**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

| **x**                                                   | ** ** | **Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**  |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                              | ** ** | ** **                                                                                    |
| **For the quarterly period ended  September 30, 2007.** |
| ** **                                              | ** ** | ** **                                                                                    |
| **OR**                                                  |
| ** **                                              | ** ** | ** **                                                                                    |
| **o**                                                   | ** ** | **Transition report pursuant to section 13 or 15(d) of the Securities  Exchange Act of 1934** |

 

Commissionfile 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’s telephone number, including area code) |

 

 

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

 

                                          Yesx                                             No o

 

 

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

 

Large accelerated filer o                                           Acceleratedfiler x                                             Non-accelerated filer o

 

 

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

                                          Yeso                                             No x

 

 

The number of shares outstanding of $0.01 par value commonstock as of November 2, 2007 was 47,291,658 shares.

 

 

----

 

**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
|                                                                                                |
|-----------------------------------------------------------------------------------------------------|
| Part  I Financial Information                                                                       |
|                                                                                                |
| Item 1. Consolidated Financial Statements                                                           |
|                                                                                                |
| Unaudited  Consolidated Statements of Income                                                        |
| Three and nine  months ended September 30, 2007 and 2006                                            |
|                                                                                                |
| Unaudited  Consolidated Balance Sheets                                                              |
| September 30,  2007 and December 31, 2006                                                           |
|                                                                                                |
| Unaudited  Consolidated Statements of Cash Flows                                                    |
| Nine months  ended September 30, 2007 and 2006                                                      |
|                                                                                                |
| Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit)                 |
| Nine months  ended September 30, 2007                                                               |
|                                                                                                |
| Notes to  Unaudited Consolidated Financial Statements                                               |
|                                                                                                |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|                                                                                                |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                 |
|                                                                                                |
| Item  4. Controls and Procedures                                                                    |
|                                                                                                |
| Part II Other Information                                                                           |
|                                                                                                |
| Item 6.  Exhibits                                                                                   |
|                                                                                                |
| Signatures                                                                                          |

 

2

----

 

 

 

**PART I       FINANCIALINFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands, except per share data)**               | ** ** | **2007**                                   | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Sales                                                           |       | $                                          | 166,910    |                                      | $          | 164,097 |   | $ | 481,349 |   | $ | 492,993 |   |
| Cost of sales                                                   |       | 115,683                                    |       | 114,910                                   |       | 331,603 |   | 339,982 |   |
| Gross profit                                                    |       | 51,227                                     |       | 49,187                                    |       | 149,746 |   | 153,011 |   |
| Selling, general  and administrative expenses                   |       | 28,632                                     |       | 25,728                                    |       | 86,929 |   | 83,253 |   |
| Retirement plan  redesign                                       |       | —                                     |       | 3,747                                     |       | — |   | 3,747 |   |
| Plant closure  costs                                            |       | —                                     |       | 1,055                                     |       | — |   | 1,055 |   |
| Operating income                                                |       | 22,595                                     |       | 18,657                                    |       | 62,817 |   | 64,956 |   |
| Interest income                                                 |       | 375                                        |       | 80                                        |       | 872 |   | 244 |   |
| Interest expense                                                |       | (8,455                                     | )          | (8,941                                    | )          | (25,260 | ) | (27,229 | ) |
| Other income  (expense), net                                    |       | 655                                        |       | (302                                      | )          | 715 |   | 797 |   |
| Income from  continuing operations before income taxes          |       | 15,170                                     |       | 9,494                                     |       | 39,144 |   | 38,768 |   |
| Provision (benefit)  for income taxes                           |       | 5,727                                      |       | (640                                      | )          | 13,800 |   | 9,901 |   |
| Income from  continuing operations                              |       | 9,443                                      |       | 10,134                                    |       | 25,344 |   | 28,867 |   |
| Discontinued  operations:                                       |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss)  from discontinued operations before income taxes |       | (6                                         | )          | 12,799                                    |       | (89 | ) | 12,238 |   |
| Income tax  provision (benefit)                                 |       | (6                                         | )          | 7,809                                     |       | (36 | ) | 7,597 |   |
| Income (loss)  from discontinued operations                     |       | —                                     |       | 4,990                                     |       | (53 | ) | 4,641 |   |
| Net income                                                      |       | $                                          | 9,443      |                                      | $          | 15,124 |   | $ | 25,291 |   | $ | 33,508 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Basic income  (loss) per share:                                 |       |                                       |       |                                      |       |   |   |   |   |
| Continuing  operations                                          |       | $                                          | 0.20       |                                      | $          | 0.21 |   | $ | 0.53 |   | $ | 0.61 |   |
| Discontinued  operations                                        |       | 0.00                                       |       | 0.11                                      |       | 0.00 |   | 0.10 |   |
| Net income                                                      |       | $                                          | 0.20       |                                      | $          | 0.32 |   | $ | 0.53 |   | $ | 0.71 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Diluted income  (loss) per share:                               |       |                                       |       |                                      |       |   |   |   |   |
| Continuing  operations                                          |       | $                                          | 0.20       |                                      | $          | 0.21 |   | $ | 0.53 |   | $ | 0.60 |   |
| Discontinued  operations                                        |       | 0.00                                       |       | 0.11                                      |       | 0.00 |   | 0.10 |   |
| Net income                                                      |       | $                                          | 0.20       |                                      | $          | 0.32 |   | $ | 0.53 |   | $ | 0.70 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average  shares used in per share calculations:        |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                           |       | 47,288                                     |       | 47,161                                    |       | 47,276 |   | 47,121 |   |
| Diluted                                                         |       | 48,113                                     |       | 47,841                                    |       | 48,068 |   | 47,889 |   |
|                                                            |       |                                       |       |                                      |       |   |   |   |   |
|                                                                 |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

3

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**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**BlountInternational, Inc. and Subsidiaries**

** **
| ** **                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                                                 | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                                                                                                          |       |                   |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                      | 33,623     |                  | $          | 27,636 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,877 and $2,545,  respectively                              |       | 93,887                 |       | 82,748                |       |
| Inventories, net                                                                                                              |       | 90,262                 |       | 77,833                |       |
| Deferred income  taxes                                                                                                        |       | 14,925                 |       | 20,122                |       |
| Other current  assets                                                                                                         |       | 11,938                 |       | 8,342                 |       |
| Total current  assets                                                                                                         |       | 244,635                |       | 216,681               |       |
| Property, plant  and equipment, net                                                                                           |       | 99,835                 |       | 99,665                |       |
| Goodwill                                                                                                                      |       | 71,892                 |       | 71,892                |       |
| Deferred  financing costs                                                                                                     |       | 11,633                 |       | 14,574                |       |
| Deferred income  taxes                                                                                                        |       | 18,688                 |       | 17,318                |       |
| Assets held for  sale                                                                                                         |       | 1,500                  |       | 2,700                 |       |
| Other assets                                                                                                                  |       | 24,240                 |       | 7,636                 |       |
| Total Assets                                                                                                                  |       | $                      | 472,423    |                  | $          | 430,466 |   |
|                                                                                                                          |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                         |       |                   |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                      | 1,500      |                  | $          | 1,500 |   |
| Accounts payable                                                                                                              |       | 38,657                 |       | 34,982                |       |
| Accrued expenses                                                                                                              |       | 64,266                 |       | 62,140                |       |
| Deferred income  taxes                                                                                                        |       | 126                    |       | 197                   |       |
| Total current  liabilities                                                                                                    |       | 104,549                |       | 98,819                |       |
| Long-term debt,  excluding current maturities                                                                                 |       | 353,500                |       | 349,375               |       |
| Deferred income  taxes                                                                                                        |       | 898                    |       | 791                   |       |
| Employee benefit  obligations                                                                                                 |       | 58,649                 |       | 71,724                |       |
| Other  liabilities                                                                                                            |       | 32,915                 |       | 15,048                |       |
| Total  liabilities                                                                                                            |       | 550,511                |       | 535,757               |       |
| Commitments and  contingent liabilities                                                                                       |       |                   |       |                  |       |
| Stockholders’  equity (deficit):                                                                                         |       |                   |       |                  |       |
| Common stock:  par value $0.01 per share, 100,000,000 shares authorized, 47,290,647 and  47,242,925 outstanding, respectively |       | 473                    |       | 472                   |       |
| Capital in  excess of par value of stock                                                                                      |       | 575,286                |       | 571,683               |       |
| Accumulated  deficit                                                                                                          |       | (635,713               | )          | (661,004              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (18,134                | )          | (16,442               | )          |
| Total  stockholders’ deficit                                                                                             |       | (78,088                | )          | (105,291              | )          |
| Total  Liabilities and Stockholders’ Deficit                                                                             |       | $                      | 472,423    |                  | $          | 430,466 |   |
|                                                                                                                               |            |                        |            |                       |            |  |  |  |  |  |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

4

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**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**BlountInternational, Inc. and Subsidiaries**

** **
| ** **                                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                                                                                 | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                                 |       |                                     |       |   |   |
| Income from continuing  operations                                                                         |       | $                                        | 25,344     |   | $ | 28,867 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by operating  activities: |       |                                     |       |   |   |
| Depreciation of  property, plant and equipment                                                             |       | 14,206                                   |       | 12,656 |   |
| Amortization,  stock compensation and other non-cash charges                                               |       | 6,234                                    |       | 8,866 |   |
| Excess tax  benefit from share-based compensation                                                          |       | (106                                     | )          | (532 | ) |
| Deferred income  taxes                                                                                     |       | 4,711                                    |       | 4,013 |   |
| (Gain) loss on  disposal of property, plant, and equipment                                                 |       | (520                                     | )          | 598 |   |
| Changes in  assets and liabilities:                                                                        |       |                                     |       |   |   |
| (Increase)  decrease in accounts receivable                                                                |       | (11,428                                  | )          | (10,795 | ) |
| (Increase)  decrease in inventories                                                                        |       | (12,429                                  | )          | (5,338 | ) |
| (Increase)  decrease in other assets                                                                       |       | (2,909                                   | )          | (22 | ) |
| Increase  (decrease) in accounts payable                                                                   |       | 3,675                                    |       | (5,549 | ) |
| Increase (decrease)  in accrued expenses                                                                   |       | 3,485                                    |       | (8,148 | ) |
| Increase  (decrease) in other liabilities                                                                  |       | (14,810                                  | )          | (8,797 | ) |
| Discontinued  operations, net                                                                              |       | (1,294                                   | )          | (3,668 | ) |
| Net cash  provided by operating activities                                                                 |       | 14,159                                   |       | 12,151 |   |
| ** **                                                                                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities:**                                                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Proceeds from  sale of property, plant and equipment                                                       |       | 1,750                                    |       | 104 |   |
| Acquisition of  business                                                                                   |       | —                                   |       | (503 | ) |
| Purchases of  property, plant and equipment                                                                |       | (14,358                                  | )          | (15,563 | ) |
| Discontinued  operations, net                                                                              |       | —                                   |       | 32,644 |   |
| Net cash  provided by (used in) investing activities                                                       |       | (12,608                                  | )          | 16,682 |   |
| ** **                                                                                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Cash  flows from financing activities:**                                                                 | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Net borrowings  under revolving credit facility                                                            |       | 5,250                                    |       | 53,000 |   |
| Repayment of  term loan principal                                                                          |       | (1,125                                   | )          | (83,473 | ) |
| Debt agreement  amendment costs                                                                            |       | —                                   |       | (700 | ) |
| Excess tax  benefit from share-based compensation                                                          |       | 106                                      |       | 532 |   |
| Proceeds from  exercise of stock options                                                                   |       | 205                                      |       | 665 |   |
| Net cash  provided by (used in) financing activities                                                       |       | 4,436                                    |       | (29,976 | ) |
|                                                                                                       |       |                                     |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                      |       | 5,987                                    |       | (1,143 | ) |
| Cash and cash  equivalents at beginning of period                                                          |       | 27,636                                   |       | 12,937 |   |
| Cash and cash  equivalents at end of period                                                                |       | $                                        | 33,623     |   | $ | 11,794 |   |
|                                                                                                            |            |                                          |            |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

