**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |
| ** ** | ** ** | **For the quarterly period ended  March 31, 2006.**                                           |
| ** ** |
| **OR**     |
| ** ** |
| **o**      | ** ** | **Transition  report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934** |

** **

**Commission file number 001-11549**

 

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrant as specifiedin its charter)

 

| **Delaware**                                                    | ** ** | **63 0780521**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  Incorporation or organization) |       | (I.R.S. Employer  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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 
|   | Yes ý | No o |   |
|--------|-----------------|-----------|--------|

 

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

 

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

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 
|   | Yes o | No ý |   |
|--------|------------|----------------|--------|

 

Indicate the number of shares outstanding of each of theissued classes of common stock, as of the latest practicable date.

 

| **Class of  Common Stock** | ** ** | **Outstanding  at May 1, 2006** |
|----------------------------|------------|---------------------------------|
| $0.01 Par Value            |       | 47,141,525 shares               |

 

 

----

 

**BLOUNT INTERNATIONAL, INC. ANDSUBSIDIARIES**

 

**Index**

 
| Part I    Financial Information |                                                                                                                   |
|------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                                   |
|                                           | Item  1. Consolidated Financial Statements                                                                             |   |
|                                           |                                                                                                                   |   |
|                                           | Unaudited  Consolidated Statements of Income Three months ended March 31, 2006 and 2005                                |   |
|                                           |                                                                                                                   |   |
|                                           | Unaudited  Consolidated Balance Sheets March 31, 2006 and December 31, 2005                                            |   |
|                                           |                                                                                                                   |   |
|                                           | Unaudited  Consolidated Statements of Cash Flows Three months ended March 31, 2006 and  2005                           |   |
|                                           |                                                                                                                   |   |
|                                           | Unaudited  Consolidated Statement of Changes in Stockholders’ Equity (Deficit) Three  months ended March 31, 2006 |   |
|                                           |                                                                                                                   |   |
|                                           | 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                                                                                                      |   |
|                                           |                                                                                                                   |   |
| Signature                                      |                                                                                                                   |
|                                                |                                                                                                                        |  |  |

 

2

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**PART I      FINANCIAL INFORMATION**

 

**ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTSOF INCOME**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                      | ** ** | **Three Months   Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
|                                                                            |       |                                                   |       |   |   |
| Sales                                                                           |       | $                                                      | 177,740    |   | $ | 185,254 |   |
| Cost of sales                                                                   |       | 121,937                                                |       | 125,285 |   |
| Gross profit                                                                    |       | 55,803                                                 |       | 59,969 |   |
| Selling, general  and administrative expenses                                   |       | 32,603                                                 |       | 30,396 |   |
| Operating income                                                                |       | 23,200                                                 |       | 29,573 |   |
| Interest income                                                                 |       | 71                                                     |       | 241 |   |
| Interest expense                                                                |       | (9,068                                                 | )          | (9,148 | ) |
| Other income  (expense), net                                                    |       | 153                                                    |       | (31 | ) |
| Income before  income taxes                                                     |       | 14,356                                                 |       | 20,635 |   |
| Provision for  income taxes                                                     |       | 5,399                                                  |       | 3,405 |   |
| Net income                                                                      |       | $                                                      | 8,957      |   | $ | 17,230 |   |
|                                                                            |       |                                                   |       |   |   |
| Basic net income  per share                                                     |       | $                                                      | 0.19       |   | $ | 0.38 |   |
|                                                                            |       |                                                   |       |   |   |
| Diluted net  income per share                                                   |       | $                                                      | 0.19       |   | $ | 0.36 |   |
|                                                                            |       |                                                   |       |   |   |
| Shares used in  per share calculations:                                         |       |                                                   |       |   |   |
| Basic                                                                           |       | 47,065                                                 |       | 45,102 |   |
| Diluted                                                                         |       | 47,784                                                 |       | 47,292 |   |
|                                                                                 |            |                                                        |            |  |  |  |  |  |

 

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

 

3

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**UNAUDITED CONSOLIDATED BALANCESHEETS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                        | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                                                                                                                          |       |               |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                  | 9,616      |                  | $          | 12,937 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,609 and $2,239  respectively                               |       | 93,060             |       | 93,593                |       |
| Inventories                                                                                                                   |       | 96,952             |       | 85,274                |       |
| Deferred income  taxes                                                                                                        |       | 26,397             |       | 28,551                |       |
| Other current  assets                                                                                                         |       | 6,401              |       | 6,250                 |       |
| Total current  assets                                                                                                         |       | 232,426            |       | 226,605               |       |
| Property, plant  and equipment, net                                                                                           |       | 102,035            |       | 101,538               |       |
| Goodwill                                                                                                                      |       | 76,891             |       | 76,891                |       |
| Deferred  financing costs                                                                                                     |       | 17,516             |       | 17,603                |       |
| Deferred income  taxes                                                                                                        |       | 12,801             |       | 12,233                |       |
| Other assets                                                                                                                  |       | 20,600             |       | 20,322                |       |
| Total Assets                                                                                                                  |       | $                  | 462,269    |                  | $          | 455,192 |   |
|                                                                                                                          |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                               | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                         |       |               |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                  | 1,500      |                  | $          | 2,360 |   |
| Accounts payable                                                                                                              |       | 37,576             |       | 41,224                |       |
| Accrued expenses                                                                                                              |       | 64,263             |       | 69,692                |       |
| Other current  liabilities                                                                                                    |       | 533                |       | 1,115                 |       |
| Total current  liabilities                                                                                                    |       | 103,872            |       | 114,391               |       |
| Long-term debt,  exclusive of current maturities                                                                              |       | 421,750            |       | 405,363               |       |
| Deferred income  taxes                                                                                                        |       | 4,296              |       | 4,250                 |       |
| Employee  benefits                                                                                                            |       | 54,949             |       | 65,853                |       |
| Other  liabilities                                                                                                            |       | 10,948             |       | 10,522                |       |
| Total  liabilities                                                                                                            |       | 595,815            |       | 600,379               |       |
| Commitments and  contingent liabilities                                                                                       |       |               |       |                  |       |
| Stockholders’  equity (deficit):                                                                                         |       |               |       |                  |       |
| Common stock:  par value $0.01 per share, 100,000,000 shares authorized, 47,100,031 and  47,004,292 outstanding, respectively |       | 471                |       | 470                   |       |
| Capital in  excess of par value of stock                                                                                      |       | 569,180            |       | 566,692               |       |
| Accumulated  deficit                                                                                                          |       | (694,593           | )          | (703,550              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (8,604             | )          | (8,799                | )          |
| Total  stockholders’ (deficit)                                                                                           |       | (133,546           | )          | (145,187              | )          |
| Total  Liabilities and Stockholders’ Deficit                                                                             |       | $                  | 462,269    |                  | $          | 455,192 |   |

 

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

 

4

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**UNAUDITED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                                           | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                     |       |                                                 |       |   |   |
| Net income                                                                     |       | $                                                    | 8,957      |   | $ | 17,230 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                                 |       |   |   |
| Depreciation of  property, plant and equipment                                 |       | 4,232                                                |       | 3,813 |   |
| Amortization,  stock compensation and other non-cash charges                   |       | 2,584                                                |       | 898 |   |
| Excess tax  benefit from share-based compensation                              |       | (302                                                 | )          |   |   |
| Deferred income  tax provision                                                 |       | 2,319                                                |       | 302 |   |
| (Gain) loss on  disposal of property, plant, and equipment                     |       | 25                                                   |       | (5 | ) |
| Changes in  assets and liabilities:                                            |       |                                                 |       |   |   |
| (Increase)  decrease in accounts receivable                                    |       | 533                                                  |       | (21,047 | ) |
| (Increase)  decrease in inventories                                            |       | (11,678                                              | )          | (9,196 | ) |
| (Increase)  decrease in other assets                                           |       | (439                                                 | )          | (612 | ) |
| Increase  (decrease) in accounts payable                                       |       | (3,648                                               | )          | 1,572 |   |
| Increase  (decrease) in accrued expenses                                       |       | (5,807                                               | )          | (6,545 | ) |
| Increase  (decrease) in other liabilities                                      |       | (11,546                                              | )          | (681 | ) |
| Net cash used in  operating activities                                         |       | (14,770                                              | )          | (14,271 | ) |
|                                                                           |       |                                                 |       |   |   |
| **Cash  flows from investing activities:**                                     |       |                                                 |       |   |   |
| Proceeds from  sale of property, plant and equipment                           |       | 26                                                   |       | 21 |   |
| Purchases of  property, plant and equipment                                    |       | (4,097                                               | )          | (5,038 | ) |
| Net cash used in  investing activities                                         |       | (4,071                                               | )          | (5,017 | ) |
|                                                                           |       |                                                 |       |   |   |
| **Cash  flows from financing activities:**                                     |       |                                                 |       |   |   |
| Net borrowings  under revolving credit facility                                |       | 98,250                                               |       |   |   |
| Repayment of  term loan principal                                              |       | (82,723                                              | )          | (800 | ) |
| Issuance costs  related to debt                                                |       | (700                                                 | )          | (2,536 | ) |
| Issuance costs  related to stock                                               |       |                                                 |       | (1,425 | ) |
| Excess tax  benefit from share-based compensation                              |       | 302                                                  |       |   |   |
| Proceeds from  exercise of stock options                                       |       | 391                                                  |       | 1,745 |   |
| Net cash  provided by (used in) financing activities                           |       | 15,520                                               |       | (3,016 | ) |
|                                                                           |       |                                                 |       |   |   |
| Net decrease in  cash and cash equivalents                                     |       | (3,321                                               | )          | (22,304 | ) |
| Cash and cash  equivalents at beginning of period                              |       | 12,937                                               |       | 48,570 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                                    | 9,616      |   | $ | 26,266 |   |
|                                                                                |            |                                                      |            |  |  |  |  |  |

 

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

 

