Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

**x****      Quarterly report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for the quarterly period ended June 30, 2010.**

 

**OR**

 

**o****         Transition reportpursuant to section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**Commission file number 001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

**(503)653-8881**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No  o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (Section 232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of August 2, 2010 there were 47,852,107 shares outstanding of$0.01 par value common stock.

 

 

 

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** **

**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| ** **                                                                                                              | ** **            | **Page** |
|-------------------------------------------------------------------------------------------------------------------------|-----------------------|----------|
|                                                                                                                    |                  |     |
| Part I                                                                                                             | Financial Information |     |
|                                                                                                                    |                  |     |
| Item 1. Consolidated Financial Statements                                                                               |                  |
|                                                                                                                    |                  |
| Unaudited Consolidated Statements of Income Three and  six months ended June 30, 2010 and 2009                     | 3                     |
|                                                                                                                    |                  |
| Unaudited Consolidated Balance Sheets June 30,  2010 and December 31, 2009                                    | 4                     |
|                                                                                                                    |                  |
| Unaudited Consolidated Statements of Cash Flows Six  months ended June 30, 2010 and 2009                           | 5                     |
|                                                                                                                    |                  |
| Unaudited Consolidated Statement of Changes in  Stockholders’ Equity (Deficit) Six months ended June 30, 2010 | 6                     |
|                                                                                                                    |                  |
| Notes to Unaudited Consolidated Financial Statements                                                                    | 7                     |
|                                                                                                                    |                  |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                     | 21                    |
|                                                                                                                    |                  |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                                     | 32                    |
|                                                                                                                    |                  |
| Item 4. Controls and Procedures                                                                                         | 32                    |
|                                                                                                                    |                  |
| Part II                                                                                                            | Other Information     |     |
|                                                                                                                    |                  |
| Item 6. Exhibits                                                                                                        | 33                    |
|                                                                                                                    |                  |
| Signatures                                                                                                              | 34                    |

 

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**PART I      FINANCIAL INFORMATION**

 