5

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**UNAUDITEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**BlountInternational, Inc. and Subsidiaries**

** **
| **(Amounts in thousands)**                | ** ** | **Shares  (in 000’s)** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated Other  Comprehensive  Income  (Loss)** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|-----------|------------|
|                                      |       |                        |       |              |       |                           |       |                     |       |                                                 |       |      |       |
| Balance December  31, 2006                |       | 47,243                      |       | $                 | 472        |                           | $          | 571,683                  |       | $                                                    | (661,004   | )         | $          | (16,442 | ) | $ | (105,291 | ) |
|                                      |       |                        |       |              |       |                           |       |                     |       |                                                 |       |      |       |
| Net income                                |       |                        |       |              |       |                           |       | 25,291                   |       |                                                 |       | 25,291    |       |
| Other  comprehensive income (loss):       |       |                        |       |              |       |                           |       |                     |       |                                                 |       |      |       |
| Foreign currency  translation adjustment  |       |                        |       |              |       |                           |       |                     |       | 1,142                                                |       | 1,142     |       |
| Unrealized  losses                        |       |                        |       |              |       |                           |       |                     |       | (25                                                  | )     | (25       | )     |
| Pension  liability adjustment, net of tax |       |                        |       |              |       |                           |       |                     |       | (2,809                                               | )     | (2,809    | )     |
| Comprehensive  loss, net                  |       |                        |       |              |       |                           |       |                     |       |                                                 |       | (1,692    | )     |
| Exercise of  stock options                |       | 48                          |       | 1                 |       | 310                            |       |                     |       |                                                 |       | 311       |       |
| Stock  compensation expense               |       |                        |       |              |       | 3,293                          |       |                     |       |                                                 |       | 3,293     |       |
| Balance  September 30, 2007               |       | 47,291                      |       | $                 | 473        |                           | $          | 575,286                  |       | $                                                    | (635,713   | )         | $          | (18,134 | ) | $ | (78,088 | ) |
|                                           |            |                             |            |                   |            |                                |            |                          |            |                                                      |            |           |            |  |  |  |  |  |  |  |  |  |

 

 

Othercomprehensive income for the three months ended September 30, 2007 was $1.1million.  Other comprehensive income forthe three and nine months ended September 30, 2006 was $0.2 million and $1.0million, respectively.

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

 

6

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE1:  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.

 

Theaccompanying financial data as of September 30, 2007 and for the three and ninemonths ended September 30, 2007 and 2006 has been prepared by the Company,without audit, pursuant to the rules and regulations of the United States Securitiesand Exchange Commission (“SEC”).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations. The December 31, 2006 consolidated balance sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica. These consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2006.

 

***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 thecircumstances.  Management is continuallyevaluating and updating these estimates and it is reasonably possible thatthese estimates will change in the near term.

 

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation.  Such reclassifications hadno effect on previously reported net income or net stockholders’ deficit.

 

 

**NOTE2:  DISCONTINUED OPERATIONS**

 

***Discontinued Lawnmower Segment.***  On July 27, 2006, the Company sold certain ofthe assets and liabilities of Dixon Industries, Inc. (“Dixon”) to HusqvarnaProfessional Outdoor Products, Inc. (“Husqvarna”), a wholly-owned subsidiary ofHusqvarna AB (Sweden).  Dixon hadpreviously been reported as the Company’s Lawnmower segment.  In the fourth quarter of 2006, the finalselling price was settled at $33.1 million after adjustment as specified in therelated asset purchase agreement. The Company used the proceeds from this saleto reduce the outstanding principal balance of the Company’s revolving creditfacility.  The sale included thedisposition of Dixon’s recorded goodwill in the amount of $5.0 million.  Certain liabilities of Dixon, as well as theland, building, building improvements, certain machinery and equipment andvarious other assets related to its Coffeyville, Kansas facility, were retainedby the Company by merger of Dixon with and into 4520 Corp. Inc., an indirectwholly-owned subsidiary of the Company.  The net property, plant and equipment associated with the discontinuedoperations of Dixon were carried at their estimated fair value and included inassets held for sale in the consolidated balance sheet as of December 31,2006.  These assets were sold inSeptember 2007 for net cash proceeds of $1.6 million.  The resulting gain of $0.4 million isincluded in other income and expense for the three and nine months endedSeptember 30, 2007.

 

Seealso Note 14:  Subsequent Events.

 

 

7

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**NOTE3:  INVENTORIES, NET**

 

Inventories consisted of the following:
| ** **                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|------------------|------------|
| **(Amounts in thousands)**  | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Raw materials  and supplies |       | $                 | 25,546     |             | $          | 24,213 |   |
| Work in progress            |       | 16,278            |       | 14,034           |       |
| Finished goods              |       | 48,438            |       | 39,586           |       |
| Total  inventories, net     |       | $                 | 90,262     |             | $          | 77,833 |   |

 

 

**NOTE4:  LONG TERM DEBT**

 

Long-term debt consisted of the following:
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Revolving credit  facility        |       | $                 | 32,250     |             | $          | 27,000 |   |
| Term loans                        |       | 147,750           |       | 148,875          |       |
| 8 7/8% senior  subordinated notes |       | 175,000           |       | 175,000          |       |
| Total debt                        |       | 355,000           |       | 350,875          |       |
| Less current  maturities          |       | (1,500            | )          | (1,500           | )          |
| Long-term debt                    |       | $                 | 353,500    |             | $          | 349,375 |   |
|                                   |            |                   |            |                  |            |  |  |  |

The weighted average interest rate on outstanding debt as ofSeptember 30, 2007was 8.08%.

 

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 a first lien credit facilitiesleverage ratio. As of September 30, 2007,the Company had the ability to borrow an additional $102.9 million under theterms of the revolving credit agreement. The revolving credit facility bearsinterest at the LIBOR rate plus 1.75%, or at the prime rate, depending on thetype of loan, and matures on August 9, 2009. Interest is payable monthly in arrears on any prime rate borrowing andat the individual maturity dates for any LIBOR-based borrowing.  Any outstanding principal is due in itsentirety on the maturity date.

 

Theterm loan facility bears interest at the LIBOR rate plus 1.75%, or at the primerate, depending on the type of loan, and matures on August 9, 2010.  The term loan facility requires quarterlypayments of $0.4 million, with a final payment of $143.3 million due on thematurity date.  Once repaid, principalunder the term loan facility may not be re-borrowed by the Company.

 

The revolving credit facility and term loans 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.

 

Therevolving credit facility and term loans are governed by the terms of amendedand restated senior credit facilities. Blount International, Inc. and all of its domestic subsidiaries otherthan Blount, Inc. guarantee Blount, Inc.’s obligations under the senior creditfacilities.  The obligations under thesenior credit facilities are collateralized by a first priority securityinterest in substantially all of the assets of Blount, Inc. and its domesticsubsidiaries, as well as a pledge of all of Blount, Inc.’s capital stock heldby Blount International, Inc. and all of the stock of domestic subsidiariesheld by Blount, Inc.  Blount, Inc. hasalso pledged 65% of the stock of each of its wholly-owned non-domesticsubsidiaries as additional collateral. See also Note 14: Subsequent Events.

 

Thesenior credit facilities contain financial covenants relating to maximumcapital expenditures, minimum fixed charge coverage ratio, maximum leverageratio and maximum first lien credit facilities leverage ratio.  In addition,

 

 

8

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thereare covenants relating, among other categories, to investments, loans andadvances, indebtedness and the sale of stock or assets.  The Company was in compliance with all debtcovenants as of September 30, 2007.

 

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

 

 

**NOTE5:  INCOME TAXES**

 

The Company is using its various federal and state net operating lossand tax credit carryforwards to reduce the amount of cash tax payments requiredin 2007.  During the nine months endedSeptember 30, 2007, the federal net operating loss carryforward was fully usedto offset U.S. taxable income. Accordingly, as of September 30, 2007, the Company has no remaining U.S.federal net operating loss carryforward. The tax provision for the three and nine months ended September 30, 2006was reduced by the year-to-date effect of implementing tax planning initiativeswith higher anticipated deductions and exclusions.

 

EffectiveJanuary 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No.48”). There was no material adjustment to the net liability for uncertain taxpositions as a result of the adoption of FIN No. 48 on January 1, 2007.  However, uncertain tax positions that werepreviously netted on the balance sheet are reported separately at September 30,2007.  At the adoption of FIN No. 48, theCompany had $27.3 million of unrecognized tax benefits of which $12.4 million,if recognized, would affect the effective tax rate.  Also, as of the adoption date, the Companyhad accrued interest and penalties of $2.8 million related to uncertain taxpositions.  The Company recognizesinterest and penalties related to uncertain tax positions as income taxexpense.  The tax years 2001 to 2006remain open to examination by the major taxing jurisdictions applicable to theCompany.

 

 

**NOTE6:  PENSION AND OTHER POST-EMPLOYMENTBENEFIT 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.  EffectiveJanuary 1, 2007, the Company implemented a redesign of its domestic retirementplans, including afreeze of its defined benefit pension plan and an associated nonqualifiedplan.  As of January 1, 2007, employeeswho had been participating in the plans ceased accruing benefits and newemployees are not eligible to participate. All retirement benefits accrued up to the time of the freeze werepreserved.  Accordingly, the Company recorded a pension curtailment charge of $3.2million in the three months ended September 30, 2006, which represented theimmediate recognition of the unamortized prior service cost for U.S.employees.  The Company expects tocontribute a total of approximately $20.0 million to its funded pension plansduring 2007, of which approximately $19.0 million has been contributed throughSeptember 30, 2007.