5

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**UNAUDITED CONSOLIDATED STATEMENTOF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**Blount International, Inc. and Subsidiaries**

 
| **(Amounts in thousands)**     | ** ** | **Shares**               | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|--------------------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                               | ** ** | **(in 000’s)** | ** ** | ** **        | ** ** | ** **                               | ** ** | ** **               | ** ** | ** **                                  | ** ** | ** ** | ** ** |
|                                     |       |                     |       |              |       |                                     |       |                     |       |                                        |       |       |       |
| Balance December  31, 2005               |       | 47,004                   |       | $                 | 470        |                                     | $          | 566,692                  |       | $                                           | (703,550   | )          | $          | (8,799 | ) | $ | (145,187 | ) |
|                                     |       |                     |       |              |       |                                     |       |                     |       |                                        |       |       |       |
| Net income                               |       |                     |       |              |       |                                     |       | 8,957                    |       |                                        |       | 8,957      |       |
| Other  comprehensive income (loss):      |       |                     |       |              |       |                                     |       |                     |       |                                        |       |       |       |
| Foreign currency  translation adjustment |       |                     |       |              |       |                                     |       |                     |       | 204                                         |       | 204        |       |
| Unrealized  losses                       |       |                     |       |              |       |                                     |       |                     |       | (9                                          | )          | (9         | )          |
| Comprehensive  income, net               |       |                     |       |              |       |                                     |       |                     |       |                                        |       | 9,152      |       |
| Exercise of  stock options               |       | 96                       |       | 1                 |       | 692                                      |       |                     |       |                                        |       | 693        |       |
| Stock  compensation expense              |       |                     |       |              |       | 1,796                                    |       |                     |       |                                        |       | 1,796      |       |
| Balance March  31, 2006                  |       | 47,100                   |       | $                 | 471        |                                     | $          | 569,180                  |       | $                                           | (694,593   | )          | $          | (8,604 | ) | $ | (133,546 | ) |

 

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

 

6

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1:  BASISOF PRESENTATION**

 

***Basis of Presentation.***The unauditedconsolidated financial statements include the accounts of Blount International,Inc. and its subsidiaries (“Blount” or the “Company”) and are prepared inconformity with accounting principles generally accepted in the United Statesof America. All significant intercompany balances and transactions have beeneliminated. In the opinion of management, the consolidated financial statementscontain all adjustments (consisting of only normal recurring adjustments)necessary for a fair statement of the financial position, results of operations,cash flows and changes in stockholders’ equity for the periods presented.

 

The accompanying financial data as of March 31, 2006 andfor the three months ended March 31, 2006 and March 31, 2005 has been preparedby the Company, without audit, pursuant to the rules and regulations of the UnitedStates Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States have beencondensed or omitted pursuant to such rules and regulations. The December 31,2005 Consolidated Balance Sheet was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States. These Consolidated FinancialStatements should be read in conjunction with the Consolidated FinancialStatements and the notes thereto, included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

 

***Use of Estimates.***Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States requires that management make certain estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities as of the dates of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting periods. It is reasonably possible that actual resultscould differ materially from those estimates and significant changes toestimates could occur in the near term.

 

***Reclassifications.***Certainamounts in the prior period financial statements have been reclassified toconform to the current period presentation. Such reclassifications had no effecton previously reported net income or net stockholders’ deficit.

 

**NOTE 2: INVENTORIES**

 

Inventories consisted of the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Raw materials  and supplies          |       | $                  | 32,481     |                  | $          | 29,254 |   |
| Work in progress                     |       | 15,954             |       | 14,276                |       |
| Finished goods                       |       | 48,517             |       | 41,744                |       |
| Total  inventories                   |       | $                  | 96,952     |                  | $          | 85,274 |   |

 

7

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**NOTE 3: PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipment consisted of the following:

 
| ** **                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Land                                      |       | $                  | 5,781      |                  | $          | 5,781 |   |
| Buildings and  improvements               |       | 69,336             |       | 68,941                |       |
| Machinery and  equipment                  |       | 194,185            |       | 194,616               |       |
| Furniture,  fixtures and office equipment |       | 35,866             |       | 34,768                |       |
| Construction in  progress                 |       | 10,445             |       | 10,146                |       |
| Accumulated  depreciation                 |       | (213,578           | )          | (212,714              | )          |
| Total property,  plant and equipment, net |       | $                  | 102,035    |                  | $          | 101,538 |   |

 

**NOTE 4: DEFERRED FINANCING COSTS**

 

Deferred financing costs represent costs incurred inconjunction with the Company’s debt financing activities and are amortized overthe term of the related debt instruments. Deferred financing costs, and therelated amortization expense, are adjusted when any pre-payments of principalare made to the related outstanding debt. During the three months ended March31, 2006, the following occurred (see Note 6):

 
| **(Amounts in thousands)** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Balance at  December 31, 2005        |       | $          | 17,603     |   |
| Financing costs  deferred            |       | 700        |       |
| Amortization  during period          |       | (787       | )          |
| Balance at March  31, 2006           |       | $          | 17,516     |   |

 

Estimated amortization remaining, by year, assuming nofurther pre-payments of principal, is as follows:

 
| **(Amounts in thousands)** | ** ** | **Estimated   Annual   Amortization** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| 2006                                 |       | $                                               | 2,941      |   |
| 2007                                 |       | 3,922                                           |       |
| 2008                                 |       | 3,922                                           |       |
| 2009                                 |       | 3,250                                           |       |
| 2010 and beyond                      |       | 3,481                                           |       |
| Total  amortization                  |       | $                                               | 17,516     |   |

 

8

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**NOTE 5: ACCRUED EXPENSES**

 

Accrued expenses consisted of the following: 

 
| ** **                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Salaries, wages  and related withholdings |       | $                  | 18,910     |                  | $          | 23,176 |   |
| Employee  benefits                        |       | 13,448             |       | 11,150                |       |
| Accrued customer  incentives              |       | 7,162              |       | 7,350                 |       |
| Accrued interest                          |       | 5,385              |       | 9,534                 |       |
| Warranty reserve                          |       | 4,772              |       | 4,888                 |       |
| Accrued taxes                             |       | 2,406              |       | 2,763                 |       |
| Product  liability costs                  |       | 2,169              |       | 2,286                 |       |
| Other                                     |       | 10,011             |       | 8,545                 |       |
| Total accrued  expenses                   |       | $                  | 64,263     |                  | $          | 69,692 |   |

 

**NOTE 6:  LONGTERM DEBT**

 

Long-term debt consisted of the following:

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| Revolving credit  facility           |       | $                  | 98,250     |                  |       |   |
| Term loans                           |       | 150,000            |       | $                     | 232,723    |   |
| 8 7/8% senior  subordinated notes    |       | 175,000            |       | 175,000               |       |
| Total debt                           |       | 423,250            |       | 407,723               |       |
| Less current maturities              |       | (1,500             | )          | (2,360                | )          |
| Long-term debt                       |       | $                  | 421,750    |                  | $          | 405,363 |   |

 

Minimum principal payments required are as follows:

 
| **(Amounts in thousands)** | ** ** | **Payments** | ** ** |
|--------------------------------------|------------|--------------|------------|
| 2006                                 |       | $            | 1,125      |   |
| 2007                                 |       | 1,500        |       |
| 2008                                 |       | 1,500        |       |
| 2009                                 |       | 99,750       |       |
| 2010                                 |       | 144,375      |       |
| 2011 and beyond                      |       | 175,000      |       |
| Total debt                           |       | $            | 423,250    |   |

 

The weighted average interest rate on outstanding debt asof March 31, 2006 was 7.47%.

 

**2006 Amendment to Credit Facilities.**On March23, 2006, the Company amended its senior credit facilities. This amendment includedthe following changes to the term loans and revolving credit facility:

 

•                  Maximumavailability under the revolving credit facility was increased from $100.0million to $150.0 million.

 

•                  Interestrates were reduced by 0.75% for the term B loan and 1.00% for the revolvingcredit facility.

 

9

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•                  Certain financialcovenants were modified, including increases to the amounts that may be paid foracquisitions, dividends and repurchase of Company stock, as well as modificationsto certain financial ratio requirements.

 

•                  TheCompany paid fees of $0.5 million and estimates an additional $0.2 million inthird party costs will be paid for the amendment.

 

Immediately following the amendment, the Companycompleted the following transactions:

 

•                  $82.1million was borrowed under the revolving credit facility.

 

•                  The totalprincipal balance of $4.6 million was paid off on the Canadian term loan, andsuch loan was cancelled.

 

•                  $77.5million in principal was paid against the term B loan leaving a balance of$150.0 million outstanding.

 

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of March 31, 2006,the Company had the ability to borrow an additional $45.9 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 inarrears on any prime rate borrowings and at the individual maturity dates forany LIBOR-based term borrowings. Any outstanding principal is due in itsentirety on the maturity date.

 

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

 

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

 

Blount International, Inc. and all of its domesticsubsidiaries other than Blount, Inc. guarantee Blount, Inc.’s obligations underthe amended senior credit facilities. The obligations under the senior creditfacilities are collateralized by a first priority security interest insubstantially all of the assets of Blount, Inc. and its domestic subsidiaries,as well as a pledge of all of Blount, Inc.’s capital stock held by BlountInternational, Inc. and all of the stock of domestic subsidiaries held byBlount, Inc. Blount, Inc. has also pledged 65% of the stock of its non-domesticsubsidiaries as additional collateral.

 

The amended and restated senior credit facilities containfinancial covenants relating, among other categories, to capital expenditures, investments,loans and advances, indebtedness, and the sale of stock or assets. The Companywas in compliance with all debt covenants as of March 31, 2006.

 

**NOTE 7: INCOME TAXES**

 

In 2003, the Company recorded a valuation allowanceagainst its deferred tax assets in the U.S. because management determined thatit was more likely than not that such deferred tax assets would not berealized. The deferred tax assets were comprised principally of domestic netoperating loss carryforwards generated during 2001 and 2003, state net operatingloss carryforwards generated from 1998 through 2003, a domestic capital losscarryforward from 2001 and other expenses not currently deductible for taxpurposes. Subsequent to 2003, additional deferred tax assets and valuationallowances were recorded for 2004 domestic net operating losses and otherexpenses not currently deductible for tax purposes.

