial assets and liabilities existing at January 1, 2008 anddid not elect the fair value option on financial assets and liabilitiestransacted in the three months ended March 31, 2008.  Therefore, the adoption of  FAS No. 159 on January 1, 2008, hadno immediate effect on our consolidated financial statements.

 

In December 2007,the FASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”).  FAS No 141(R) replaces FSAS No. 141,Business Combinations, and improves the relevance, representationalfaithfulness and comparability of the information that a reporting entityprovides in its financial reports about a business combination and itseffects.  The provisions of FAS No. 141(R) areeffective for us on January 1, 2009. The impact 

 

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of adopting FAS No. 141(R) willdepend on the nature, terms and size of business combinations completed afterthe effective date.

 

In December 2007,the FASB issued FAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements” (“FAS No. 160”). FAS No 160 amends Accounting Research Bulletin No. 51, ConsolidatedFinancial Statements, and improves the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements for those entities that have anoutstanding non-controlling interest in one or more subsidiaries or thatdeconsolidate a subsidiary.  Theprovisions of FAS No. 160 are effective for us on January 1,2009.    Earlier adoption isprohibited.  The adoption of FAS No. 160is not anticipated to have a material impact on our financial position andresults of operations.

 

In March 2008, theFASB issued FAS No. 161, “Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133” (“FAS No. 161”). FAS No. 161 requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improves the transparency of financialreporting.  The provisions of FAS No. 161 are effective for theCompany on January 1, 2009.   Theadoption of FAS No. 161 is not anticipated to have a material impact onour financial position and results of operations.

 

**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 upon availableinformation and upon assumptions that the Company believes are reasonable;however, these forward looking statements involve certain risks and should notbe considered indicative of actual results that the Company may achieve in thefuture. Specifically, issues concerning foreign currency exchange rates, the costto the Company of commodities in general, and of steel in particular, theanticipated level of applicable interest rates and the anticipated effects ofdiscontinued operations involve certain estimates and assumptions. To theextent that these, or any other such assumptions, are not realized goingforward, or other unforeseen factors arise, actual results for the periodssubsequent 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 Financial Conditionand Results of Operations in our most recent Form 10-K for furtherdiscussion of market risk.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sSecurities Exchange Act of 1934 reports is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and regulations, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow fortimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

The Company, under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of the end of the periodcovered by this report. 

 

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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.

 

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

 

**PART II     OTHERINFORMATION**

 

**ITEM 6. EXHIBITS**

 

**(a) Exhibits:**

 

**2.1 Stock Purchase Agreementamong Blount International Inc., Blount, Inc., Carlton Holdings, Inc.,The Shareholders of Carlton Holdings, Inc. and Jerry A. Parsons andRichard L. Hawkins, as the Shareholders’ Representative dated as of May 2,2008.

 

**31.1 Certification pursuantto section 302 of the Sarbanes-Oxley Act of 2002 by James S. Osterman, Chairmanof the Board and Chief Executive Officer.

 

**31.2 Certification pursuantto section 302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, SeniorVice President and Chief Financial Officer.

 

**32.1 Certification pursuantto section 906 of the Sarbanes-Oxley Act of 2002 by James S. Osterman, Chairmanof the Board and Chief Executive Officer.

 

**32.2 Certification pursuantto section 906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, SeniorVice President and Chief Financial Officer.

 

**   Filed electronically herewith.  Copies of such exhibits may be obtained uponwritten request from:

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange 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 - Corporate Controller |
| Chief Financial Officer    |       | (Principal Accounting Officer)        |
|                       |       |                                  |
| Dated: May 9, 2008    |       |                                  |
|                            |            |                                       |  |

 

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