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                               | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts  in thousands, except per share data)**       | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Sales                                                    |       | $                                     | 148,956    |                                | $          | 114,001 |   | $ | 285,639 |   | $ | 230,525 |   |
| Cost of sales                                            |       | 96,457                                |       | 79,362                              |       | 183,125 |   | 158,096 |   |
| Gross profit                                             |       | 52,499                                |       | 34,639                              |       | 102,514 |   | 72,429 |   |
| Selling, general, and administrative expenses            |       | 29,758                                |       | 24,015                              |       | 58,014 |   | 49,186 |   |
| Gain on sale of land and building                        |       | —                                |       | (2,701                              | )          | — |   | (2,701 | ) |
| Plant closure and severance costs                        |       | —                                |       | 1,365                               |       | — |   | 6,404 |   |
| Operating income                                         |       | 22,741                                |       | 11,960                              |       | 44,500 |   | 19,540 |   |
| Interest income                                          |       | 50                                    |       | 52                                  |       | 75 |   | 155 |   |
| Interest expense                                         |       | (6,407                                | )          | (6,425                              | )          | (12,926 | ) | (12,356 | ) |
| Other income (expense), net                              |       | (18                                   | )          | 52                                  |       | (31 | ) | 38 |   |
| Income before income taxes                               |       | 16,366                                |       | 5,639                               |       | 31,618 |   | 7,377 |   |
| Provision for income taxes                               |       | 5,923                                 |       | 1,407                               |       | 12,392 |   | 2,188 |   |
| Net income                                               |       | $                                     | 10,443     |                                | $          | 4,232 |   | $ | 19,226 |   | $ | 5,189 |   |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Basic income per share                                   |       | $                                     | 0.22       |                                | $          | 0.09 |   | $ | 0.40 |   | $ | 0.11 |   |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Diluted income per share                                 |       | $                                     | 0.22       |                                | $          | 0.09 |   | $ | 0.40 |   | $ | 0.11 |   |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Weighted average shares  used in per share calculations: |       |                                  |       |                                |       |   |   |   |   |
| Basic                                                    |       | 47,840                                |       | 47,747                              |       | 47,815 |   | 47,743 |   |
| Diluted                                                  |       | 48,349                                |       | 48,183                              |       | 48,339 |   | 48,181 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**UNAUDITED CONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts  in thousands, except share and per share data)**                                                                  | ** ** | **2010**          | ** ** | **2009**              | ** ** |
|                                                                                                                          |       |              |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                     |       | $                 | 72,812     |                  | $          | 55,070 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $3,673 and $3,339, respectively                               |       | 77,737            |       | 74,475                |       |
| Inventories, net                                                                                                              |       | 83,502            |       | 78,179                |       |
| Deferred income taxes                                                                                                         |       | 7,711             |       | 5,528                 |       |
| Other current assets                                                                                                          |       | 16,944            |       | 23,962                |       |
| Total current assets                                                                                                          |       | 258,706           |       | 237,214               |       |
| Property, plant, and equipment, net                                                                                           |       | 111,588           |       | 114,470               |       |
| Deferred income taxes                                                                                                         |       | 13,183            |       | 16,006                |       |
| Intangible assets                                                                                                             |       | 11,609            |       | 12,371                |       |
| Goodwill                                                                                                                      |       | 66,071            |       | 66,071                |       |
| Other assets                                                                                                                  |       | 38,601            |       | 37,434                |       |
| Total Assets                                                                                                                  |       | $                 | 499,758    |                  | $          | 483,566 |   |
|                                                                                                                          |       |              |       |                  |       |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                          |       |              |       |                  |       |
| Current maturities of long-term debt                                                                                          |       | $                 | 4,924      |                  | $          | 5,013 |   |
| Accounts payable                                                                                                              |       | 31,352            |       | 31,539                |       |
| Accrued expenses                                                                                                              |       | 56,819            |       | 50,614                |       |
| Deferred income taxes                                                                                                         |       | 261               |       | 501                   |       |
| Total current liabilities                                                                                                     |       | 93,356            |       | 87,667                |       |
| Long-term debt, excluding current maturities                                                                                  |       | 275,498           |       | 280,852               |       |
| Deferred income taxes                                                                                                         |       | 4,744             |       | 4,695                 |       |
| Employee benefit obligations                                                                                                  |       | 76,807            |       | 75,780                |       |
| Other liabilities                                                                                                             |       | 39,068            |       | 41,312                |       |
| Total liabilities                                                                                                             |       | 489,473           |       | 490,306               |       |
| Commitments and contingent liabilities                                                                                        |       |              |       |                  |       |
| Stockholders’ equity (deficit):                                                                                          |       |              |       |                  |       |
| Common stock: par value $0.01 per share,  100,000,000 shares authorized, 47,841,440 and 47,759,331 outstanding,  respectively |       | 478               |       | 478                   |       |
| Capital in excess of par value of stock                                                                                       |       | 582,809           |       | 581,211               |       |
| Accumulated deficit                                                                                                           |       | (537,329          | )          | (556,555              | )          |
| Accumulated other comprehensive loss                                                                                          |       | (35,673           | )          | (31,874               | )          |
| Total stockholders’ equity (deficit)                                                                                     |       | 10,285            |       | (6,740                | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit)                                                                    |       | $                 | 499,758    |                  | $          | 483,566 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)**                                                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Cash flows from operating  activities:**                                         |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 19,226     |   | $ | 5,189 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                               |       |   |   |
| Depreciation of property, plant, and equipment                                     |       | 11,087                             |       | 9,843 |   |
| Amortization of intangible assets and deferred  financing costs                    |       | 2,354                              |       | 2,881 |   |
| Stock compensation and other non-cash charges                                      |       | 1,503                              |       | 1,758 |   |
| Asset impairment charges                                                           |       | 264                                |       | 1,987 |   |
| Excess tax expense (benefit) from stock-based  compensation                        |       | (112                               | )          | 149 |   |
| Deferred income tax (benefit) expense                                              |       | 67                                 |       | (1,142 | ) |
| (Gain) loss on disposal of assets                                                  |       | 101                                |       | (2,587 | ) |
| Changes in assets and liabilities:                                                 |       |                               |       |   |   |
| (Increase) decrease in accounts receivable                                         |       | (5,718                             | )          | 12,064 |   |
| (Increase) decrease in inventories                                                 |       | (5,740                             | )          | 4,641 |   |
| (Increase) decrease in other assets                                                |       | 3,476                              |       | 2,583 |   |
| Increase (decrease) in accounts payable                                            |       | 299                                |       | (8,567 | ) |
| Increase (decrease) in accrued expenses                                            |       | 7,950                              |       | (13,477 | ) |
| Increase (decrease) in other liabilities                                           |       | (2,792                             | )          | 3,285 |   |
| Discontinued operations                                                            |       | (574                               | )          | (534 | ) |
| Net cash provided by operating activities                                          |       | 31,391                             |       | 18,073 |   |
|                                                                               |       |                               |       |   |   |
| **Cash flows from investing  activities:**                                         |       |                               |       |   |   |
| Purchases of property, plant, and equipment                                        |       | (8,641                             | )          | (8,511 | ) |
| Proceeds from sale of assets                                                       |       | 22                                 |       | 3,256 |   |
| Net cash used in investing activities                                              |       | (8,619                             | )          | (5,255 | ) |
|                                                                               |       |                               |       |   |   |
| **Cash flows from financing  activities:**                                         |       |                               |       |   |   |
| Net repayments of principal borrowed under revolving  credit facility              |       | (3,400                             | )          | (7,000 | ) |
| Repayment of term loan principal                                                   |       | (2,043                             | )          | (11,746 | ) |
| Issuance costs related to debt                                                     |       | —                             |       | (1,900 | ) |
| Excess tax (expense) benefit from stock-based  compensation                        |       | 112                                |       | (149 | ) |
| Proceeds from stock-based compensation activity                                    |       | 295                                |       | 91 |   |
| Payment of employee taxes on restricted stock                                      |       | (333                               | )          | (290 | ) |
| Net cash used in financing activities                                              |       | (5,369                             | )          | (20,994 | ) |
|                                                                               |       |                               |       |   |   |
| Effect of exchange rate changes                                                    |       | 339                                |       | (1,347 | ) |
|                                                                               |       |                               |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | 17,742                             |       | (9,523 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 55,070                             |       | 58,275 |   |
| Cash and cash equivalents at end of period                                         |       | $                                  | 72,812     |   | $ | 48,752 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY(DEFICIT)**