 

10

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In the fourth quarter of2005, the Company concluded that, except for a few specific deferred tax assets,it was more likely than not that the Company will realize the majority of thesedeferred tax assets. Therefore, the Company reversed the majority of thevaluation allowance as of December 31, 2005. The remaining valuation allowanceof $2.9 million as of December 31, 2005 pertains to certain tax credit andstate NOL carryforwards that are not currently expected to be realized beforethey expire.

 

The effect of the Company’sdomestic net operating loss carryforwards and the related valuation allowance wasthat the income tax provision for the three months ended March 31, 2005primarily consisted of foreign, state and local taxes, with minimal federal taxexpense recognized. The income tax provision for the three months ended March31, 2006 consisted of federal, foreign, state and local taxes. The Companycontinues to utilize its various net operating loss and tax creditcarryforwards to reduce the amount of cash tax payments required.

 

**NOTE 8: PENSION AND POST-RETIREMENT BENEFIT PLANS**

 

The Company sponsorsdefined benefit pension plans covering substantially all of its employees inthe U.S. and Canada. The Company also sponsors various other post-retirementmedical and benefit plans covering many of its current and former employees. Thecomponents of net periodic benefit cost for these plans are as follows:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                            | ** ** | **Other Post-Retirement   Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                         |       | $                                                    | 1,735      |   | $ | 1,483 |   | $ | 122 |   | $ | 107 |   |
| Interest cost                        |       | 2,575                                                |       | 2,394 |   | 569 |   | 514 |   |
| Expected return  on plan assets      |       | (2,785                                               | )          | (2,419 | ) | (3 | ) | (11 | ) |
| Amortization of  prior service cost  |       | 93                                                   |       | 93 |   | 3 |   | 2 |   |
| Amortization of  net loss            |       | 813                                                  |       | 652 |   | 338 |   | 271 |   |
| Total net  periodic benefit cost     |       | $                                                    | 2,431      |   | $ | 2,203 |   | $ | 1,029 |   | $ | 883 |   |

 

**NOTE 9: COMMITMENTS AND CONTINGENT LIABILITIES**

 

Guarantees and other commercial commitments aresummarized in the following table: 

 
| ** **                                         | ** ** | **March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2006**           | ** ** |
| Warranty reserve                                   |       | $                  | 4,772      |   |
| Letters of  credit outstanding                     |       | 6,035              |       |
| Third party  financing agreements (1)              |       | 2,842              |       |
| Accounts  receivable securitization (2)            |       | 248                |       |
| Total guarantees  and other commercial commitments |       | $                  | 13,897     |   |

 

----

(1) Applicable to third party financing agreements for customer equipmentpurchases.

 

(2) Includes guarantees to a third party financing company of certainaccounts receivable.

 

11

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The warranty reserve is included in accrued expenses onthe consolidated balance sheet. In addition to these amounts, the Company alsoguarantees certain debt of its subsidiaries (see Note 15).

 

Changes in the warranty reserve are as follows:  

 
| ** **                           | ** ** | **Three Months   Ended March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                               | ** ** |
| Balance at  December 31, 2005        |       | $                                                      | 4,888      |   |
| Accrued warranty  expense            |       | 851                                                    |       |
| Payments made  (in cash or in-kind)  |       | (967                                                   | )          |
| Balance at March  31, 2006           |       | $                                                      | 4,772      |   |

 

The Company was named a potentially liable person (“PLP”)by the Washington State Department of Ecology (“WDOE”) in connection with thePasco Sanitary Landfill Site (“Site”). This Site has been monitored by WDOEsince 1988. From available records, the Company believes that it sent 26 drumsof chromic hydroxide sludge in a non-toxic, trivalent state to the Site. TheCompany further believes that the Site contains more than 50,000 drums in totaland millions of gallons of additional wastes, some potentially highly toxic innature. Accordingly, based both on volume and on the nature of the waste, theCompany believes that it is a de minimis contributor.

 

The current on-sitemonitoring program is being conducted and funded by certain PLPs, excluding theCompany and several other PLPs, under the supervision of WDOE. Depending uponthe results of this study, further studies or remediation could be required.The Company may or may not be required to pay a share of the current study, orto contribute to the cost of subsequent studies or remediation, if any. TheCompany is unable to estimate such costs, or the likelihood of being assessedany portion thereof. However, during the most recent negotiations with thosePLPs that are funding the work at the Site, the Company’s potential share ofthe estimated cost ranged from approximately $20 thousand to $0.3 million. Asof March 31, 2006 and December 31, 2005, the Company had accrued $0.1 millionfor the potential costs of any clean-up at the Site. The Company incurred nocosts during the three months ended March 31, 2006 or 2005 in connection withthe remediation efforts at the Site.

 

On June 30, 2005, theCompany was served with a “notice of meeting” on behalf of Williams Control,Inc. (“WCI”) in connection with WCI’s agreement with the State of OregonDepartment of Environmental Quality (“DEQ”) to enter into the voluntary cleanupprogram (the “Program”) relating to WCI’s facility located near Portland,Oregon (the “WCI Site”).

 

The notice alleges thatBlount, Inc. is responsible for some portion of any required cleanup orremediation related to the Program as a successor in interest to OmarkIndustries, Inc. (“Omark”) through Omark’s alleged operations at the WCI Sitefrom 1968 through 1973. The Company understands that one or more other prioroperators of the business, including the entity from which WCI purchased thebusiness, and the landowner of the WCI Site, have also been served with thenotice. One such prior operator has recently filed a petition in federalbankruptcy court for matters apparently unrelated to its involvement in thisenvironmental matter. The impact of this petition on the ultimate allocation ofthe costs of the Program, and of this party’s ability to discharge any shareallocated to it, is under review.

 

WCI alleges that a plumeof chlorinated solvents, primarily TCE, is contained in groundwater at the Siteand has migrated onto neighboring properties. At this time, the Company doesnot know the number of locations or the extent of contamination, if any, thatmay be involved.

 

Although there have beendiscussions among several of the potential participants to any settlement, atthis stage, the Company does not have a sufficient basis to determine whetherit has any liability in this matter or, if it does, what its share of any costsof remediation would be; however, based upon estimates of remediation costs andapportionments furnished by WCI, the Company does not believe that any cost toit will have a materially adverse effect on its consolidated financialposition, results of operations or cash flows. The Company has reserved all ofits rights in this matter and is investigating further.

 

12

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The Company is a defendant in a number of productliability lawsuits and other legal proceedings, some of which seek significantor unspecified damages, involving serious personal injuries for which there areretentions or deductible amounts under the Company’s insurance policies. Inaddition, the Company is a party to a number of other suits arising out of thenormal course of its business. While there can be no assurance as to theirultimate outcome, management does not believe these lawsuits will have amaterial adverse effect on the Company’s consolidated financial position,operating results or cash flows.

 

The Company accrues, by a charge to income, an amount representingmanagement’s best estimate of 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 of the current circumstances.

 

**NOTE 10: EARNINGS PER SHARE DATA**

 

The number of shares usedin the denominators of the basic and diluted earnings per share computationswas as follows: 

 
| ** **                                                                                       | ** ** | **Three Months   Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(Shares in thousands)**                                                              | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Shares for basic  income per share computation – weighted average common shares outstanding |       | 47,065                                                 |       | 45,102 |   |
| Dilutive effect  of stock options and warrants                                                   |       | 719                                                    |       | 2,190 |   |
| Shares for  diluted income per share computation                                                 |       | 47,784                                                 |       | 47,292 |   |
| Options and  stock appreciation rights excluded from computation as anti-dilutive                |       | 778                                                    |       | 7 |   |

 

**NOTE 11: STOCK-BASED COMPENSATION**

 

Effective January 1, 2006, the Company adopted Statementof Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFASNo. 123(R)”), which is a revision of SFAS No. 123 and supersedes AccountingPrinciples Board Opinion No. 25. SFAS No. 123(R) requires all share-based compensationto employees, including grants of employee stock options and stock appreciationrights (“SARs”), to be valued at fair value on the date of grant, and to beexpensed over the applicable service period. Under SFAS No. 123(R), pro formadisclosure of the income statement effects of share-based compensation is nolonger an alternative to expense recognition. The adoption of SFAS No. 123(R)resulted in a reduction in income before taxes of $1.8 million and a reductionin net income of $1.2 million in the three months ended March 31, 2006. Theadoption of SFAS 123(R) reduced basic and diluted earnings per share by $0.02for the three months ended March 31, 2006. Under the modified prospectiveapplication method the results for prior periods have not been restated.

 

Under the Company’s 1999 Stock Incentive Plan and 2000Stock Incentive Plan, options to purchase the Company’s common stock, SARs andother forms of stock-based compensation could be granted to employees,directors and other persons who perform services for the Company. Such optionsmay be either incentive stock options or non-qualified stock options. Optionsand SARs generally vest in equal installments over a three year period andexpire ten years from the date of grant.The numberof shares which could be issued under these two plans could not exceed an aggregateof 5,875,000 shares.

 

The fair value of options and SARs was estimated on thegrant date using the Black-Scholes option valuation model. The estimatedaverage life of SARs granted in 2006 was derived from the “simplified” methoddescribed in U. S. Securities and Exchange Commission (“SEC”) Staff AccountingBulletin No. 107 (“SAB 107”). The expected average life for options granted in2005 was based on historical data and management estimate. The risk-freeinterest rate is based on the implied yield available on U.S. Treasuryzero-coupon issues with the remaining term 

 

13

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equal to the average life. The expected volatilityfactors used are based on the historical volatility of the Company’s stock. Theexpected dividend yield is based on historical information and managementestimate.