 

Thecomponents of net periodic benefit cost for these plans are as follows: 
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **Pension Benefits**                 | ** ** | **Other Post-Employment Benefits** | ** ** |
| **(Amounts in thousands)**                                    | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                                  |       | $                                    | 907        |   | $ | 1,470 |   | $ | 95 |   | $ | 86 |   |
| Interest cost                                                 |       | 2,572                                |       | 2,518 |   | 526 |   | 428 |   |
| Expected return  on plan assets                               |       | (3,287                               | )          | (2,900 | ) | 0 |   | (4 | ) |
| Immediate  recognition and amortization of prior service cost |       | (2                                   | )          | 3,636 |   | 2 |   | 3 |   |
| Amortization of  net actuarial loss                           |       | 371                                  |       | 396 |   | 243 |   | 143 |   |
| Total net  periodic benefit cost                              |       | $                                    | 561        |   | $ | 5,120 |   | $ | 866 |   | $ | 656 |   |
|                                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

9

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| ****                                                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                    | ** ** | **Pension Benefits**                | ** ** | **Other Post-Employment Benefits** | ** ** |
| **(Amounts in thousands)**                                    | ** ** | **2007**                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                                  |       | $                                   | 2,721      |   | $ | 4,867 |   | $ | 285 |   | $ | 258 |   |
| Interest cost                                                 |       | 7,715                               |       | 7,691 |   | 1,577 |   | 1,284 |   |
| Expected return  on plan assets                               |       | (9,861                              | )          | (8,692 | ) | 0 |   | (12 | ) |
| Immediate  recognition and amortization of prior service cost |       | (6                                  | )          | 3,813 |   | 6 |   | 7 |   |
| Amortization of  net actuarial loss                           |       | 1,113                               |       | 2,076 |   | 729 |   | 430 |   |
| Total net  periodic benefit cost                              |       | $                                   | 1,682      |   | $ | 9,755 |   | $ | 2,597 |   | $ | 1,967 |   |

 

The Company also sponsors a defined contribution 401(k) plan coveringmost employees in the U.S.  Under theplan, the Company currently matches employee contributions to 401(k) accountsup to 4.5% of base compensation.  Inconjunction with the redesign of its domestic retirement plans, the definedcontribution 401(k) plan was amended to permit an additional discretionaryannual Company contribution of 3%, 4% or 5% of base compensation, dependingupon the participant’s years of service. The new contribution will be made whether or not the employeecontributes to the plan.

 

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the over-funded orunder-funded status of a defined benefit post-retirement plan (other than amulti-employer plan) as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in whichthe changes occur through comprehensive income. The Company adopted SFAS No. 158 effective December 31, 2006, andrecognized an increase in liabilities of $16.2 million and a charge toaccumulated other comprehensive loss, net of deferred income taxes, of $12.3million, based on preliminary actuarially estimated valuations of the Company’svarious plans.  In the nine months endedSeptember 30, 2007, the Company recognized an additional $4.5 million inliabilities and a charge to other comprehensive loss, net of deferred incometaxes, of $2.8 million, reflecting the updated estimates of the 2006actuarially determined valuations of the various plans.

 

 

**NOTE7:  COMMITMENTS AND CONTINGENTLIABILITIES**

 

Guaranteesand other commercial commitments are summarized in the following table: 
| ** **                                                                       | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**                                                       | ** ** | **2007**          | ** ** |
| Warranty reserve                                                                 |       | $2,774            |       |
| Letters of  credit outstanding                                                   |       | 5,505             |       |
| Guarantees of  third party financing agreements for customer equipment purchases |       | 2,087             |       |

 

Changesin the warranty reserve are as follows:

 
| **(Amounts in thousands)**          | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|
| Balance at  December 31, 2006       |       | $3,269   |       |
| Accrued warranty  expense           |       | 1,163    |       |
| Payments made  (in cash or in-kind) |       | (1,658   | )          |
| Balance at  September 30, 2007      |       | $2,774   |       |

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 Note 4).

 

 

10

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TheCompany is a defendant in a number of product liability lawsuits, some of whichseek significant or unspecified damages, involving serious personal injuriesfor which there are retentions or deductible amounts under the Company’sinsurance policies. In addition, the Company is a party to a number of othersuits arising out of the normal course of its business, including suitsconcerning commercial contracts, employee matters and intellectual propertyrights.  In some instances, the Companyis the plaintiff and is seeking recovery of damages. In others, the Company isa 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, operatingresults or cash flows.

 

TheCompany accrues, by a charge to income, an amount representing management’sbest estimate of the undiscounted probable loss related to any matter deemed bymanagement and its counsel as a probable loss contingency in light of all ofthe then known circumstances. The Company does not accrue a charge to incomefor a matter deemed by management and its counsel to be a reasonably possibleloss contingency in light of all such current circumstances.

 

 

**NOTE8:  EARNINGS PER SHARE DATA**

 

Shares used in the denominators of the basic anddiluted earnings per share computations were as follows:

 
| ** **                                                                                                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Shares in thousands)**                                                                                            | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Shares for basic  income per share computation — weighted average common shares outstanding                     |       | 47,288                                |       | 47,161                               |       | 47,276 |   | 47,121 |   |
| Dilutive effect  of common stock equivalents                                                                         |       | 825                                   |       | 680                                  |       | 792 |   | 768 |   |
| Shares for  diluted income per share computation                                                                     |       | 48,113                                |       | 47,841                               |       | 48,068 |   | 47,889 |   |
| Options and  stock appreciation rights excluded from computation as anti-dilutive because  they are out-of-the-money |       | 1,727                                 |       | 1,945                                |       | 1,727 |   | 1,831 |   |

 

 

**NOTE9:  STOCK-BASED COMPENSATION**

 

EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123(R), ‘‘Share-Based Payment’’ (“SFASNo. 123(R)”).  SFAS No. 123(R) requiresall share-based compensation to employees, directors and others who performservices for the Company, including grants of stock options and stockappreciation rights (“SARs”), to be valued at fair value on the date of grantand to be expensed over the applicable service period. Under SFAS No. 123(R),pro forma disclosure of the income statement effects of share-basedcompensation is no longer an alternative to expense recognition.  The Company followed the modified prospectiveapplication method permitted under SFAS No. 123(R) and, accordingly, theresults for prior periods were not restated.

 

Thefair value of options and SARs was estimated on the respective grant datesusing the Black-Scholes option valuation model. The estimated average life ofSARs was 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.

 

Under certain conditions, stock options, SARs,restricted stock units (“RSUs”) and restricted stock granted by the Company areeligible for continued vesting upon the retirement of the employee.  SFAS No. 123(R) clarifies that the fairvalue 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.

 

 

11

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The Company made the following awards during theperiods indicated:

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **In 000’s**                                          | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock  appreciation rights granted                         |       | n/a                                   |       | n/a                                  |       | 380 |   | 612 |   |
| Aggregate fair  value of SARs granted                      |       | n/a                                   |       | n/a                                  |       | $ | 1,617 |   | $ | 3,518 |   |
| Restricted stock  and RSUs granted                         |       | n/a                                   |       | 35                                   |       | 181 |   | 35 |   |
| Aggregate fair  value of restricted stock and RSUs granted |       | n/a                                   |       | $                                    | 318        |   | $ | 2,138 |   | $ | 318 |   |
|                                                            |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

The restricted stock and RSUs generally vest over athree year period.  The effect of applying acceleratedamortization of expense recognized for those employees that were retirementeligible or become retirement eligible prior to the completion of the vesting period,compared to straight-line amortization over the vesting period, was a decreasein stock-based compensation expense of $0.4 million and an increase of $0.1million for the three months ended September 30, 2007 and 2006, respectively.  The effect of applying acceleratedamortization of expense recognized for those employees that were retirementeligible or become retirement eligible prior to the completion of the vestingperiod, compared to straight-line amortization over the vesting period, was an increasein stock-based compensation expense of $0.6 million and $1.1 million for thenine months ended September 30, 2007 and 2006, respectively.

 

Thefollowing assumptions were used to estimate the fair value of SARs:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Estimated  average life                 |       | n/a                                   |       | n/a                                  |       | 6 years |   | 6 years |   |
| Risk-free  interest rate                |       | n/a                                   |       | n/a                                  |       | 4.5 | % | 4.6 | % |
| Expected  volatility                    |       | n/a                                   |       | n/a                                  |       | 29.1 - 29.5 | % | 26.7 | % |
| Weighted average  volatility            |       | n/a                                   |       | n/a                                  |       | 29.3 | % | 26.7 | % |
| Dividend yield                          |       | n/a                                   |       | n/a                                  |       | 0.0 | % | 0.0 | % |
| Weighted average  grant date fair value |       | n/a                                   |       | n/a                                  |       | $ | 4.50 |   | $ | 6.09 |   |
|                                         |            |                                       |            |                                      |            |  |  |  |  |  |  |

 

As of September 30, 2007, the total unrecognized stock-basedcompensation expense related to previously granted awards was $2.4 million. Theweighted-average period over which this expense is expected to be recognized is1.1 years.  The Company’s policy upon theexercise of options, RSUs or SARs has been to issue new shares into the marketplace.

 

 

**NOTE10:  SEGMENT INFORMATION**

 

TheCompany identifies operating segments primarily based on managementresponsibility. The Company has two operating segments, each of which is areportable segment: Outdoor Products and Industrial and Power Equipment.  See also Note 2 regarding the discontinuationof the former Lawnmower segment business. Outdoor Products manufactures andmarkets cutting chain, bars, sprockets and accessories for chainsaw use;concrete-cutting equipment; and lawnmower blades and accessories for yard careequipment. Industrial and Power Equipment manufactures and markets timberharvesting equipment, timber harvesting heads, industrial tractors and loaders,rotational bearings, worm gear reducers, hydraulic pump drives, swing drivesand winches.

 

Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies.