**BlountInternational, Inc. and Subsidiaries**

 
| ** (Amounts in thousands)**                                | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                                            |       |       |       |              |       |                           |       |                     |       |                                        |       |      |       |
| Balance December 31, 2009                                  |       | 47,759     |       | $                 | 478        |                           | $          | 581,211                  |       | $                                           | (556,555   | )         | $          | (31,874 | ) | $ | (6,740 | ) |
|                                                            |       |       |       |              |       |                           |       |                     |       |                                        |       |      |       |
| Net income                                                      |       |       |       |              |       |                           |       | 19,226                   |       |                                        |       | 19,226    |       |
| Other comprehensive income:                                     |       |       |       |              |       |                           |       |                     |       |                                        |       |      |       |
| Foreign currency translation                                    |       |       |       |              |       |                           |       |                     |       | (2,130                                      | )          | (2,130    | )          |
| Unrealized losses                                               |       |       |       |              |       |                           |       |                     |       | (1,669                                      | )          | (1,669    | )          |
| Comprehensive income, net                                       |       |       |       |              |       |                           |       |                     |       |                                        |       | 15,427    |       |
| Stock options, stock appreciation rights, and  restricted stock |       | 82         |       |              |       | 74                             |       |                     |       |                                        |       | 74        |       |
| Stock compensation expense                                      |       |       |       |              |       | 1,524                          |       |                     |       |                                        |       | 1,524     |       |
|                                                            |       |       |       |              |       |                           |       |                     |       |                                        |       |      |       |
| Balance June 30, 2010                                      |       | 47,841     |       | $                 | 478        |                           | $          | 582,809                  |       | $                                           | (537,329   | )         | $          | (35,673 | ) | $ | 10,285 |   |

 

Othercomprehensive loss, net of a deferred tax benefit of $0.7 million and $1.0million, was $2.3 million and $3.8 million for the three and six months ended June 30,2010, respectively.  Other comprehensiveincome, net of a deferred tax expense of $1.1 million and $0.9 million, was$3.3 million and $1.6 million for the three and six months ended June 30,2009, respectively.