 

The following assumptions were used to estimate fairvalue:

 
| ** **                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Estimated  average life                 |       | 6 years                                              |       | 5 years |   |
| Risk-free  interest rate                |       | 4.6%                                                 |       | 3.7% |   |
| Expected  volatility                    |       | 26.7%                                                |       | 43.4% - 43.9% |   |
| Weighted average  volatility            |       | 26.7%                                                |       | 43.5% |   |
| Dividend yield                          |       | 0.0%                                                 |       | 0.0% |   |
| Weighted average  grant date fair value |       | $ 6.09                                          |       | $ 7.44 |   |

 

A summary of stock option and stock-settled SARs activityfor the first quarter of 2006 is presented in the following table:

 
| ** **                                     | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Shares**                                                     | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                     | ** ** | **(in ‘000’s)**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(in ‘000’s)** | ** ** |
| Outstanding options  at beginning of period    |       | 3,118                                                          |       | $ | 9.22 |   |   |   |   |   |
| SARs Granted                                   |       | 612                                                            |       | 16.76 |   |   |   |   |   |
| Options  Exercised                             |       | (96                                                            | )          | 4.09 |   |   |   |   |   |
| Options  Forfeited                             |       | (10                                                            | )          | 6.77 |   |   |   |   |   |
| Outstanding  options and SARs at end of period |       | 3,624                                                          |       | 10.63 |   | 6.6 |   | $ | 20,518 |   |
|                                           |       |                                                           |       |   |   |   |   |   |   |
| Outstanding  options at end of period          |       | 3,012                                                          |       | 9.39 |   | 5.9 |   | 20,518 |   |
| Outstanding SARs  at end of period             |       | 612                                                            |       | 16.76 |   | 9.9 |   | 0 |   |
|                                           |       |                                                           |       |   |   |   |   |   |   |
| Options  Exercisable at end of period          |       | 2,666                                                          |       | $ | 8.45 |   | 5.5 |   | $ | 20,516 |   |

 

The total intrinsic value of options exercised was $1.2million and $2.3 million during the three months ended March 31, 2006 and 2005respectively. The total fair value of options which vested during the threemonths ended March 31, 2006 and 2005 was $22 thousand and zero, respectively.

 

The total share-based compensationcost recognized in income during the three months ended March 31, 2006 and 2005was $1.8 million and $36 thousand respectively. The total tax benefit relatedto share-based compensation recognized in the three months ending March 31,2006 and 2005 was $0.6 million and $6 thousand. As of March 31, 2006, the totalcompensation cost related to non-vested awards not yet recognized is $3.0million. The weighted-average period over which this expense is expected to berecognized is 1.3 years.

 

The total amount of cashreceived from options exercised during the three months ended March 31, 2006and 2005 was $0.4 million and $1.7 million respectively. The tax benefitrealized from stock options exercised during the three months ended March 31,2006 and 2005 was $0.3 million and zero respectively. No cash was used tosettle equity instruments in the three months ended March 31, 2006 and 2005. TheCompany’s policy upon the exercise of options or SARs has been to issue newshares into the market place.

 

Under certain conditions,stock options and SARs granted by the Company are eligible for continuedvesting upon the retirement of the employee. SFAS No. 123(R) clarified thatthe fair value of such stock-based compensation should be expensed based on anaccelerated service period, or immediately, rather than ratably over thevesting 

 

14

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period stated in thegrant, for employees who are retirement eligible prior to the completion of thevesting period. Prior to the adoption of SFAS No. 123(R) the Company’s proforma disclosure reflected the expense of such options ratably over the statedvesting period. The SEC has recentlyclarified that companies should continue to follow the expense amortization methodthey have been using for pro forma disclosure until adoption of SFAS No.123(R), and then apply the accelerated amortization schedule to all subsequentgrants to those employees that became eligible for retirement within thevesting period. Had the Company been accounting for such stock options usingthe accelerated amortization schedule for those employees that were eligiblefor retirement or became eligible for retirement within the vesting period, theeffect on stock-based compensation expense in the pro forma disclosure for thethree months ended March 31, 2005 would not have been material. The amount ofaccelerated amortization of expense recognized for those employees that wereretirement eligible or became retirement eligible within the vesting periodduring the three months ended March 31, 2006 was $1.4 million.

 

Thefollowing table shows the effect on net earnings and earnings per share hadcompensation cost been recognized based upon the fair value at the grant datesin accordance with SFAS 123 and SFAS No. 148 “Accounting for Stock-BasedCompensation – Transition and Disclosure – an Amendment of FASB Statement No.123”. 

 
| ** **                                                                                                                              | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Amounts in thousands, except per share amounts)**                                                      | ** ** | **2005**                                         | ** ** |
| Net income as  reported                                                                                                                 |       | $                                                | 17,230     |   |
| Add: stock-based  employee compensation cost, net of tax, included in the reported results                                              |       | 30                                               |       |
| Deduct: total  stock-based employee compensation cost, net of tax, that would have been  included in net income under fair value method |       | (198                                             | )          |
| Pro forma net  income                                                                                                                   |       | $                                                | 17,062     |   |
|                                                                                                                                    |       |                                             |       |
| Basic earnings  per share as reported                                                                                                   |       | $                                                | 0.38       |   |
| Pro forma basic  earnings per share                                                                                                     |       | $                                                | 0.38       |   |
| Diluted earnings  per share as reported                                                                                                 |       | $                                                | 0.36       |   |
| Pro forma  diluted earnings per share                                                                                                   |       | $                                                | 0.36       |   |

 

On April 25, 2006, the Company’s stockholders approvedthe Blount International, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) andthe 1999 and 2000 plans were terminated at that time. The 2006 Plan providesfor substantially similar terms and conditions of stock-based awards to thepredecessor plans, but also provides for the use of restricted stock awards. Themaximum number of shares that may be awarded under the 2006 Plan is 4,236,919, ofwhich 736,919 represent shares remaining under the 1999 and 2000 plans thatwere transferred to the 2006 Plan. The maximum number of incentive stockoptions that may be issued under the 2006 Plan is 1,750,000.

 

**NOTE 12: SEGMENT INFORMATION**

 

The Company identifies operating segments primarily basedon management responsibility. The Company has three reportable segments:Outdoor Products, Industrial and Power Equipment and Lawnmower. OutdoorProducts manufactures and markets cutting chain, bars, sprockets andaccessories for chainsaw use, concrete cutting equipment, and lawnmower bladesand accessories for outdoor care equipment. Industrial and Power Equipmentmanufactures and markets timber harvesting equipment, industrial tractors andloaders, rotation bearings and swing drives. The Lawnmower segment manufacturesand markets zero-turn riding lawnmowers and related accessories.

 

15

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Certain financial information by segment is presented inthe table below: 

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| **Sales:**                           |       |                                                 |       |   |   |
| Outdoor Products                     |       | $                                                    | 114,196    |   | $ | 116,801 |   |
| Industrial and Power Equipment       |       | 49,842                                               |       | 56,016 |   |
| Lawnmower                            |       | 13,938                                               |       | 12,742 |   |
| Inter-Segment Elimination            |       | (236                                                 | )          | (305 | ) |
| Total Sales                          |       | $                                                    | 177,740    |   | $ | 185,254 |   |
|                                 |       |                                                 |       |   |   |
| **Operating income:**                |       |                                                 |       |   |   |
| Outdoor Products                     |       | $                                                    | 24,807     |   | $ | 28,486 |   |
| Industrial and Power Equipment       |       | 3,323                                                |       | 4,747 |   |
| Lawnmower                            |       | 916                                                  |       | 241 |   |
| Inter-Segment Elimination            |       | (43                                                  | )          | (39 | ) |
| Contribution from segments           |       | 29,003                                               |       | 33,435 |   |
| Corporate expenses                   |       | (5,803                                               | )          | (3,862 | ) |
| Operating income                     |       | $                                                    | 23,200     |   | $ | 29,573 |   |

 

**NOTE 13: RELATED PARTY TRANSACTIONS**

 

In March 2005, $3.2 million was paid to an affiliate ofLehman Brothers Banking Partners II, L.P. (“Lehman Brothers”) for previouslyaccrued advisory fees relating to refinancing transactions involving the saleof stock and the issuance and repayment of debt in 2004. Lehman Brothers ownedapproximately 33% of the Company’s common stock outstanding at the time of thistransaction and owned approximately 19% of the Company’s common stockoutstanding as of March 31, 2006.

 

**NOTE 14: SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Interest paid                        |       | $                                                    | 12,288     |   | $ | 8,459 |   |
| Income taxes paid, net               |       | 3,199                                                |       | 4,798 |   |
|                                      |            |                                                      |            |  |  |  |  |

 

**NOTE 15: CONSOLIDATING FINANCIAL INFORMATION**

 

See Note 6 for a discussion of the Company’s guarantorsubsidiaries. The following consolidating financial information sets forthcondensed consolidating statements of operations, balance sheets and statementsof cash flows of Blount International, Inc., Blount, Inc., the guarantorsubsidiaries and the non-guarantor subsidiaries.