 

 

12

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Certainfinancial information by segment is presented in the table below:

 
| ** **                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Sales:**                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                |       | $                                     | 122,112    |                                 | $          | 111,481 |   | $ | 361,085 |   | $ | 340,400 |   |
| Industrial and  Power Equipment |       | 44,984                                |       | 52,747                               |       | 120,789 |   | 153,226 |   |
| Inter-segment  elimination      |       | (186                                  | )          | (131                                 | )          | (525 | ) | (633 | ) |
| Total sales                     |       | $                                     | 166,910    |                                 | $          | 164,097 |   | $ | 481,349 |   | $ | 492,993 |   |
|                            |       |                                  |       |                                 |       |   |   |   |   |
| **Operating  income:**          | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                |       | $                                     | 23,667     |                                 | $          | 23,532 |   | $ | 71,401 |   | $ | 71,437 |   |
| Industrial and  Power Equipment |       | 2,831                                 |       | 3,949                                |       | 5,617 |   | 11,980 |   |
| Inter-segment  elimination      |       | —                                |       | 56                                   |       | — |   | 29 |   |
| Contribution  from segments     |       | 26,498                                |       | 27,537                               |       | 77,018 |   | 83,446 |   |
| Corporate  expenses             |       | (3,903                                | )          | (4,078                               | )          | (14,201 | ) | (13,688 | ) |
| Retirement plan  redesign       |       | —                                |       | (3,747                               | )          | — |   | (3,747 | ) |
| Plant closure  costs            |       | —                                |       | (1,055                               | )          | — |   | (1,055 | ) |
| Operating income                |       | $                                     | 22,595     |                                 | $          | 18,657 |   | $ | 62,817 |   | $ | 64,956 |   |
|                                 |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**NOTE11:  SUPPLEMENTAL CASH FLOWS INFORMATION**
| ** **                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Interest paid              |       | $                                    | 27,145     |   | $ | 29,255 |   |
| Income taxes  paid, net    |       | 10,544                               |       | 6,871 |   |
|                            |            |                                      |            |  |  |  |  |

 

 

**NOTE12:  RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”).  SFAS No.157 defines fair value, establishes a framework for measuring fair value inaccordance with accounting principles generally accepted in the U.S., andexpands disclosures about fair value measurements.  The provisions of SFASNo. 157 are effective for the Company on January 1, 2008.  The Company iscurrently evaluating the impact of the provisions of SFAS No. 157.

 

InFebruary 2007, the FASB issued SFAS No. 159, “Fair Value Option for FinancialAssets and Financial Liabilities-Including an Amendment of FASB Statement No.115” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value.  Theprovisions of SFAS No. 159 are effective for the Company on January 1,2008.  The Company is currently evaluating the impact of the provisions ofSFAS No. 159.

 

 

**NOTE13:  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-guarantor subsidiaries.

 

 

13

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**CondensedConsolidating Statement of Operations Information**

 
| **(Amounts in thousands)**                                    | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
|                                                          |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |
| **For the  Three Months Ended  September 30, 2007**           |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |
| Sales                                                         |       |                             |       | $                 | 129,801    |                        | $          | 12,145                          |       | $                | 78,864     |             | $          | (53,900 | ) | $ | 166,910 |   |
| Cost of sales                                                 |       |                             |       | 90,237            |       | 9,921                       |       | 70,218                          |       | (54,693          | )          | 115,683          |       |
| Gross profit                                                  |       |                             |       | 39,564            |       | 2,224                       |       | 8,646                           |       | 793              |       | 51,227           |       |
| Operating  expenses                                           |       |                             |       | 19,667            |       | 878                         |       | 8,001                           |       | 86               |       | 28,632           |       |
| Operating income                                              |       |                             |       | 19,897            |       | 1,346                       |       | 645                             |       | 707              |       | 22,595           |       |
| Other income  (expense), net                                  |       | $                                | (5,782     | )                 | (1,839     | )                           | 506        |                            | (310       | )                |       |             | (7,425     | ) |
| Income (loss)  from continuing operations before income taxes |       | (5,782                           | )          | 18,058            |       | 1,852                       |       | 335                             |       | 707              |       | 15,170           |       |
| Provision  (benefit) for income taxes                         |       | 31                               |       | 5,582             |       | 602                         |       | (488                            | )          |             |       | 5,727            |       |
| Income (loss)  from continuing operations                     |       | (5,813                           | )          | 12,476            |       | 1,250                       |       | 823                             |       | 707              |       | 9,443            |       |
| Equity in  earnings (losses) of affiliated companies          |       | 15,256                           |       | 2,780             |       | (99                         | )          |                            |       | (17,937          | )          |             |       |
| Net income                                                    |       | $                                | 9,443      |              | $          | 15,256                      |       | $                               | 1,151      |             | $          | 823              |       | $ | (17,230 | ) | $ | 9,443 |   |
|                                                          |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                          |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
| **(Amounts in thousands)**                                    | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the  Nine Months Ended  September 30, 2007**            |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |   |   |   |   |   |
| Sales                                                         |       |                             |       | $                 | 374,639    |                        | $          | 35,766                          |       | $                | 234,242    |             | $          | (163,298 | ) | $ | 481,349 |   |
| Cost of sales                                                 |       |                             |       | 270,255           |       | 29,460                      |       | 194,278                         |       | (162,390         | )          | 331,603          |       |
| Gross profit                                                  |       |                             |       | 104,384           |       | 6,306                       |       | 39,964                          |       | (908             | )          | 149,746          |       |
| Operating  expenses                                           |       |                             |       | 60,677            |       | 3,069                       |       | 23,183                          |       |             |       | 86,929           |       |
| Operating income                                              |       |                             |       | 43,707            |       | 3,237                       |       | 16,781                          |       | (908             | )          | 62,817           |       |
| Other income  (expense), net                                  |       | $                                | (17,566    | )                 | (5,500     | )                           | 782        |                            | (1,389     | )                |       |             | (23,673    | ) |
| Income (loss)  from continuing operations before income taxes |       | (17,566                          | )          | 38,207            |       | 4,019                       |       | 15,392                          |       | (908             | )          | 39,144           |       |
| Provision  (benefit) for income taxes                         |       | (3,937                           | )          | 14,805            |       | 1,417                       |       | 1,515                           |       |             |       | 13,800           |       |
| Income (loss)  from continuing operations                     |       | (13,629                          | )          | 23,402            |       | 2,602                       |       | 13,877                          |       | (908             | )          | 25,344           |       |
| Loss from  discontinued operations                            |       |                             |       |              |       | (53                         | )          |                            |       |             |       | (53              | )          |
| Equity in  earnings of affiliated companies                   |       | 38,920                           |       | 15,518            |       | 141                         |       |                            |       | (54,579          | )          |             |       |
| Net income                                                    |       | $                                | 25,291     |              | $          | 38,920                      |       | $                               | 2,690      |             | $          | 13,877           |       | $ | (55,487 | ) | $ | 25,291 |   |
|                                                               |            |                                  |            |                   |            |                             |            |                                 |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

14

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**CondensedConsolidating Statement of Operations Information**

 
| **(Amounts in thousands)**                                    | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the  Three Months Ended  September 30, 2006**      |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |
| Sales                                                         |       |                             |       | $                 | 114,885    |                        | $          | 24,061                            |       | $                | 71,935     |             | $          | (46,784 | ) | $ | 164,097 |   |
| Cost of sales                                                 |       |                             |       | 78,681            |       | 15,255                      |       | 53,132                            |       | (32,158          | )          | 114,910          |       |
| Gross profit                                                  |       |                             |       | 36,204            |       | 8,806                       |       | 18,803                            |       | (14,626          | )          | 49,187           |       |
| Selling, general  and administrative expenses                 |       |                             |       | 21,362            |       | 2,038                       |       | 7,130                             |       |             |       | 30,530           |       |
| Operating income                                              |       |                             |       | 14,842            |       | 6,768                       |       | 11,673                            |       | (14,626          | )          | 18,657           |       |
| Other income  (expense), net                                  |       | $                                | (5,896     | )                 | $          | (4,471                      | )          | 678                               |       | 526              |       |             |       | (9,163 | ) |
| Income (loss)  from continuing operations before income taxes |       | (5,896                           | )          | 10,371            |       | 7,446                       |       | 12,199                            |       | (14,626          | )          | 9,494            |       |
| Provision  (benefit) for income taxes                         |       | (2,393                           | )          | (4,715            | )          | 5,255                       |       | 1,213                             |       |             |       | (640             | )          |
| Income (loss)  from continuing operations                     |       | (3,503                           | )          | 15,086            |       | 2,191                       |       | 10,986                            |       | (14,626          | )          | 10,134           |       |
| Income from  discontinued operations                          |       |                             |       |              |       | 4,990                       |       |                              |       |             |       | 4,990            |       |
| Equity in  earnings of affiliated companies                   |       | 18,627                           |       | 3,541             |       | 88                          |       |                              |       | (22,256          | )          |             |       |
| Net income                                                    |       | $                                | 15,124     |              | $          | 18,627                      |       | $                                 | 7,269      |             | $          | 10,986           |       | $ | (36,882 | ) | $ | 15,124 |   |
|                                                          |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                          |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **(Amounts in thousands)**                                    | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **For the  Nine Months Ended  September 30, 2006**       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |   |   |   |   |   |
| Sales                                                         |       |                             |       | $                 | 349,771    |                        | $          | 79,608                            |       | $                | 211,547    |             | $          | (147,933 | ) | $ | 492,993 |   |
| Cost of sales                                                 |       |                             |       | 254,792           |       | 58,898                      |       | 160,963                           |       | (134,671         | )          | 339,982          |       |
| Gross profit                                                  |       |                             |       | 94,979            |       | 20,710                      |       | 50,584                            |       | (13,262          | )          | 153,011          |       |
| Selling, general  and administrative expenses                 |       |                             |       | 60,169            |       | 6,079                       |       | 21,807                            |       |             |       | 88,055           |       |
| Operating income                                              |       |                             |       | 34,810            |       | 14,631                      |       | 28,777                            |       | (13,262          | )          | 64,956           |       |
| Other income  (expense), net                                  |       | $                                | (16,923    | )                 | (9,591     | )                           | 347        |                              | (21        | )                |       |             | (26,188    | ) |
| Income (loss)  from continuing operations before income taxes |       | (16,923                          | )          | 25,219            |       | 14,978                      |       | 28,756                            |       | (13,262          | )          | 38,768           |       |
| Provision  (benefit) for income taxes                         |       | (6,363                           | )          | 4,398             |       | 5,632                       |       | 6,234                             |       |             |       | 9,901            |       |
| Income (loss)  from continuing operations                     |       | (10,560                          | )          | 20,821            |       | 9,346                       |       | 22,522                            |       | (13,262          | )          | 28,867           |       |
| Income from  discontinued operations                          |       |                             |       |              |       | 4,641                       |       |                              |       |             |       | 4,641            |       |
| Equity in  earnings of affiliated companies                   |       | 44,068                           |       | 23,247            |       | 294                         |       |                              |       | (67,609          | )          |             |       |
| Net income                                                    |       | $                                | 33,508     |              | $          | 44,068                      |       | $                                 | 14,281     |             | $          | 22,522           |       | $ | (80,871 | ) | $ | 33,508 |   |
|                                                               |            |                                  |            |                   |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

 

15

----

 