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**UNAUDITED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

***Basis of Presentation.***  The unaudited Consolidated FinancialStatements include the accounts of Blount International, Inc. and itssubsidiaries (collectively, “Blount” or the “Company”) and are prepared inconformity with accounting principles generally accepted in the United Statesof America (“U.S.”).  All significantintercompany balances and transactions have been eliminated.  In the opinion of management, theConsolidated Financial Statements contain all adjustments (consisting of onlynormal recurring adjustments) necessary for a fair statement of the financialposition, results of operations, cash flows, and changes in stockholders’equity (deficit) for the periods presented.

 

Theaccompanying financial data as of June 30, 2010 and for the three and sixmonths ended June 30, 2010 and 2009 has been prepared by the Company,without audit, pursuant to the rules and regulations of the U.S.Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the U.S. have been condensed or omitted pursuant to such rules andregulations. The December 31, 2009 Consolidated Balance Sheet was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the U.S.  These Consolidated Financial Statementsshould be read in conjunction with the Consolidated Financial Statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2009.

 

***Use of Estimates.******* The preparation of financial statements inconformity with accounting principles generally accepted in the U.S. requiresthat management make certain estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities as of the dates of the financial statements, as well as thereported amounts of revenues and expenses during the reporting periods.  We base our estimates on various assumptionsthat are believed to be reasonable under the circumstances.  Management is continually evaluating andupdating these estimates and it is reasonably possible that these estimateswill change in the near term.

 

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation.  Such reclassificationshave no effect on previously reported consolidated net income, cash flows, ornet stockholders’ equity (deficit).

 

**NOTE 2:  RESTRUCTURING ACTIVITIES**

 

***Gain on Sale of Land and Building.***  On June 25, 2009, we sold the land andbuilding representing our former European headquarters and distributioncenter.  These operations have been movedto new, nearby leased facilities.  Werecognized a pre-tax gain of $2.7 million on the sale.

 

***Plant Closure Costs.***  In the second quarter of 2009, we closed ourmanufacturing facility in Milan, Tennessee. Products previously manufactured in that facility are now produced inour other manufacturing facilities. During the three months ended June 30, 2009, we recognized a totalof $0.5 million in plant closure costs. For the six months ended June 30, 2009, we recognized a total of$3.8 million in charges related to this plant closure, consisting of $2.0million in asset impairment charges, $1.0 million in employee severance andbenefit costs, and $0.8 million in other expenses.  Of these charges, $0.1 million and $0.2million, respectively, are recognized in cost of goods sold in the ConsolidatedStatements of Income for the three and six months ended June 30,2009.  The land and building arecurrently being marketed for sale, and are included in assets held for sale onthe Consolidated Balance Sheets.

 

***Severance Costs.***  We took actions during 2009 to reduce thenumber of employees at certain of our locations in addition to the Milanfacility mentioned above.  During thethree and six months ended June 30, 2009, we recognized a total of $1.0million and $2.8 million, respectively, in severance charges related to thisreduction in force.  From December 31,2008 to June 30, 2009, the Company reduced its workforce by approximately610 positions, or 17%, of its previous work force.

 

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**NOTE 3:  INVENTORIES, NET**

Inventoriesconsisted of the following:

 
| ** **                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Raw materials and supplies  |       | $                 | 11,489     |                  | $          | 11,510 |   |
| Work in progress            |       | 13,105            |       | 13,095                |       |
| Finished goods              |       | 58,908            |       | 53,574                |       |
| Total inventories, net      |       | $                 | 83,502     |                  | $          | 78,179 |   |

 

**NOTE 4:  LONG-TERM DEBT**

 

Long-termdebt consisted of the following:

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts  in thousands)**      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Revolving credit facility        |       | $                 | —     |                  | $          | 3,400 |   |
| Term loans                       |       | 105,422           |       | 107,465               |       |
| 8 7/8% senior subordinated notes |       | 175,000           |       | 175,000               |       |
| Total debt                       |       | 280,422           |       | 285,865               |       |
| Less current maturities          |       | (4,924            | )          | (5,013                | )          |
| Long-term debt                   |       | $                 | 275,498    |                  | $          | 280,852 |   |

 

Theweighted average interest rate on outstanding debt as of June 30, 2010 was7.58%.