 

16

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**Condensed Consolidating Statement of OperationsInformation**

 
| **(Amounts in thousands)**             | ** ** | **Blount   International,   Inc.** | ** ** | **Blount,   Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| **For the Three Months Ended March 31, 2006**    |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Sales                                            |       |                                         |       | $                       | 119,624    |                              | $          | 42,587                                  |       | $                | 69,151     |             | $          | (53,622 | ) | $ | 177,740 |   |
| Cost of sales                                    |       |                                         |       | 90,889                  |       | 32,728                            |       | 53,412                                  |       | (55,092          | )          | 121,937          |       |
| Gross profit                                     |       |                                         |       | 28,735                  |       | 9,859                             |       | 15,739                                  |       | 1,470            |       | 55,803           |       |
| Selling, general and administrative  expenses    |       |                                         |       | 20,324                  |       | 5,047                             |       | 7,232                                   |       |             |       | 32,603           |       |
| Operating income                                 |       |                                         |       | 8,411                   |       | 4,812                             |       | 8,507                                   |       | 1,470            |       | 23,200           |       |
| Other, net                                       |       | $                                            | (5,353     | )                       | (2,925     | )                                 | (161       | )                                       | (405       | )                |       |             | (8,844     | ) |
| Income (loss) before income taxes                |       | (5,353                                       | )          | 5,486                   |       | 4,651                             |       | 8,102                                   |       | 1,470            |       | 14,356           |       |
| Provision (benefit) for income taxes             |       | (2,013                                       | )          | 4,842                   |       | 233                               |       | 2,337                                   |       |             |       | 5,399            |       |
| Income (loss)                                    |       | (3,340                                       | )          | 644                     |       | 4,418                             |       | 5,765                                   |       | 1,470            |       | 8,957            |       |
| Equity in earnings of affiliated companies,  net |       | 12,297                                       |       | 11,653                  |       | 64                                |       |                                    |       | (24,014          | )          |             |       |
| Net income                                       |       | $                                            | 8,957      |                    | $          | 12,297                            |       | $                                       | 4,482      |             | $          | 5,765            |       | $ | (22,544 | ) | $ | 8,957 |   |

 
| **(Amounts in thousands)**             | ** ** | **Blount   International,   Inc.** | ** ** | **Blount,   Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| **For the Three Months Ended March 31, 2005**    |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Sales                                            |       |                                         |       | $                       | 121,931    |                              | $          | 42,000                                  |       | $                | 71,688     |             | $          | (50,365 | ) | $ | 185,254 |   |
| Cost of sales                                    |       |                                         |       | 92,439                  |       | 34,253                            |       | 51,343                                  |       | (52,750          | )          | 125,285          |       |
| Gross profit                                     |       |                                         |       | 29,492                  |       | 7,747                             |       | 20,345                                  |       | 2,385            |       | 59,969           |       |
| Selling, general and administrative  expenses    |       |                                         |       | 18,129                  |       | 4,024                             |       | 8,243                                   |       |             |       | 30,396           |       |
| Operating income                                 |       |                                         |       | 11,363                  |       | 3,723                             |       | 12,102                                  |       | 2,385            |       | 29,573           |       |
| Other, net                                       |       | $                                            | (4,032     | )                       | (4,777     | )                                 | (131       | )                                       | 2          |             |       |             | (8,938     | ) |
| Income (loss) before income taxes                |       | (4,032                                       | )          | 6,586                   |       | 3,592                             |       | 12,104                                  |       | 2,385            |       | 20,635           |       |
| Provision (benefit) for income taxes             |       | (665                                         | )          | (726                    | )          | 180                               |       | 4,616                                   |       |             |       | 3,405            |       |
| Income (loss)                                    |       | (3,367                                       | )          | 7,312                   |       | 3,412                             |       | 7,488                                   |       | 2,385            |       | 17,230           |       |
| Equity in earnings of affiliated companies,  net |       | 20,597                                       |       | 13,285                  |       | 69                                |       |                                    |       | (33,951          | )          |             |       |
| Net income (loss)                                |       | $                                            | 17,230     |                    | $          | 20,597                            |       | $                                       | 3,481      |             | $          | 7,488            |       | $ | (31,566 | ) | $ | 17,230 |   |

 

17

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**Condensed Consolidating Balance Sheet Information**

 
| **(Amounts in thousands)**                       | ** ** | **Blount   International,   Inc.** | ** ** | **Blount,   Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                                   | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| **March 31, 2006**                                         | ** ** | ** **                                   | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **Assets**                                                 |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Cash and cash equivalents                                  |       |                                         |       |                    |       |                              |       | $                                       | 11,701     |             | $          | (2,085           | )          | $ | 9,616 |   |
| Accounts receivable, net                                   |       |                                         |       | $                       | 43,719     |                              | $          | 22,931                                  |       | 26,410           |       |             |       | 93,060 |   |
| Intercompany receivables                                   |       |                                         |       | 169,547                 |       | 65,982                            |       | 9,087                                   |       | (244,616         | )          |             |       |
| Inventories                                                |       |                                         |       | 39,273                  |       | 27,428                            |       | 30,251                                  |       |             |       | 96,952           |       |
| Other current assets                                       |       |                                         |       | 29,071                  |       | 774                               |       | 2,953                                   |       |             |       | 32,798           |       |
| Total current assets                                       |       |                                         |       | 281,610                 |       | 117,115                           |       | 80,402                                  |       | (246,701         | )          | 232,426          |       |
| Investments in affiliated companies                        |       | $                                            | 112,437    |                    | 274,422    |                              | 387        |                                    | 248        |             | (387,494   | )                |       |   |
| Property, plant and equipment, net                         |       |                                         |       | 26,492                  |       | 32,305                            |       | 43,238                                  |       |             |       | 102,035          |       |
| Goodwill and other assets                                  |       |                                         |       | 81,298                  |       | 30,719                            |       | 15,791                                  |       |             |       | 127,808          |       |
| Total Assets                                               |       | $                                            | 112,437    |                    | $          | 663,822                           |       | $                                       | 180,526    |             | $          | 139,679          |       | $ | (634,195 | ) | $ | 462,269 |   |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**   |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Current maturities of long-term debt                       |       |                                         |       | $                       | 1,500      |                              |       |                                    |       |             |       |             | $          | 1,500 |   |
| Accounts payable                                           |       |                                         |       | 21,355                  |       | $                                 | 9,424      |                                    | $          | 8,882            |       | $                | (2,085     | ) | 37,576 |   |
| Intercompany payables                                      |       | $                                            | 244,616    |                    |       |                              |       |                                    |       |             | (244,616   | )                |       |   |
| Accrued expenses                                           |       |                                         |       | 43,240                  |       | 7,863                             |       | 13,693                                  |       |             |       | 64,796           |       |
| Total current liabilities                                  |       | 244,616                                      |       | 66,095                  |       | 17,287                            |       | 22,575                                  |       | (246,701         | )          | 103,872          |       |
| Long-term debt, excluding current  maturities              |       |                                         |       | 421,750                 |       |                              |       |                                    |       |             |       | 421,750          |       |
| Other liabilities                                          |       | 1,367                                        |       | 63,540                  |       | 66                                |       | 5,220                                   |       |             |       | 70,193           |       |
| Total liabilities                                          |       | 245,983                                      |       | 551,385                 |       | 17,353                            |       | 27,795                                  |       | (246,701         | )          | 595,815          |       |
| Stockholders equity (deficit)                              |       | (133,546                                     | )          | 112,437                 |       | 163,173                           |       | 111,884                                 |       | (387,494         | )          | (133,546         | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit) |       | $                                            | 112,437    |                    | $          | 663,822                           |       | $                                       | 180,526    |             | $          | 139,679          |       | $ | (634,195 | ) | $ | 462,269 |   |
|                                                            |            |                                              |            |                         |            |                                   |            |                                         |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

18

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| **(Amounts in thousands)**                       | ** ** | **Blount   International,   Inc.** | ** ** | **Blount,   Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                                   | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| **December 31, 2005**                                      |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| ** **                                                 |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **Assets**                                                 |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Cash and cash equivalents                                  |       |                                         |       | $                       | 43         |                              |       |                                    | $          | 13,731           |       | $                | (837       | ) | $ | 12,937 |   |
| Accounts receivable, net                                   |       |                                         |       | 54,278                  |       | $                                 | 18,831     |                                    | 20,484     |             |       |             | 93,593     |   |
| Intercompany receivables                                   |       |                                         |       | 159,351                 |       | 67,624                            |       | 16,774                                  |       | (243,749         | )          |             |       |
| Inventories                                                |       |                                         |       | 38,688                  |       | 23,784                            |       | 22,802                                  |       |             |       | 85,274           |       |
| Other current assets                                       |       |                                         |       | 31,404                  |       | 867                               |       | 2,530                                   |       |             |       | 34,801           |       |
| Total current assets                                       |       |                                         |       | 283,764                 |       | 111,106                           |       | 76,321                                  |       | (244,586         | )          | 226,605          |       |
| Investments in affiliated companies                        |       | $                                            | 99,943     |                    | 261,663    |                              | 323        |                                    | 248        |             | (362,177   | )                |       |   |
| Property, plant and equipment, net                         |       |                                         |       | 26,558                  |       | 32,591                            |       | 42,389                                  |       |             |       | 101,538          |       |
| Goodwill and other assets                                  |       |                                         |       | 79,924                  |       | 30,708                            |       | 16,417                                  |       |             |       | 127,049          |       |
| Total Assets                                               |       | $                                            | 99,943     |                    | $          | 651,909                           |       | $                                       | 174,728    |             | $          | 135,375          |       | $ | (606,763 | ) | $ | 455,192 |   |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**   |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                       |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Current maturities of long-term debt                       |       |                                         |       | $                       | 2,313      |                              |       |                                    | $          | 47               |       |             |       | $ | 2,360 |   |
| Accounts payable                                           |       |                                         |       | 24,940                  |       | $                                 | 9,375      |                                    | 7,746      |             | $          | (837             | )          | 41,224 |   |
| Intercompany payables                                      |       | $                                            | 243,749    |                    |       |                              |       |                                    |       |             | (243,749   | )                |       |   |
| Other current liabilities                                  |       |                                         |       | 49,862                  |       | 7,179                             |       | 13,766                                  |       |             |       | 70,807           |       |
| Total current liabilities                                  |       | 243,749                                      |       | 77,115                  |       | 16,554                            |       | 21,559                                  |       | (244,586         | )          | 114,391          |       |
| Long-term debt, excluding current  maturities              |       |                                         |       | 400,757                 |       |                              |       | 4,606                                   |       |             |       | 405,363          |       |
| Other liabilities                                          |       | 1,381                                        |       | 74,094                  |       |                              |       | 5,150                                   |       |             |       | 80,625           |       |
| Total liabilities                                          |       | 245,130                                      |       | 551,966                 |       | 16,554                            |       | 31,315                                  |       | (244,586         | )          | 600,379          |       |
| Stockholders equity (deficit)                              |       | (145,187                                     | )          | 99,943                  |       | 158,174                           |       | 104,060                                 |       | (362,177         | )          | (145,187         | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit) |       | $                                            | 99,943     |                    | $          | 651,909                           |       | $                                       | 174,728    |             | $          | 135,375          |       | $ | (606,763 | ) | $ | 455,192 |   |
|                                                            |            |                                              |            |                         |            |                                   |            |                                         |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