**CondensedConsolidating Balance Sheet Information**

 
| **(Amounts in thousands)**                                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **September  30, 2007**                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** |
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Assets**                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Cash and cash  equivalents                                 |       |                             |       |              |       | $                           | 40         |                              | $          | 38,180           |       | $                | (4,597     | )  | $ | 33,623 |   |
| Accounts  receivable, net                                  |       |                             |       | $                 | 52,481     |                        | 5,756      |                              | 35,650     |             |       |             | 93,887     |   |
| Intercompany  receivables                                  |       |                             |       | 173,574           |       | 86,879                      |       | 4,269                             |       | (264,722         | )     |             |       |
| Inventories                                                |       |                             |       | 61,248            |       | 5,710                       |       | 24,497                            |       | (1,193           | )     | 90,262           |       |
| Deferred income  taxes                                     |       |                             |       | 14,713            |       |                        |       | 212                               |       |             |       | 14,925           |       |
| Other current  assets                                      |       |                             |       | 6,083             |       | 54                          |       | 5,801                             |       |             |       | 11,938           |       |
| Total current  assets                                      |       |                             |       | 308,099           |       | 98,439                      |       | 108,609                           |       | (270,512         | )          | 244,635          |       |
| Investments in  affiliated companies                       |       | $                                | 187,849    |              | 247,030    |                        | 673        |                              | 248        |             | (435,800   | )                |       |   |
| Property, plant  and equipment, net                        |       |                             |       | 40,332            |       | 10,717                      |       | 48,786                            |       |             |       | 99,835           |       |
| Assets held for  sale                                      |       |                             |       | 1,500             |       |                        |       |                              |       |             |       | 1,500            |       |
| Goodwill and  other assets                                 |       |                             |       | 103,390           |       | 11,893                      |       | 13,029                            |       | (1,859           | )          | 126,453          |       |
| Total Assets                                               |       | $                                | 187,849    |              | $          | 700,351                     |       | $                                 | 121,722    |             | $          | 170,672          |       | $ | (708,171 | ) | $ | 472,423 |   |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                             |       |              |       |                        |       |                              |       |
|                                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Current  maturities of long-term debt                      |       |                             |       | $                 | 1,500      |                        |       |                              |       |             |       |             | $          | 1,500 |   |
| Accounts payable                                           |       |                             |       | 30,033            |       | $                           | 3,830      |                              | $          | 9,391            |       | $                | (4,597     | )  | 38,657 |   |
| Intercompany  payables                                     |       | $                                | 264,722    |              |       |                        |       |                              |       |             | (264,722   | )           |       |   |
| Other current liabilities                                  |       |                             |       | 42,566            |       | 3,624                       |       | 18,202                            |       |             |       | 64,392           |       |
| Total current  liabilities                                 |       | 264,722                          |       | 74,099            |       | 7,454                       |       | 27,593                            |       | (269,319         | )          | 104,549          |       |
| Long-term debt,  excluding current maturities              |       |                             |       | 353,500           |       |                        |       |                              |       |             |       | 353,500          |       |
| Other  liabilities                                         |       | 1,215                            |       | 84,903            |       |                        |       | 8,203                             |       | (1,859           | )          | 92,462           |       |
| Total  liabilities                                         |       | 265,937                          |       | 512,502           |       | 7,454                       |       | 35,796                            |       | (271,178         | )          | 550,511          |       |
| Stockholders’  equity (deficit)                       |       | (78,088                          | )          | 187,849           |       | 114,268                     |       | 134,876                           |       | (436,993         | )          | (78,088          | )          |
| Total  Liabilities and Stockholders’ Equity (Deficit) |       | $                                | 187,849    |              | $          | 700,351                     |       | $                                 | 121,722    |             | $          | 170,672          |       | $ | (708,171 | ) | $ | 472,423 |   |
|                                                            |            |                                  |            |                   |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

16

----

 

**CondensedConsolidating Balance Sheet Information**

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

 

 

17

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**CondensedConsolidating Cash Flows Information**

** **
| **(Amounts in thousands)**                            | ** ** | **Blount International, Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **For the  Nine Months Ended  September 30, 2007**    |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                              | 3,920      |              | $          | (936                       | )          | $                              | 590        |             | $          | 13,330           |       | $ | (2,745 | ) | $ | 14,159 |   |
| ** **                                            |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Purchase of  property, plant and equipment            |       |                           |       | (8,377            | )          | (1,397                     | )          | (4,584                         | )          |             |       | (14,358          | )          |
| Other                                                 |       |                           |       | 152               |       | 1,562                      |       | 36                             |       |             |       | 1,750            |       |
| Net cash used in  investing activities                |       | —                         |       | (8,225            | )          | 165                        |       | (4,548                         | )          | —           |       | (12,608          | )          |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       |                           |       | 5,250             |       |                       |       |                           |       |             |       | 5,250            |       |
| Repayment of  term loan principal                     |       |                           |       | (1,125            | )          |                       |       |                           |       |             |       | (1,125           | )          |
| Advances from  (to) affiliates                        |       | (4,231                         | )          | 5,036             |       | (805                       | )          |                           |       |             |       |             |       |
| Other                                                 |       | 311                            |       |              |       |                       |       |                           |       |             |       | 311              |       |
| Net cash  provided by (used in) financing activities  |       | (3,920                         | )          | 9,161             |       | (805                       | )          | —                         |       | —           |       | 4,436            |       |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       |                           |       |              |       | (50                        | )          | 8,782                          |       | (2,745           | )          | 5,987            |       |
| Cash and cash  equivalents at beginning of period     |       | —                         |       | —            |       | 90                         |       | 29,398                         |       | (1,852           | )          | 27,636           |       |
| Cash and cash  equivalents at end of period           |       | $                              | —     |              | $          | —                     |       | $                              | 40         |             | $          | 38,180           |       | $ | (4,597 | ) | $ | 33,623 |   |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| **For the  Nine Months Ended  September 30, 2006**    |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                              | 6,347      |              | $          | (2,917                     | )          | $                              | (1,274     | )                | $          | 12,830           |       | $ | (2,835 | ) | $ | 12,151 |   |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Purchase of  property, plant and equipment            |       |                           |       | (8,055            | )          | (1,509                     | )          | (5,999                         | )          |             |       | (15,563          | )          |
| Discontinued operations                               |       |                           |       |              |       | 32,644                     |       |                           |       |             |       | 32,644           |       |
| Other                                                 |       |                           |       | 43                |       | 1                          |       | (443                           | )          |             |       | (399             | )          |
| Net cash provided  by (used in) investing activities  |       | —                         |       | (8,012            | )          | 31,136                     |       | (6,442                         | )          | —           |       | 16,682           |       |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       |                           |       | 53,000            |       |                       |       |                           |       |             |       | 53,000           |       |
| Repayment of  term loan principal                     |       |                           |       | (78,820           | )          |                       |       | (4,653                         | )          |             |       | (83,473          | )          |
| Advances from  (to) affiliates                        |       | (7,544                         | )          | 37,406            |       | (29,862                    | )          |                           |       |             |       |             |       |
| Other                                                 |       | 1,197                          |       | (700              | )          |                       |       |                           |       |             |       | 497              |       |
| Net cash  provided by (used in) financing activities  |       | (6,347                         | )          | 10,886            |       | (29,862                    | )          | (4,653                         | )          | —           |       | (29,976          | )          |
|                                                  |       |                           |       |              |       |                       |       |                           |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       |                           |       | (43               | )          |                       |       | 1,735                          |       | (2,835           | )          | (1,143           | )          |
| Cash and cash  equivalents at beginning of period     |       |                           |       | 43                |       |                       |       | 13,731                         |       | (837             | )          | 12,937           |       |
| Cash and cash  equivalents at end of period           |       | $                              | —     |              | $          | —                     |       | $                              | —     |             | $          | 15,466           |       | $ | (3,672 | ) | $ | 11,794 |   |
|                                                       |            |                                |            |                   |            |                            |            |                                |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

18

----

 

 

 

**NOTE14:  SUBSEQUENT EVENTS**

 

***Discontinued Forestry Division.***  On November 5, 2007, the Company sold itsForestry Division to Caterpillar Forest Products Inc., a wholly-ownedsubsidiary of Caterpillar Inc. The Company received consideration of $77.3million for the sale.  Proceeds receivedupon completion of the transaction are subject to certain post-closingadjustments and will be utilized to reduce debt and pay applicable taxes andtransaction fees.

 

TheCompany’s Forestry Division manufactured and distributed purpose-built timberharvesting equipment, industrial tractors and loaders. The Forestry Division isincluded in the Industrial and Power Equipment Segment in the accompanyingfinancial statements. The Forestry Division will be reported as discontinuedoperations in subsequent financial statements. Selected financial data for the Forestry Division included in theconsolidated statement of income is presented below:

 
| ** **                        | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                                  |       |                                 |       |   |   |   |   |
| Sales                             |       | $                                     | 37,851     |                                 | $          | 45,278 |   | $ | 99,761 |   | $ | 131,193 |   |
| Contribution to  operating income |       | 2,275                                 |       | 2,708                                |       | 3,838 |   | 9,946 |   |
| Plant closure  costs              |       | —                                |       | 1,055                                |       | — |   | 1,055 |   |
|                                   |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

Totalassets of the Forestry Division, included in the consolidated balance sheets,were $71.7 million at September 30, 2007 and $65.9 million at December 31,2006.

 

TheCompany will recognize a gain on the sale from this transaction in the fourthquarter of this year. It is estimated that the gain on sale will be between $10million and $12 million. Net cash proceeds after payment of taxes, fees andescrow requirements are estimated to be between $46 and $48 million.

 

***2007 Amendment of Credit Agreements.***  EffectiveNovember 5, 2007, the Company amended the terms of its senior credit facilityagreements to provide the following:

 

•                  Permit the sale of the Forestry Division;

•                  Permit one-time exclusions related to the sale of theForestry Division and related restructuring events with respect to certain covenantratios;

•                  Authorize permitted acquisitions up to $100 millionper acquisition, not to exceed $200 million over the term of the Agreement; and

•                  Reduce the maximum permitted Senior Leverage Ratiofrom 2.75 to 2.50 times trailing 12-month adjusted EBITDA.

In conjunction with this amendment, the Company paid its Senior CreditFacility lenders a $0.6 million fee, which will be recorded as deferredfinancing costs in the fourth quarter of 2007 and amortized over the remainingterm of the agreements.

 

 

19

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**ITEM2.**  **MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis should be read in conjunction with ourunaudited consolidated financial statements included elsewhere in this report.