 

***8 7/8% Senior Subordinated Notes.***  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at the option of the Company, in whole or in part, at redemptionprices of 102.219% through July 31, 2010; and at 100% on August 1,2010 and thereafter (see further discussion following).  These notes are issued by the Company’swholly-owned subsidiary, Blount, Inc., and are fully and unconditionally,jointly and severally, guaranteed by the Company and all of its domesticsubsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8%senior subordinated notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all ofits domestic subsidiaries guarantee these 8 7/8% senior subordinated notes,none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”)guarantee these notes.  See also Note 14.

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as Agent on May 15, 2003.  The agreement was amended and restated on August 9,2004, underwent several subsequent amendments, and was amended and restatedagain on December 4, 2009.  Thesenior credit facilities consist of a revolving credit facility and a term loanfacility.

 

***April 2009 Amendment to Revolving Credit Facility***.  On April 30, 2009, we entered into anamendment to the revolving credit facility as follows:

 

·                  The maturity date was extended to August 9,2010.

 

·                  We reduced total availability under therevolving credit facility from $150.0 million to $90.0 million.

 

·                  The interest rate was increased from theLIBOR rate plus 1.75% or the U.S. prime interest rate, with no minimum, to theLIBOR rate as defined in the credit agreement (the “LIBOR Rate”) plus 5.00% orthe U.S. index rate as defined in the credit agreement (the “U.S. Index Rate”)plus 3.25%, with a minimum rate of 7.50%, on all outstanding principal.  The Company may elect to borrow amounts undereither the LIBOR Rate or the U.S. Index Rate.

 

·                  The commitment fee on unused borrowingcapacity was increased from 0.375% to 1.00%.

 

·                  The Company incurred fees and third partycosts of $2.0 million related to the amendment.

 

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**December 2009Amendment and Restatement of Credit Facilities.**  On December 4, 2009, the senior creditfacility was amended and restated as follows:

 

·                  The maturity date for both the revolvingcredit facility and the term loan facility was extended to February 9,2012.

 

·                  We reduced total availability under therevolving credit facility from $90.0 million to $60.0 million.

 

·                  The interest rate on the term loan facilitywas increased from LIBOR plus 1.75% or the U.S. prime rate to the LIBOR Rateplus 3.50%, or the index rate as defined in the credit agreement (the “IndexRate”) plus 2.50%, with a minimum rate of 5.50%.  The Company may elect to borrow amounts forspecific periods under either the LIBOR Rate or Index Rate.

 

·                  The maximum allowed leverage ratio, asdefined in the credit agreement, was increased from 4.25 to 4.50.

 

·                  Existing term loans representing $3.9 millionof the total of $107.5 million term loan principal outstanding at the time werenot affected by this amendment and restatement, and the terms for this portionof the term loans remain unchanged, including interest at the prime rate and amaturity date of August 9, 2010. The principal amount of these unchanged term loans is included incurrent maturities of long-term debt on the Consolidated Balance Sheets.

 

·                  The Company incurred fees and third partycosts of $3.3 million related to the amendment and restatement.

 

Therevolving credit facility provides for total available borrowings up to $60.0million, reduced by outstanding letters of credit and further restricted by aspecific leverage ratio and credit facility leverage ratio.  As of June 30, 2010, the Company had theability to borrow an additional $56.7 million under the terms of the revolvingcredit agreement.  The revolving creditfacility bears interest at the LIBOR Rate plus 5.00%, or the U.S. Index Rateplus 3.25%, with a minimum interest rate of 7.50%, and matures on February 9,2012.  Interest is payable on theindividual maturity dates for each LIBOR-based borrowing, and monthly on U.S.Index Rate borrowings.  Any outstandingprincipal is due in its entirety on the maturity date.