19

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**Condensed Consolidating Cash FlowsInformation**

 
| **(Amounts in thousands)**                  | ** ** | **Blount   International,   Inc.** | ** ** | **Blount,   Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **For the Three Months Ended March 31, 2006**         |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash provided by (used in) operating  activities  |       | $                                            | 1,998      |                    | $          | (19,836                           | )          | $                                       | 461        |             | $          | 3,855            |       | $ | (1,248 | ) | $ | (14,770 | ) |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash used in investing activities                 |       |                                         |       | (2,448                  | )          | (461                              | )          | (1,162                                  | )          |             |       | (4,071           | )          |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash provided by (used in) financing  activities  |       | (1,998                                       | )          | 22,241                  |       |                              |       | (4,723                                  | )          |             |       | 15,520           |       |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net decrease in cash and cash equivalents             |       |                                         |       | (43                     | )          |                              |       | (2,030                                  | )          | (1,248           | )          | (3,321           | )          |
| Cash and cash equivalents at beginning of  period     |       |                                         |       | 43                      |       |                              |       | 13,731                                  |       | (837             | )          | 12,937           |       |
| Cash and cash equivalents at end of period            |       | $                                            | 0          |                    | $          | 0                                 |       | $                                       | 0          |             | $          | 11,701           |       | $ | (2,085 | ) | $ | 9,616 |   |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| **For the Three Months Ended March 31, 2005**         |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash provided by (used in) operating  activities  |       | $                                            | (1,921     | )                       | $          | (7,770                            | )          | $                                       | 2,902      |             | $          | (7,482           | )          |   |   | $ | (14,271 | ) |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash used in investing activities                 |       |                                         |       | (1,251                  | )          | (442                              | )          | (3,324                                  | )          |             |       | (5,017           | )          |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net cash provided by (used in) financing  activities  |       | 1,921                                        |       | (4,925                  | )          |                              |       | (12                                     | )          |             |       | (3,016           | )          |
|                                                  |       |                                         |       |                    |       |                              |       |                                    |       |             |       |             |       |
| Net increase (decrease) in cash and cash  equivalents |       |                                         |       | (13,946                 | )          | 2,460                             |       | (10,818                                 | )          |             |       | (22,304          | )          |
| Cash and cash equivalents at beginning of  period     |       |                                         |       | 17,229                  |       | (2,460                            | )          | 33,801                                  |       |             |       | 48,570           |       |
| Cash and cash equivalents at end of period            |       | $                                            | 0          |                    | $          | 3,283                             |       | $                                       | 0          |             | $          | 22,983           |       |   |   | $ | 26,266 |   |

 

20

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

 

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

 

**Operating Results**

 

**Three months ended March 31, 2006 compared tothree months ended March 31, 2005**

 

Sales for the first quarter ended March 31, 2006 were$177.7 million compared to $185.3 million in the first quarter of 2005. Operatingincome in the quarter decreased to $23.2 million in 2006 from $29.6 million in2005. Net income for the first quarter of 2006 was $9.0 million ($0.19 perdiluted share) compared to net income of $17.2 million ($0.36 per dilutedshare) for the same period in 2005.

 

Sales in the first quarter decreased by $7.5 million, or4%, from the first quarter of 2005. This decrease includes an $8.0 milliondecline due to lower sales volume and a $2.2 million decline related tocurrency exchange rates. These factors were partially offset by a $2.7 millionincrease related to selling prices and mix. Highlights for the quarter includedthe following:

 

•                  In theOutdoor Products segment sales decreased by $2.6 million, or 2%, from last year’srecord results, including a $2.2 million negative effect from foreign currencytranslation.

 

•                  In theIndustrial and Power Equipment segment sales decreased by $6.2 million, or 11%.This decrease was primarily the result of a unit volume decline for timberharvesting equipment. Contributing to this decline was a brand name conversionthat disrupted product flow, along with inventory adjustments in thedistribution channel.

 

•                  In the Mowersegment sales increased by $1.2 million, or 9%, including a 6% increase in unitvolume and a stronger product mix.

 

•                  Internationalsales, on a consolidated basis, decreased by 8% and domestic sales decreased by1% compared to the first quarter of 2005.

 

Consolidated order backlog as of March 31, 2006 was$109.5 million, a decrease from $136.6 million at December 31, 2005 and $161.9million at March 31, 2005.

 

Operating income decreased by $6.4 million to $23.2million during the first quarter of 2006 compared to 2005, and was 13.1% ofsales compared to 16.0% last year. The decrease includes a year over yearreduction in gross profit of $4.2 million, or 7%, and an increase in SG&Aexpense of $2.2 million, or 7%. Included in these results are the following keyfactors:

 

•                  Theunfavorable effect of lower sales revenue primarily from a reduction in salesof timber harvesting equipment;

 

•                  Theunfavorable net effect of currency exchange rates, due to a weak US dollarrelative to the Canadian dollar and the Brazilian real, and a relativelystronger US dollar relative to European currencies;

 

•                  Higherselling, general and administrative costs largely due to the adoption of a newaccounting standard for stock-based compensation; and

 

•                  Thefavorable effect of lower steel costs.

 

21

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The year over year change in consolidated gross profit ispresented in the following table:

 
| **(Amounts in millions)** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| First quarter 2005 gross profit     |       | $          | 60.0       |   |
| Increase (decrease)                 |       |       |       |
| Sales volume                        |       | (3.1       | )          |
| Selling price and mix               |       | 2.7        |       |
| Product cost and mix                |       | (0.9       | )          |
| Foreign currency translation        |       | (2.9       | )          |
| First quarter 2006 gross profit     |       | $          | 55.8       |   |

 

As a percent of sales, gross margin decreased to 31.4% inthe first quarter of 2006 compared to 32.4% for the same period in 2005. Currencyexchange rates contributed to lower sales in Europe as the average U.S. dollarexchange rate was 10% stronger than the euro (with similar ratios for other keyEuropean currencies). Exchange rates also contributed to higher product costsfor our plants in Canada and Brazil, where the average exchange rates wereapproximately 7% and 22% weaker for the U.S. dollar compared to the respectivelocal currencies. Lower unit volumes were experienced in our two largest segments.Steel prices, which have generally risen over the past two years, werefavorable in the first quarter of 2006 compared to 2005 by an estimated $1.2million, but the decrease was offset by other unfavorable factors, whichincluded the effect of annual salary and wage increases and changes in productmix.

 

SG&A increased to $32.6 million in the first quarterof 2006 from $30.4 million in the same period of 2005. As a percent of sales,SG&A increased to 18.3% from 16.4% in 2005. The year over year increase of$2.2 million, or 7%, includes $1.8 million for stock-based compensation expenserelated to the adoption of a new accounting standard, a $0.3 million increasein salaries due to a 3.5% average increase in base compensation and $0.4million increase for travel primarily to support international growthinitiatives, partially offset by the $0.4 million favorable effect of currencyexchange rates on expenses at our foreign offices.

 

Interest expense was $9.1 million during the firstquarter of 2006, $0.1 million lower than last year due to a decrease in averageoutstanding debt balances, partially offset by an increase in average interestrates on our variable rate debt. Interest income decreased by $0.2 million,year over year, primarily due to a decline in average cash balancesoutstanding.

 

Our provision for income taxes was $5.4 million in thefirst quarter of 2006, with an effective tax rate of 37.6% on income beforeincome taxes. This compares to last year’s first quarter provision of $3.4million, which was 16.5% of income before income taxes. Last year’ssignificantly lower tax rate was primarily due to our application of a fullvaluation allowance on domestic tax assets, and was based upon a managementdetermination concerning the likelihood of those assets being realized. Thisdetermination was first made in the third quarter of 2003 and was modified atDecember 31, 2005, when most of the remaining valuation allowance was reversed.The effect of this increase in our effective income tax rate is partiallyoffset by a decrease in income before taxes during the first quarter of 2006compared to the same period last year.

 

Net income for the first quarter of 2006 was $9.0million, or $0.19 per diluted share, compared to net income of $17.2 million,or $0.36 per diluted share, in 2005. The $8.3 million decrease in net income isprimarily due to the following:

 

•                  A decreasein operating income of $6.4 million for the first quarter; and

 

•                  Anincrease in the provision for income taxes of $2.0 million.

 

22

----

 

***Segment Results.*******The following table reflects segment sales and operatingincome for 2006 and 2005:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2006 as % of 2005** | ** ** |
| Sales:                               |       |                                                 |       |   |   |   |   |
| Outdoor Products                     |       | $                                                    | 114,196    |   | $ | 116,801 |   | 98 | % |
| Industrial and Power Equipment       |       | 49,842                                               |       | 56,016 |   | 89 | % |
| Lawnmower                            |       | 13,938                                               |       | 12,742 |   | 109 | % |
| Inter-Segment Elimination            |       | (236                                                 | )          | (305 | ) | 77 | % |
| Total sales                          |       | 177,740                                              |       | 185,254 |   | 96 | % |
| Operating income                     |       |                                                 |       |   |   |   |   |
| Outdoor Products                     |       | 24,807                                               |       | 28,486 |   | 87 | % |
| Industrial and Power Equipment       |       | 3,323                                                |       | 4,747 |   | 70 | % |
| Lawnmower                            |       | 916                                                  |       | 241 |   | 380 | % |
| Inter-Segment Elimination            |       | (43                                                  | )          | (39 | ) | 110 | % |
| Contribution from segments           |       | 29,003                                               |       | 33,435 |   | 87 | % |
| Corporate expenses                   |       | (5,803                                               | )          | (3,862 | ) | 150 | % |
| Operating income                     |       | $                                                    | 23,200     |   | $ | 29,573 |   | 78 | % |

 

***Outdoor Products Segment.***Sales forthe Outdoor Products segment in the first quarter of 2006 decreased $2.6million, or 2%, compared to the same period of 2005, when the segment set anall time record for sales in a single quarter. The year over year effect offoreign currency translation on sales during the first quarter compared to lastyear was a reduction of $2.2 million. Lower sales volume resulted in a decreaseof $1.8 million for the quarter. These decreases were partially offset by thecombination of selling price and mix which resulted in an increase of $1.3million for the quarter compared to the same period in 2005. Order backlogdecreased to $70.3 million compared to $82.5 million at December 31, 2005, and$90.8 million at March 31, 2005. The decrease in backlog is partially due toincreases in capacity and improved delivery to customers that have resulted inreduced order lead-time.