 

**Results of Operations**

**Three months and nine months ended September 30,2007 compared to three months and nine months ended September 30, 2006.**
| ** **                                             | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands, except per share data)**      | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Sales                                                  |       | $                                     | 166,910    |                                 | $          | 164,097 |   | $ | 481,349 |   | $ | 492,993 |   |
| Gross profit                                           |       | 51,227                                |       | 49,187                               |       | 149,746 |   | 153,011 |   |
| Operating income                                       |       | 22,595                                |       | 18,657                               |       | 62,817 |   | 64,956 |   |
| Income from  continuing operations                     |       | 9,443                                 |       | 10,134                               |       | 25,344 |   | 28,867 |   |
| Income (loss)  from discontinued operations            |       | —                                |       | 4,990                                |       | (53 | ) | 4,641 |   |
| Net income                                             |       | 9,443                                 |       | 15,124                               |       | 25,291 |   | 33,508 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations per diluted share   |       | 0.20                                  |       | 0.21                                 |       | 0.53 |   | 0.60 |   |
| Income from  discontinued operations per diluted share |       | 0.00                                  |       | 0.11                                 |       | 0.00 |   | 0.10 |   |
| Net income per  diluted share                          |       | 0.20                                  |       | 0.32                                 |       | 0.53 |   | 0.70 |   |
|                                                        |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

Sales in the three months ended September 30, 2007 increased$2.8 million, or 2%, from the same period in 2006. For the nine month period,sales decreased year-over-year by $11.6 million, or 2%.  During 2007, sales of the Company’s productsto international markets have increased from the comparable periods in2006.  Sales outside North Americaincreased 20% in the three month period and 17% in the nine month period.  These stronger international sales wereoffset by declines in North American markets, primarily due to lower sales oftimber harvesting equipment.  Demand fortimber products and timber harvesting equipment continues to be weak in NorthAmerica, due in part to the decline in housing starts.  Sales for the three month and nine monthperiods in North America declined by 14% and 17%, respectively, from thecomparable periods in 2006.

Consolidatedorder backlog at September 30, 2007 was $91.2 million, compared to $73.3million at December 31, 2006 and $93.5 million at September 30, 2006.

 

Grossprofit increased by $2.0 million, or 4%, for the three month period, butdecreased by $3.3 million, or 2%, for the nine month period.  As a percent of sales, gross margin increasedto 30.7% for the three months compared to 30.0% for the same period in2006.  Gross margin was 31.1% for thefirst nine months of 2007, compared to 31.0% for the first nine months of 2006.

 

The year-over-year change in consolidated gross profit ispresented in the following table: 
| **(Amounts in millions)**     | ** ** | **Three months  Ended September 30** | ** ** | **Nine months  Ended September 30** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| 2006 gross  profit            |       | $                                    | 49.2       |                                | $          | 153.0 |   |
| Increase  (decrease)          |       |                                 |       |                                |       |
| Sales volume                  |       | 1.3                                  |       | (2.5                                | )          |
| Price, cost and  mix          |       | 0.7                                  |       | (1.8                                | )          |
| Foreign currency  translation |       | —                               |       | 1.0                                 |       |
| 2007 gross  profit            |       | $                                    | 51.2       |                                | $          | 149.7 |   |

The changes attributed to sales volume reflect increases inunit sales outside of North America, offset by decreases in the U.S. andCanadian markets.  The combined effect ofproduct price, cost and mix was favorable for the three

 

 

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month period, but was unfavorable for the nine month period,as cost increases outpaced productivity gains. Changes in price and product mix have generally been favorable, but havebeen offset by higher costs.  Changes insteel prices were neutral for the three month period, but had an unfavorableeffect estimated at $0.9 million for the nine month period compared to lastyear.  Higher costs in the current yearalso included increases for freight which were driven, in part, by higherenergy costs.  In addition, the ninemonth period of 2007 includes $1.0 million of non-recurring expense related toconsolidation within our logistics operations.

 

Selling,general and administrative (“SG&A”) expense was $28.6 million and $86.9million for the three and nine month periods of 2007, respectively.  As a percent of sales, in 2007 SG&Aincreased to 17.2% for the three month period and to 18.1% for the nine monthperiod compared to 15.7% and 16.9% for the respective periods in 2006.  The year-over-year increases of $2.9 million,or 11%, for the three months, and $3.7 million, or 4%, for the nine monthperiod include $0.7 million and $1.6 million of additional expense in ourforeign offices (primarily in Europe) as a result of movement in currencyexchange rates.  Other year-over-year increasesfor the three and nine month periods include higher wages of $0.3 million and$0.8 million, respectively, and increases in performance-based compensation of$0.4 million and $1.0 million, respectively. Stock-based compensation expense was $0.1 million lower for the threemonths, but was $0.4 million higher for the nine month period compared to thesame periods last year.  Professionalexpenses have increased $0.7 million and $0.3 million during the three monthand nine month periods, primarily due to higher legal expenses, partially offsetby reductions in compliance-related audit fees. Advertising expense has decreased year-over-year by $0.2 million for thethree months and $0.5 million for the nine months.  For the nine month period, expense forR&D materials decreased $0.6 million.

 

Operatingincome increased $3.9 million for the three month period, with an operatingmargin of 13.5% compared to 11.4% in the three month period last year.  For the nine month period, operating incomedecreased by $2.1 million compared to the same period in 2006, with anoperating margin of 13.1% compared to 13.2% last year.  Included in last year’s three and nine monthperiods were $4.8 million of nonrecurring expenses related to the redesign ofU.S. retirement plans and plant closure costs. Excluding these nonrecurring expenses in 2006, the comparable operatingmargin would have been 14.3% and 14.1% for the three and nine month periods,respectively.

 

Interestexpense was $8.5 million and $25.3 million during the three months and ninemonths ended September 30, 2007, respectively, compared to $8.9 million and$27.2 million during the same periods in 2006. The decreases in interest expense were due primarily to lower averageoutstanding debt balances.  Interestincome of $0.4 million and $0.9 million for the three and nine month periods,respectively, was approximately four times last year’s levels due to theincrease in cash balances at our foreign subsidiaries.

 

Otherincome was $0.7 million for the three and nine months of 2007 and was primarilyattributable to gains on the sale of assets, including $0.4 million for aformer manufacturing facility in Coffeyville, Kansas.  This compares to other expense of $0.3million and other income of $0.8 million during the same periods of 2006,respectively.  Included in the nine monthperiod of 2006 were proceeds from two insurance settlements.

 

Theprovision for income taxes on continuing operations was $5.7 million, with aneffective tax rate of 37.8% on pre-tax book income, and $13.8 million, with aneffective rate of 35.3%, respectively, in the three and nine month periodsended September 30, 2007.  For the threeand nine month periods last year we recorded a tax benefit of $0.6 million anda tax provision of $9.9 million, respectively. Last year’s three month period reflected the nine month effect ofimplementing tax planning initiatives with higher anticipated deductions andexclusions, and the effective tax rate for the nine month period was25.5%.  During the nine months endedSeptember 30, 2007, the federal net operating loss carryforward was fully usedto offset U.S. taxable income and hence U.S. income taxes for subsequentperiods, including the three months ended September 30, 2007, will requiresettlement in cash.  We utilizedavailable net operating loss and tax credit carryforwards to offset cash taxespayable in the U.S. during all other periods presented.

 

Discontinuedoperations consisted entirely of our former Lawnmower segment, which operatedthrough July 26, 2006.  In the currentyear, the loss from discontinued operations was $0.1 million for the nine monthperiod.  This loss primarily reflectscosts of continuing to own the idle manufacturing facility for this segmentwhile it was being marketed for sale. This facility was sold in September 2007 for cash proceeds of $1.6million.  Income of $5.0 million ($0.11per diluted share) and $4.6 million ($0.10 per diluted share), respectively,was recognized for the

 

 

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threeand nine month periods in 2006.  The 2006pre-tax income of $12.8 million and $12.2 million, respectively, included a$17.7 million pre-tax gain on the disposal of net assets, partially offset byseverance and pension curtailment costs related to the impending plant closureassociated with the sale of the business announced on June 30, 2006.

 

***SegmentResults.*******
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Sales:**                      | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                |       | $                                     | 122,112    |                                 | $          | 111,481 |   | $ | 361,085 |   | $ | 340,400 |   |
| Industrial and  Power Equipment |       | 44,984                                |       | 52,747                               |       | 120,789 |   | 153,226 |   |
| Inter-Segment  elimination      |       | (186                                  | )          | (131                                 | )          | (525 | ) | (633 | ) |
| Total sales                     |       | $                                     | 166,910    |                                 | $          | 164,097 |   | $ | 481,349 |   | $ | 492,993 |   |
|                            |       |                                  |       |                                 |       |   |   |   |   |
| **Operating  income:**          | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outdoor Products                |       | $                                     | 23,667     |                                 | $          | 23,532 |   | $ | 71,401 |   | $ | 71,437 |   |
| Industrial and  Power Equipment |       | 2,831                                 |       | 3,949                                |       | 5,617 |   | 11,980 |   |
| Inter-Segment  elimination      |       | —                                |       | 56                                   |       | — |   | 29 |   |
| Contribution  from segments     |       | 26,498                                |       | 27,537                               |       | 77,018 |   | 83,446 |   |
| Corporate  expenses             |       | (3,903                                | )          | (4,078                               | )          | (14,201 | ) | (13,688 | ) |
| Retirement plan  redesign       |       | —                                |       | (3,747                               | )          | — |   | (3,747 | ) |
| Plant closure  costs            |       | —                                |       | (1,055                               | )          | — |   | (1,055 | ) |
| Operating income                |       | $                                     | 22,595     |                                 | $          | 18,657 |   | $ | 62,817 |   | $ | 64,956 |   |
|                                 |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment in the three monthsended September 30, 2007 increased $10.6 million, or 10%, compared to the sameperiod of 2006.  Sales for the segment inthe nine months ended September 30, 2007 increased $20.7 million, or 6%,compared to the same period of 2006.

 

Stronginternational market conditions led to year-over-year increases in unit volumeacross most product categories.  Thisvolume increase resulted in an increase in sales of $6.1 million for the threemonth period and $10.4 million for the nine month period compared to the sameperiods last year.  Compared to lastyear, improvements in average selling prices generated additional sales revenueof $2.5 million for the quarter and $4.7 million for the nine monthperiod.  Additionally, the year-over-yeareffect from foreign currency translation on sales, due primarily to movement ofexchange rates involving European currencies, was $2.0 million favorable forthe three month period and $5.6 million favorable for the nine month period.  Geographically, sales grew outside the U.S. by14% and 12% for the three and nine months ended September 30, 2007,respectively, compared to the same periods of 2006.  Sales within the U.S. were flat for the threemonth period on a year-over-year basis, but were 5% lower for the nine monthperiod due to lower volume in the first quarter.  Sales of outdoor care parts and accessoriesincreased 28% in the third quarter compared to last year and were 8% higher ona year to date basis.  Sales of chainsawcomponents and accessories increased by 8% and 6% for the three and nine monthperiods ended September 30, 2007, respectively, compared to the same periods of2006.  Sales of concrete cutting productsincreased by 3% for the comparable three month period and were 5% higher thanthe nine month period last year.  Orderbacklog for the segment was $67.6 million at September 30, 2007 compared to$54.8 million at December 31, 2006 and $64.8 million at September 30, 2006.

 

Segmentcontribution to operating income increased $0.1 million for the three monthperiod and was flat for the nine month period compared to the same periods lastyear.  For the three month period, theoperating margin was 19.4% compared to 21.1% last year.  For the nine month period the operating marginwas 19.8% of sales compared to 21.0% for the same period in 2006.  The increase in sales volume generated anadditional $3.1 million of income for the three month period and an increase of$5.7 million for the nine month period compared to last year. For both periods,the favorable effect of higher sales volumes was largely offset by theunfavorable net effects from price and cost, product mix and foreign exchangerates.  The net effect of changes inselling price, cost and mix had an unfavorable effect of $0.3 million and $3.4million, respectively, compared to the three and nine month periods in 2006,with increases in freight costs being a primary factor.  Segment contribution for the nine monthperiod in 2007

 

 

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alsoincluded a non-recurring expense related to consolidation of logisticsoperations in the U.S., which is expected to improve customer service andreduce future logistical expenses.  Thenet effect of foreign exchange was unfavorable $0.6 million and $0.5 million,respectively, for the three and nine month periods.  During both periods of 2007, the U.S. dollarwas weaker compared to European currencies during the same periods of 2006,providing a positive effect on sales. However, the favorable effect on sales was more than offset by thenegative effect from the weaker U.S. dollar that resulted in increased productcosts and operating expenses, after translation to U.S. Dollars, for ourEuropean sales offices and in our Brazilian and Canadian manufacturingplants.  SG&A expense increased $2.7million and $3.4 million, respectively, largely due to increases incompensation costs and higher legal fees.

 

***Industrial and Power Equipment Segment.***** **Sales for the Industrial and Power Equipment segmentdecreased $7.8 million, or 15%, and $32.4 million, or 21%, respectively, in thethree and nine month periods ended September 30, 2007, compared to the sameperiods of 2006.

 

Theyear-over-year sales decline was caused primarily by lower unit sales volume ofour timber harvesting equipment, with negative impacts of $8.0 million and$33.7 million for the three and nine month periods.  The volume decrease occurred across mostproduct lines.  Geographically, sales inNorth America decreased 24% and 27% year-over-year for the three and nine monthperiods, respectively.  Weaker timbermarkets, caused in part by a decline in U.S. housing starts, were the primaryreason for the market decline in these products, and shipments in the firstquarter of 2007 were further impacted by an inventory reduction at the dealerlevel.  These decreases were partiallyoffset by an increase in sales volume outside North America and by improvementsin price and mix.  Compared to last year,sales of timber harvesting equipment outside North America increased $4.0million, or 122%, and $7.2 million, or 80%, for the three and nine monthperiods, and were strongest in Latin America. Sales outside North America represented 19% of our total timber harvestingequipment sales in the three months ended September 30, 2007 and 16% for thenine month period of 2007.  Sales of ourrotational bearings and swing drive products were also lower compared to lastyear, with lower unit volumes of $0.8 million and $3.7 million, respectively,for the three and nine month periods of 2007 compared to 2006.  These decreases in sales volume of gearcomponents were partially offset by improvements in price and product mix.  Order backlog for the segment was $23.6million at September 30, 2007 compared to $18.5 million at December 31, 2006and $28.7 million at September 30, 2006.

 

Threemonth segment contribution to operating income decreased $1.1 million, to 6.3%of sales, compared to 7.5% of sales last year. For the nine month period, segment contribution to operating incomedecreased $6.4 million, to 4.7% of sales, compared to 7.8% last year.  For both the three and nine month periods,lower sales volume was partially offset by improvements in selling prices,product mix and the reduction of plant overhead, partially resulting from theclosure of one of the segment’s manufacturing plants in 2006.  The effect of changes in steel prices wasminimal year-over-year for the three month period, but had an estimated adverseeffect of $0.6 million for the nine months.

 

***Corporate Expense.***  Corporate expense for the three and ninemonth periods ended September 30, 2007 was $3.9 million and $14.2 million,respectively, representing a decrease of $0.2 million for the three months andan increase of $0.5 million for the nine months compared to both periods lastyear.  Stock-based compensation expensewas $0.6 million and $3.3 million, respectively, for the three and nine monthperiods, $0.1 million lower and $0.4 million higher than the same periods lastyear.  Awards typically vest over threeyears and the expense is weighted more heavily in the period of grant becauseof the number of grantees who are retirement-eligible at the grant date.  Under SFAS No. 123(R), the fair value of stockawards must be expensed immediately at the grant date for retirement-eligiblegrantees.  The year-over-year decreasefor the three months ended September 30, 2007 was due to prior year grantactivity receiving this accelerated expense treatment.  Generally, however, our stock-basedcompensation expense is expected to increase during the three year periodending December 31, 2008, largely as a result of adding expense for new grantsto the ongoing period expense of awards made since the adoption of SFAS No.123(R) in 2006.  Stock-based compensationexpense for the fiscal year 2007 is expected to be approximately $3.8 millioncompared to $3.3 million for the year 2006. Salaries and performance-based compensation increased $0.2 million and$0.6 million year-over-year for the three and nine month periods, respectively,reflecting annual wage increases and additional staffing.  Benefit expenses decreased $0.2 million and$0.4 million during the three and nine month periods.   Expenses for professional services decreased$0.2 million and $0.3 million, respectively, for the three and nine monthperiods due to a decrease in compliance-related audit services.

 

 

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**FinancialCondition, Liquidity and Capital Resources**

 

Totaldebt at September 30, 2007 was $355.0 million compared to $350.9 million atDecember 31, 2006.  As of September 30,2007, outstanding debt consisted of a revolving credit facility balance of $32.3million, a term loan of $147.8 million and senior subordinated notes of $175.0million.  The net funds borrowed duringthe first nine months of 2007 were used to support capital spending andincreases in working capital, and to make contributions to our domestic pensionplan.

 

Interestexpense was $25.3 million in the nine months ended September 30, 2007, adecrease of $2.0 million compared to the same period of 2006.  The decrease primarily reflects the favorableeffect from a reduction in the average principal amount of debtoutstanding.  Our interest expense mayvary in the future because the revolving credit facility and term loan interestrates are variable. The interest rate is fixed at 8 7/8% on the senior subordinatednotes.  Our weighted average interestrate on all debt was 8.08% as of September 30, 2007 compared to 7.99% as ofDecember 31, 2006.  Cash paid forinterest in the first nine months of 2007 was $27.1 million compared to $29.3million in the same period of 2006.

 

***2006 Amendment to Credit Facilities.***  On March 23, 2006, we amended certain termsof our senior credit facilities.  Thisamendment included the following changes to the term notes and revolving creditfacility:

•                  Maximum availability under the revolving credit facility wasincreased from $100.0 million to $150.0 million;

•                  Variable interest rates were reduced by 0.75% for the termloan and by 1.00% for the revolving credit facility, letter of credit fees werereduced by 0.75%, and unused line fees were reduced by 0.125%;

•                  Certain financial covenants were modified, includingincreases to the amounts that may be expended for acquisitions, dividends andpurchase of Company stock, as well as modifications to certain financial ratiorequirements; and

•                  The Company incurred fees and third party costs of $0.7million related to the amendment.

 

Immediately following the amendment, we completed the followingtransactions:

•                  $82.1 million was borrowed under the revolving creditfacility.

•                  The total principal balance of $4.6 million was paid off onthe Canadian term loan, and that loan was cancelled.

•                  $77.5 million in principal waspaid against the term loan, leaving a balance of $150.0 million outstanding.

The revolving credit facility provides total available borrowings up 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 September 30, 2007, we had the ability toborrow an additional $102.9 million under the terms of the revolving creditagreement.  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 borrowings and at the individual maturity dates for any LIBOR-basedterm borrowings.  Any outstandingprincipal is due in its entirety on the maturity date.

 

Theterm loan facility bears interest at the LIBOR rate plus 1.75%, or at the primerate, depending on the type of loan, and matures on August 9, 2010.  The term loan facility requires quarterlypayments of $0.4 million, with a final payment of $143.3 million due on thematurity date.  Once repaid, principalunder the term loan facility may not be re-borrowed by the Company.

 

Thesenior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of our assets or the issuance ofstock under certain circumstances, and upon the Company’s annual generation ofexcess cash flow as determined under the credit agreement.  These credit facilities contain financialcovenant calculations relating to maximum capital expenditures, minimum fixedcharge coverage ratio, maximum leverage ratio and maximum first lien creditfacilities leverage ratio.  In addition,there are

 

 

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covenantsrelating, among other categories, to investments, loans and advances,indebtedness and the sale of stock or assets. The Company was in compliance with all debt covenants as of September30, 2007.

 

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

 

Ourdebt continues to be significant, and future debt service payments continue torepresent substantial obligations.  Thisdegree of leverage may adversely affect our operations and could have importantadverse consequences.

 

Weintend to fund working capital, capital expenditures and debt servicerequirements for the next twelve months with expected cash flows generated fromoperations.  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 September 30, 2007 were $33.6 million compared to $27.6million at December 31, 2006.  The $6.0million increase in our cash balance during the first nine months of 2007compares to a decrease of $1.1 million during the same period of 2006.

 

Cashflows from operating activities are summarized in the following table:  
| ** **                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**              | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Income from  continuing operations      |       | $                                   | 25,344     |   | $ | 28,867 |   |
| Non-cash items                          |       | 24,525                              |       | 25,601 |   |
| Subtotal                                |       | 49,869                              |       | 54,468 |   |
| Changes in  assets and liabilities, net |       | (34,416                             | )          | (38,649 | ) |
| Discontinued  operations, net           |       | (1,294                              | )          | (3,668 | ) |
| Cash provided by  operating activities  |       | $                                   | 14,159     |   | $ | 12,151 |   |
|                                         |            |                                     |            |  |  |  |  |  |

 

Non-cashitems consist of expenses for depreciation of property, plant and equipment,amortization and other non-cash charges, stock compensation expense, deferredincome taxes and the tax benefit from exercise of stock options.

 

Cashprovided by operating activities during the nine months ended September 30,2007 of $14.2 million included the following:

•                  Income from continuing operationsdecreased $3.5 million from the prior year.

•                  Non-cash items decreased $1.1million, primarily due to last year’s unusual non-cash pension curtailmentexpense.  This year’s non-cash items alsoincluded:

•                  Depreciation expense of $14.2million, representing an increase of 12% compared to last year

•                  Amortization of deferredfinancing costs of $2.9 million

•                  Stock-based compensationexpense of $3.3 million

•                  Deferred income taxes of $4.7million

•                  Changes in assets andliabilities, net, included the following items:

•                  An $11.4 million increase inreceivables

•                  A $12.4 million increase ininventories

•                  A combined increase in accountspayable and accrued expenses of $7.2 million

 

 

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•                  A $14.8 million decrease inother liabilities, including contributions of $18.8 million to our fundedpension plans

•                  A $2.9 million increase inother assets

•                  Discontinued operations used$1.3 million in cash.