 

The decrease in sales during the first quarter reflects a5% reduction in sales of our chain saw parts and accessories, offset partiallyby a 5% increase in sales of outdoor care parts and accessories, and an 8%increase in sales of our concrete cutting products. Geographically, salesincreased in U.S. domestic markets by 8% compared to the prior year quarter,but were offset by a 7% decrease in international sales, a portion of which isdue to the unfavorable foreign currency translation mentioned above.

 

First quarter segment contribution to operating incomewas $24.8 million compared to $28.5 million for 2005, or 21.7% of salescompared to 24.4% of sales last year. In the year over year comparison, thechange in sales volume is estimated to have negatively impacted operatingincome by $1.2 million. Currency translation exchange rates have had anunfavorable net effect on the segment’s operating income estimated at $2.5million for the first quarter ended March 31, 2006 compared to the same periodin 2005. The effect of foreign currency exchange rates is due to the U.S.dollar weakening against the Canadian dollar and Brazilian real, the homecurrencies of the locations where product is sourced, combined with a netunfavorable effect of a U.S. dollar strengthening in markets such as Europe andJapan, where our products are sold. The combined net unfavorable effect ongross profit was $2.9 million, partially offset by a $0.4 million decreaserelated to exchange rates for SG&A expenses, primarily in our Europeansales offices. These overall unfavorable trends have been partially offset bydecreases in steel prices of $0.9 million, selling price increases implementedin certain of our markets and lower spending in SG&A.

 

***Industrial and PowerEquipment Segment.***Sales for the Industrial and PowerEquipment segment decreased $6.2 million, or 11%, in the first quarter of 2006compared to the same period of 2005. The year over year decline was due tolower unit sales of our timber harvesting equipment, estimated at $8.6 millioncompared to last year. This 

 

23

----

 

volume decrease was partially offset by improved pricerealization and mix of $0.6 million, and a volume increase in our gearcomponents business. Geographically, the sales declined both domestically andinternationally, with the international portion decreasing by $1.5 million, or19%, compared to last year.

 

During the quarter we amended agreements established in2003 with Caterpillar Inc. The amended agreements converted products offeredunder the Timberking brand to the “Caterpillar” or “CAT” brand. While sales forthe first quarter included some initial CAT branded shipments, the brandconversion caused a planned disruption to product flow and contributed to a 39%decrease in Timberking/CAT brand sales on a year over year basis.

 

Order backlog for the segment was $38.0 million at March31, 2006 compared to $45.0 million at December 31, 2005, and $69.8 million atMarch 31, 2005. Inventory levels for our timber harvesting equipment are highin certain areas and retail sales incentive programs have been implemented on atargeted basis. Also during the first quarter, market conditions for ourharvesters and forwarders were weak in eastern Canada and the upper mid-westernpart of the United States due to weather-related factors. During the firstquarter, production was shutdown at one of our three plants for a month due tothe decrease in demand, and the same plant is scheduled to be shut down for amonth in the second quarter. The segment manufactures primarily to sold dealerorders and carries very limited finished goods inventory.

 

Sales of our rotational bearings and mechanical powertransmission products, which are sold primarily in domestic markets, were up$1.8 million, or 34%, compared to last year’s first quarter. The growth wasprimarily due to increased unit volumes that have been supported byimprovements in manufacturing processes that generated better product flow andcustomer service.

 

Segment contribution to operating income decreased $1.4million, or 30%, during the first quarter of 2006 compared to the same periodin 2005. The year over year decrease includes the unfavorable effect from lowervolume of $1.9 million, brand conversion costs of $0.8 million, increases inproduct development related to EPA-mandated Tier III engines and other productdesign projects of $0.5 million and expansion of our international salesorganization of $0.2 million. These decreases were partially offset by the yearover year favorable effects of improved price realization, product mix andproduct cost that has come from improved productivity and a small net decreasein steel prices. The operating margin was 6.7% for the first quarter of 2006compared to 8.5% for the same period in 2005.

 

***Lawnmower Segment.***Sales forthe Lawnmower segment increased $1.2 million, or 9%, in the first quarter of2006, compared to our sales in the first quarter of 2005.

 

The results for the first quarter reflect higher averageprices due to selling price increases and improved product mix compared to lastyear, resulting in $0.7 million of increased sales. Unit volume increased 6%compared to last year and generated $0.5 million of additional sales. Growth ofinternational sales continues to be a point of focus, and international salesincreased $0.6 million on a year over year basis, representing 16% of totalsegment sales for the three months ended March 31, 2006 compared to 13% for thesame period of 2005. Order backlog, which is seasonal in this business, was$1.2 million at March 31, 2006 and compares to $9.1 million at December 31,2005 and $1.3 million at March 31, 2005.

 

Segment contribution to operating income increased $0.7million during the first quarter of 2006 compared to $0.2 million during thesame period last year. The year over year increase is primarily the result ofimproved selling price realization and the stronger product mix, generating$0.6 million of additional gross profit. The increase in sales volume combinedwith a decrease in SG&A contributed $0.1 million. The operating margin was6.6% during the first quarter of 2006 compared to 1.9% last year.

 

***Corporate Expense.***Theincrease of $1.9 million, or 50%, in corporate expense during the first quarterincluded $1.8 million related to the adoption of a new accounting standard forstock-based compensation, Statement of Financial Accounting Standards No.123(R), “Share-Based Payment” (“SFAS No. 123(R)”). Adoption of SFAS No. 123(R)resulted in stock-based compensation expense during the first quarter of 2006and the expensing of grants made to retirement-eligible employees at the timeof grant. As a result, the compensation expense taken during the first quarterwas higher than the expense expected in future quarters during 2006, and thetotal expected stock-based 

 

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compensation expense for 2006 is now estimated at between$2.8 million and $3.2 million. In addition, salary and performance compensationexpense increased $0.2 million, and was partially offset by decreases in legaland other professional service expenses compared to last year’s first quarter.

 

**Financial Condition, Liquidity and CapitalResources**

 

Total debt at March 31, 2006 was $423.3 million comparedto $407.7 million at December 31, 2005. As of March 31, 2006, outstanding debtconsisted of a balance on our revolving credit facility of $98.3 million, aterm B loan of $150.0 million and 8 7/8% senior subordinated notes of $175.0million. The interest rate is fixed on the senior subordinated notes but isvariable on the revolving credit facility and term B loan. The increase intotal debt was used to make voluntary contributions to our domestic fundedpension plan, to fund semi-annual interest payments on our public debt and tosupport increases in working capital.

 

Interest expense was $9.1 million in the first quarter of2006, a decrease of $0.1 million compared to the first quarter of 2005. Thecomparison includes the favorable effect from a reduction in the averageprincipal amount of debt outstanding, but is largely offset by higher variableinterest rates for the two comparable periods. Our interest expense may vary inthe future because the revolving credit facility and term B loan interest ratesare variable. Interest rates have risen throughout 2005 and the first quarterof 2006, although we reduced our variable interest rates with an amendment ofour credit facilities in March 2006. Our weighted average interest rate on alldebt was 7.47% as of March 31, 2006. Cash paid for interest in the firstquarter of 2006 was $12.3 million compared to $8.5 million in the first quarterof 2005, and the increase is due to the difference in timing of term loaninterest payments.

 

***2006 Amendment to CreditFacilities.***On March 23, 2006, the Company amendedits senior credit facilities. This amendment included the following changes tothe term notes and revolving credit facility:

 

•                  Maximumavailability under the revolving credit facility was increased from $100.0million to $150.0 million.

 

•                  Interestrates were reduced by 0.75% for the term B loan and 1.00% for the revolvingcredit facility.

 

•                  Certainfinancial covenants were modified, including increases to the amounts that maybe expended for acquisitions, dividends and purchase of Company stock, as wellas modifications to certain financial ratio requirements.

 

•                  TheCompany paid fees of $0.5 million and estimates that an additional $0.2 millionin third party costs will be paid in connection with the amendment.

 

Immediately following the amendment, we completed the following transactions:

 

•                  $82.1million was borrowed under the revolving credit facility.

 

•                  The totalprincipal balance of $4.6 million was paid off on the Canadian term loan, andthat loan was cancelled.

 

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

 

The amended revolving credit facility provides total availableborrowings up to $150.0 million, reduced by outstanding letters of credit, andfurther restricted by a specific leverage ratio and first lien creditfacilities leverage ratio. As of March 31, 2006, the Company had the ability toborrow an additional $45.9 million under the terms of the revolving creditagreement. The revolving credit facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2009. Interest is payable monthly in arrears on any prime rateborrowings and at the individual maturity dates for any LIBOR-based termborrowings. Any outstanding principal is due in its entirety on the maturitydate.

 

The amended term B loan bears interest at the LIBOR rateplus 1.75%, or at the prime rate, depending on the type of loan, and matures onAugust 9, 2010. The term B loan facility requires quarterly payments of $0.4million, with a 

 

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final payment of $143.3 million due on the maturity date.Once repaid, principal under the term B loan facility may not be re-borrowed bythe Company.

 

The amended and restated senior credit facilities may beprepaid at any time. There can also be additional mandatory repaymentrequirements related to the sale of our assets or the issuance of stock undercertain circumstances, and upon the Company’s annual generation of excess cashflow as determined under the credit agreement. These credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenantsrelating, among other categories, to investments, loans and advances,indebtedness, and the sale of stock or assets. The Company was in compliancewith all debt covenants as of March 31, 2006. Specific financial covenant calculationsunder the agreements are as follows:

 
| ** **                                  | ** ** | **Required Ratio** | ** ** | **March 31, 2006** |
|---------------------------------------------|------------|--------------------|------------|--------------------|
| Fixed  charge coverage ratio                |       | Not less than 1.15 |       | 1.93               |
| Leverage ratio                              |       | Not more than 4.25 |       | 3.19               |
| First lien credit facilities leverage ratio |       | Not more than 2.75 |       | 1.89               |

 

Our debt continues to be significant, and future debtservice payments continue to represent substantial obligations. This degree ofleverage may adversely affect our operations and could have importantconsequences.