Cashprovided by operating activities during the nine months ended September 30,2006 of $12.2 million included the following:

•                  Income from continuingoperations of $28.9 million.

•                  Non-cash items were $25.6million and included the following:

•                  Depreciation expense of $12.7million

•                  Amortization of deferredfinancing costs of $2.7 million

•                  Stock-based compensationexpense of $2.9 million

•                  Pension curtailment charges of$3.2 million

•                  Deferred income taxes of $4.0million

•                  Changes in assets andliabilities, net, included the following items:

•                  A $10.8 million increase inreceivables

•                  A $5.3 million increase ininventories

•                  A combined decrease in accountspayable and accrued expenses of $13.7 million, reflecting a decrease in thepurchase of raw materials and other inventory, and an increase in accruedinterest expense primarily due to our debt securities

•                  A decrease in other liabilitiesof $8.8 million, primarily due to contributions made to our funded pensionplans

•                  Discontinued operations used$3.7 million in net cash.

Cashtaxes paid during the first nine months of 2007 were $10.5 million compared to$6.9 million for the same period in 2006. As of June 2007, our U.S. federal net operating loss carryforwards werefully utilized, resulting in a year-over-year increase of cash tax payments.

 

Cashflows from investing activities are summarized as follows:
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**                           | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Proceeds from  sale of property, plant and equipment |       | $                                   | 1,750      |   | $ | 104 |   |
| Acquisition of  business                             |       | —                              |       | (503 | ) |
| Purchases of  property, plant and equipment          |       | (14,358                             | )          | (15,563 | ) |
| Discontinued  operations                             |       | —                              |       | 32,644 |   |
| Cash provided by  (used in) investing activities     |       | $                                   | (12,608    | ) | $ | 16,682 |   |
|                                                      |            |                                     |            |  |  |  |  |  |

Cashused in investing activities in the first nine months of 2007 was $12.6 millionand included the following:

•                  Proceeds from the sale ofproperty, plant and equipment includes $1.6 million from the sale of a formermanufacturing facility in Coffeyville, Kansas.

•                  Purchases of property, plantand equipment primarily represents expanded manufacturing capacity andproductivity improvements, but also include routine replacement ofequipment.  In the nine months endedSeptember 30, 2007, we spent $7.2 million related to capacity, including $2.7million for our plant in China.  We alsospent $2.7 million related to consolidation of North American logistics in ourOutdoor Products segment.  During 2007,we expect to invest $20.0 million to $23.0 million in available cash forcapital expenditures, primarily capacity expansion, ongoing productivity andcost improvements in our

 

 

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manufacturing processes, routine replacement of machinery andequipment and replacement of tooling used in production processes.

The2006 activity includes the following:

•                  The purchase of VotecEngineering AB, a European manufacturer of harvester heads, for $0.5 million.

•                  Purchases of property, plantand equipment of $15.6 million.  Thisincluded $9.2 million related to capacity, with $4.8 million invested at ourmanufacturing facility in China, primarily for the installation of equipment toramp up production capacity.

•                  Cash provided from discontinuedoperations was $32.6 million.  On July27, 2006, we sold certain assets and liabilities of Dixon to Husqvarna.  Blount received preliminary proceeds of $33.9million upon the closing of the transaction, which were used to reduce debt,fund the closure of Dixon’s Coffeyville, Kansas facility and pay transitioncosts and transaction fees.  Thepreliminary proceeds received were subject to certain post-closing adjustmentsunder the terms of the related asset purchase agreement.

Cashflows from financing activities are summarized as follows:
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)**                                    | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Net increase  (decrease) in debt                              |       | $                                   | 4,125      |   | $ | (30,473 | ) |
| Debt agreement  amendment costs                               |       | —                              |       | (700 | ) |
| Proceeds and tax  benefits from the exercise of stock options |       | 311                                 |       | 1,197 |   |
| Cash provided by  (used in) financing activities              |       | $                                   | 4,436      |   | $ | (29,976 | ) |
|                                                               |            |                                     |            |  |  |  |  |  |

 

Cashprovided by financing activities in the first nine months of 2007 was $4.4million compared to $30.0 million of cash used in the comparable period of2006.  The 2007 activity included thefollowing:

•                  Net borrowing of $5.3 millionon our revolving credit facility to support operations

•                  Required repayments of $1.1million on our term loan

•                  Exercise of stock options thatgenerated $0.3 million

The2006 activity included the following:

•                  A net draw down of $53.0million on our revolving credit facility. Draw downs were necessary to fund the reduction of term loan debt aspart of the amendment to our senior credit facilities that occurred in March2006 and to support operations, and were partially offset by repayments usingproceeds from the sale of our Lawnmower segment;

•                  Payments of $83.5 million ofprincipal on our term loan debt, which included $1.3 million of scheduledpayments and $82.1 million related to the March 2006 amendment of our seniorcredit facilities;

•                  Expenditures of $0.7 millionincurred in connection with the March 2006 amendment to our senior creditfacilities; and

•                  Exercise of stock options thatgenerated $1.2 million, consisting of $0.7 million of proceeds from theexercise of stock options and a related $0.5 million of tax benefit from theseexercises.

 

**SubsequentEvents**

 

***Discontinued Forestry Division.***  On November 5, 2007, the Company sold itsForestry Division to Caterpillar Forest Products Inc., a wholly-ownedsubsidiary of Caterpillar Inc. The Company received consideration of $77.3million for the sale.  Proceeds receivedupon completion of the transaction are subject to certain post-closingadjustments and will be utilized to reduce debt and pay applicable taxes andtransaction fees.

 

OurForestry Division manufactured and distributed purpose-built timber harvestingequipment, industrial tractors and loaders. The Forestry Division is includedin the Industrial and Power Equipment Segment in the accompanying financialstatements. The Forestry Division will be reported as discontinued operationsin subsequent financial

 

 

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statements.  Selected financial data for the ForestryDivision included in the consolidated statement of income is presented below:

 
| ** **                        | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                              |       |                                  |       |                                 |       |   |   |   |   |
| Sales                             |       | $                                     | 37,851     |                                 | $          | 45,278 |   | $ | 99,761 |   | $ | 131,193 |   |
| Contribution to  operating income |       | 2,275                                 |       | 2,708                                |       | 3,838 |   | 9,946 |   |
| Plant closure  costs              |       | —                                |       | 1,055                                |       | — |   | 1,055 |   |
|                                   |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |

 

Totalassets of the Forestry Division, included in the consolidated balance sheets,were $71.7 million at September 30, 2007 and $65.9 million at December 31,2006.

 

TheCompany will recognize a gain on the sale from this transaction in the fourthquarter of this year. It is estimated that the gain on sale will be between $10million and $12 million. Net cash proceeds after payment of taxes, fees andescrow requirements are estimated to be between $46 and $48 million.

 

***2007 Amendment of Credit Agreements.***  EffectiveNovember 5, 2007, we amended the terms of our senior credit facility agreementsto provide the following:

 

•                  Permit the sale of the Forestry Division;

•                  Permit one-time exclusions related to the sale of theForestry Division and related restructuring events with respect to certaincovenant ratios;

•                  Authorize permitted acquisitions up to $100 millionper acquisition, not to exceed $200 million over the term of the Agreement; and

•                  Reduce the maximum permitted Senior Leverage Ratiofrom 2.75 to 2.50 times trailing 12-month adjusted EBITDA.

In conjunction with this amendment, the Company paid its Senior CreditFacility lenders a $0.6 million fee, which will be recorded as deferredfinancing costs in the fourth quarter of 2007 and amortized over the remainingterm of the agreements.

 

**CriticalAccounting 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, 2006, except as follows:

 

Effective January 1, 2007, we account for uncertain tax positions inaccordance with FIN No. 48, which clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes.”  The application of income tax law isinherently complex.  Laws and regulationsin this area are voluminous and are often ambiguous.  As such, we are required to make manyassumptions and judgments regarding our income tax exposures.  Interpretations of income tax laws andregulations and guidance surrounding them change over time.  Changes in our assumptions and judgments canmaterially affect amounts recognized in the consolidated financialstatements.  See Note 5 to theconsolidated financial statements for additional information on our uncertaintax positions and the impact of adopting FIN No. 48.

 

**RecentAccounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157.  SFAS No. 157 defines fair value, establishesa framework for measuring fair value in accordance with accounting principlesgenerally accepted in the U.S., and expands disclosures about fair valuemeasurements.  The provisions of SFAS No. 157 are effective for theCompany on January 1, 2008.  We are currently evaluating the impact of theprovisions of SFAS No. 157.

 

 

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InFebruary 2007, the FASB issued SFAS No. 159.  SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  The provisions of SFAS No. 159 are effective for theCompany on January 1, 2008.  We are currently evaluating the impact of theprovisions of SFAS No. 159.

 

**ForwardLooking Statements**

 

“Forwardlooking statements,” as defined by the Private Securities Litigation Reform Actof 1995, used in this report, including without 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, thecost to 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.

 

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We areexposed to market risks from changes in interest rates, foreign currencyexchange rates and commodity prices, including raw materials such as steel. Wemanage our exposure to these market risks through our regular operating andfinancing activities, and, when deemed appropriate, through the use ofderivatives. When utilized, derivatives are used as risk management tools andnot for trading or speculative purposes. See also, the “Market Risk” section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations in our most recent Form 10-K for further discussion of market risk.

 

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company’s Securities Exchange Act of 1934 reports is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and regulations, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

The Company, under the supervision and with the participationof the Company’s management, including the Company’s Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures as of the end ofthe period covered by this report. Based on this evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel.

 

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

 

 

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**PART II     OTHERINFORMATION**

 

**ITEM 6. EXHIBITS**

**(a) Exhibits:**

 

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

 

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

 

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

 

**32.2 Certification pursuant to section 906 of theSarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior Vice President andChief Financial Officer.

 

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**   Filedelectronically herewith.  Copies of suchexhibits may be obtained upon written request from:

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

 

 

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the duly authorizedundersigned.

 
| BLOUNT  INTERNATIONAL, INC.                                                                           |   |                            |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------|
|                 Registrant |   |                            |
|                                                                                                  |   |                            |
|                                                                                                  |   |                            |
| /s/  Calvin E. Jenness                                                                                |   | /s/  Mark V. Allred             |
| Calvin  E. Jenness                                                                                    |   | Mark  V. Allred                 |
| Senior  Vice President and                                                                            |   | Vice  President and Controller  |
| Chief  Financial Officer                                                                              |   | (Principal  Accounting Officer) |
|                                                                                                  |   |                            |
| Dated:  November 9, 2007                                                                              |   |                            |

 

 

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