 

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

 

Cash and cash equivalents at March 31, 2006 were $9.6million compared to $12.9 million at December 31, 2005. The $3.3 milliondecrease in our cash balance during the first three months of 2006 compares toa decrease of $22.3 million in the same period of 2005.

 

Cash used in operating activities is summarized in thefollowing table:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| Net income                             |       | $                                                    | 8,957      |   | $ | 17,230 |   |
| Non-cash items                         |       | 8,858                                                |       | 5,008 |   |
| Subtotal                               |       | 17,815                                               |       | 22,238 |   |
| Changes in assets and liabilities, net |       | (32,585                                              | )          | (36,509 | ) |
| Cash used for operating activities     |       | $                                                    | (14,770    | ) | $ | (14,271 | ) |

 

Non-cash items consist of expense for depreciation ofproperty, plant and equipment; amortization; stock compensation expense; taxbenefit from exercise of stock options and other non-cash charges; deferredincome taxes and (gain) loss on disposal of property, plant and equipment.

 

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

 

•                  Net incomeof $9.0 million decreased $8.3 million due to the lower operating income thatresulted from a decrease in sales, unfavorable currency exchange rates,additional stock compensation expense from our adoption of SFAS 123(R), and anincrease in our effective income tax rate.

 

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•                  Non-cashadjustments included stock compensation expense of $1.8 million related to theadoption of SFAS 123(R); $2.3 million of deferred tax expense related to ourutilization of net operating losses to satisfy what would otherwise have becomecash tax liabilities on domestic earnings; and depreciation, amortization andother non-cash charges of $5.0 million, an increase of $0.3 million compared tothe same period in 2005, primarily due to higher depreciation expense.

 

•                  Changes inassets and liabilities, net, used $32.6 million of net cash and included thefollowing items.

 

•                  An $11.7million increase in inventories.

 

•                  A combineddecrease in accounts payable and accrued expenses of $9.5 million, including a$4.1 million reduction of accrued interest, and $4.4 million reduction inaccruals for performance-based compensation related to 2005 that was paidduring the first quarter of 2006.

 

•                  A decreasein other liabilities of $11.5 million included contributions of $12.3 milliontowards our funded pension plans.

 

Cash used in operating activities during the three monthsended March 31, 2005 of $14.3 million included the following:

 

•                  Net incomeof $17.2 million.

 

•                  Non-cashadjustments of $5.0 million for depreciation, amortization, deferred taxexpense, and other non-cash charges.

 

•                  Changes inassets and liabilities, net, used $36.5 million of net cash and included thefollowing items.

 

•                  A $21.0million increase in accounts receivable due to the increase in sales, as wellas sales programs in certain of our segments, which also contributed to theincrease in accounts receivable balances.

 

•                  A $9.2million increase in inventories across our three segments, primarily due tobusiness growth.

 

•                  A combineddecrease in accounts payable and accrued expenses of $5.0 million, including$8.1 million reduction in accruals for performance-based compensation relatedto 2004 that was paid during the first quarter of 2005, offset by otherincreases related to business growth.

 

•                  A decreasein other liabilities of $0.7 million included a contribution of $2.0 milliontowards our funded pension plans.

 

Accounts receivable decreased during the first quarter of2006 by $0.5 million from the end of 2005. The increase in receivables includesa $2.6 million increase in trade receivables, partially offset by a $0.4million increase in the allowance for doubtful accounts and $2.7 milliondecrease in other receivables. The allowance for doubtful accounts increased to$2.6 million compared to $2.2 million at December 31, 2005.

 

Cash taxes paid during the first quarter of 2006 were$3.2 million compared to $4.8 million for the same period in 2005. During 2006,cash taxes are expected to approximate the 2005 level even though the effectivetax rate has increased, since we continue to utilize net operating losscarryforwards to reduce current taxes payable.

 

Net cash used for investing activities in the first threemonths of 2006 was $4.1 million compared to $5.0 million for the same period in2005, with virtually all of the activity consisting of expenditures forproperty, plant and equipment. The 2006 expenditures included $0.7 milliontowards capacity for our facility in China, $0.8 million for business systemsand related support equipment, and other routine manufacturing equipment. The2005 expenditures included capital spending for additional capacity, with $1.3million for our China facility, $1.5 million in our Brazilian facility, andother routine expenditures primarily for our manufacturing facilities. During2006 we expect to utilize approximately $25.0 million in available cash forcapital purchases, much of it directed toward increasing our manufacturingcapacity in the Outdoor Products segment.

 

Cash provided by financing activities in the first threemonths of 2006 was $15.5 million compared to cash used of $3.0 million in thecomparable period of 2005. The 2006 activity included the followingtransactions:

 

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•                  A net drawdown of $98.3 million on our revolving credit facility to support operationsand fund the reduction of term loan debt as part of the amendment to our seniorcredit facilities that occurred in March 2006.

 

•                  Paymentsof $82.7 million of principal on our term loan debt, which included $0.6million of scheduled payments and $82.1 million related to the March 2006amendment of our senior credit facilities.

 

•                  Expendituresof $0.7 million incurred with the March 2006 amendment to our senior creditfacilities.

 

•                  Exerciseof stock options that generated $0.7 million, including $0.4 million ofproceeds from the exercise of stock options, and a related $0.3 million of taxbenefit from these exercises that is recognized as a financing activity underSFASNo. 123(R).

 

The 2005 activity included the following transactions:

 

•                  Scheduledpayment of $0.8 million of principal on our term loans.

 

•                  Payment ofpreviously recorded debt issuance costs of $2.5 million, and previouslyrecorded stock issuance costs of $1.4 million, related to financingtransactions completed in 2004.

 

•                  Proceedsfrom the exercise of stock options of $1.7 million.

 

Of the amounts disbursed for debt and equity issuancecosts in the first three months of 2005, $3.2 million was paid to LehmanBrothers, which previously controlled more than 50% of our outstanding commonstock.

 

**Critical Accounting Policies**

 

On January 1, 2006 we adopted a new accounting standard,SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”. SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options and stock appreciation rights (“SARs”), to be valued at fairvalue on the date of grant, and to be expensed over the applicable serviceperiod. Prior to the adoption of this new standard, our policy was to accountfor stock-based compensation under Accounting Principals Board Opinion No. 25,using the intrinsic value method for stock options, and to provide pro formadisclosure of the income statement effects of share-based payments using fairvalue accounting.

 

In implementing this new standard, the modifiedprospective method was selected, and as a result the comparison to financialresults in periods ending prior to our date of adoption will not include theeffects of expense recognition for similar transactions. During the threemonths ended March 31, 2006, stock compensation expense was $1.2 million, netof the tax effect. This compares to pro forma expense of $0.2 million net oftax for the same period in 2005. At March 31, 2006, there was $3.0 million oftotal compensation cost for non-vested awards that has not yet been recognized,with the weighted average period over which it is expected to be recognized at1.3 years.

 

Undercertain conditions, stock options and SARs granted by the Company are eligiblefor continued vesting upon the retirement of the employee. SFAS No. 123(R)clarified that the fair value of such stock-based compensation should beexpensed based on an accelerated service period, or immediately, rather than ratablyover the vesting period stated in the grant, for employees who are retirementeligible prior to the completion of the vesting period. The amount of accelerated amortization of expense recognized for thoseemployees that were retirement eligible or became retirement eligible withinthe vesting period during the three months ended March 31, 2006 was $1.4million.

 

With the adoption SFAS No. 123(R), there was no materialdifference in valuation methodologies or assumptions used to estimate fairvalue compared to our previous pro forma disclosure. Furthermore, there havebeen no modifications to outstanding options during the period this standardwas adopted, or any changes in the terms or conditions. New awards were grantedduring the first quarter of 2006, in the form of stock-settled SARs, withcomparable quantities granted as in previous grants.

 

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**Forward Looking Statements**

 

“Forward looking statements,” as defined by the PrivateSecurities Litigation Reform Act of 1995, used in this report, includingwithout limitation our “outlook,” “guidance,” “expectations,”  “beliefs,” “plans,” “indications,” “estimates,”“anticipations,” and their variants, are based upon available information andupon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning foreign currency exchange rates, the cost tothe Company of commodities in general, and of steel in particular, and theanticipated level of applicable interest rates involve certain estimates andassumptions. To the extent that these, or any other such assumptions, are not realizedgoing forward, or other unforeseen factors arise, actual results for theperiods subsequent to the date of this report may differ materially.

 

**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk from changes in interestrates, foreign currency exchange rates and commodity prices, including rawmaterials such as steel. We manage our exposure to these market risks throughour regular operating and financing activities, and, when deemed appropriate,through the use of derivatives. When utilized, derivatives are used as riskmanagement tools and not for trading or speculative purposes. See Market Risksection of Management’s Discussion and Analysis of Financial Condition andResults of Operations in our most recent Form 10-K for further discussion ofmarket risk.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’sExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, 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 participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures. Based on this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective at thereasonable assurance level as of March 31, 2006.

 

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

 

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**PART II OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 

**(a) Exhibits:**

 

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

 

**31.2 Certification pursuant to section302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior VicePresident and Chief Financial Officer.

 

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

 

**32.2 Certification pursuant to section906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness, Senior VicePresident and Chief Financial Officer.

 

**  Filed electronically herewith. Copies of such exhibits may be obtainedupon written request from:

 

Blount International, Inc.

P.O. Box 22127

Portland, Oregon  97269-2127

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| BLOUNT INTERNATIONAL, INC. |   |
|----------------------------|--------|
| Registrant                 |
|                       |
|                       |
| /s/ Calvin E. Jenness      |   |
| Calvin E. Jenness          |
| Senior Vice President and  |
| Chief Financial Officer    |
|                       |
| Dated: May 9, 2006         |
|                            |        |  |

 

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