 

Theterm loan facility bears interest at the LIBOR Rate plus 3.50%, or the IndexRate plus 2.50%, with a minimum interest rate of 5.50%, and matures on February 9,2012.  The term loan facility requiresquarterly principal payments of $0.3 million, and an additional principalpayment of $3.9 million on August 9, 2010, with a final payment of $99.7million due on the maturity date.  Oncerepaid, principal under the term loan facility may not be re-borrowed by theCompany.

 

Theamended and restated senior credit facilities contain financial covenantsrelating to:

 

·                  Maximum capital expenditures.

 

·                  Minimum fixed charge coverage ratio, definedas earnings from continuing operations before interest, taxes, depreciation,amortization, and certain other items (“EBITDA”) divided by cash payments forinterest, taxes, capital expenditures, scheduled debt principal payments, andcertain other items.

 

·                  Maximum leverage ratio, defined as total debtdivided by EBITDA.

 

·                  Maximum credit facility leverage ratio,defined as principal outstanding under the senior credit facilities divided byEBITDA.

 

Inaddition, there are covenants or restrictions relating to, among othercategories, acquisitions, investments, loans and advances, indebtedness,dividends on our stock, and the sale of stock or assets.  We were in compliance with all debt covenantsas of June 30, 2010.  Non-compliancewith these covenants, if it were to become an event of default under the termsof the credit agreement, could result in severe limitations to our overallliquidity, and the term loan lenders could require actions for immediaterepayment of outstanding amounts, potentially requiring sale of our assets.  Such non-compliance, if any, could alsoresult in an event of default under the indenture agreement related to the 87/8% senior subordinated notes.  Our debtis not subject to any triggers that would require early payment of debt due toany adverse change in our credit rating.

 

Theamended and restated senior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of Company assets, the issuance ofstock under certain circumstances, or upon the Company’s annual generation ofexcess cash flow, as determined under the credit agreement.

 

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

 

**August 2010Amendment and Restatement of Credit Facilities and Repayment of Notes.**  On August 9, 2010, the Company enteredinto an amendment and restatement of its senior credit facilities whichincluded the following terms:

 

·                  A term B loan facility wasestablished with maximum borrowings of $275.0 million.

 

·                  A term A loan facility was established withmaximum borrowings of $75.0 million.

 

·                  Maximum borrowings under the revolving creditfacility were increased to $75.0 million.

 

·                  The maturity dates were extended to August 2015for the revolving credit facility and the term A loan and to August 2016for the term B loan.

 

·                  The LIBOR interest rate on the revolvingcredit facility and term A facility was changed to LIBOR plus 3.50%.

 

·                  The LIBOR interest rate on the term Bfacility was changed to LIBOR plus 4.00%, with a minimum rate of 5.50%.

 

·                  Certain financial and other covenants wereamended and revised.

 

·                  The Company expects to pay approximately $6.3million in fees and transaction costs in connection with these transactions.

 

TheCompany then drew $350.0 million under these facilities and repaid theprincipal outstanding under its previous term loan facility.  In addition, the Company notified the trusteeof its 8 7/8% senior subordinated notes due August 1, 2012 of its intentto redeem the notes at 100% of principal in September 2010, following theexpiration of the required redemption notification period, and deposited $175.0million with the trustee for that purpose.

 

**NOTE 5:  PENSION AND OTHERPOST-EMPLOYMENT BENEFIT PLANS**

 

TheCompany sponsors defined benefit pension plans covering employees in the U.S.,Canada, and Belgium.  The Company alsosponsors various other post-employment medical and benefit plans covering manyof its current and former employees.  TheU.S. defined benefit pension plan and the associated nonqualified plan havebeen frozen since December 31, 2006.  Employees who currentlyparticipate in these U.S. plans no longer accrue benefits and new employeeshired since December 31, 2006, are not eligible to participate.  Allretirement benefits accrued up to the time of the freeze were preserved.

 

Thecomponents of net periodic benefit cost for these plans are as follows:

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                 | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts  in thousands)**          | ** ** | **2010**                             | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                         |       | $                                    | 624        |   | $ | 548 |   | $ | 67 |   | $ | 66 |   |
| Interest cost                        |       | 2,734                                |       | 2,656 |   | 524 |   | 505 |   |
| Expected return on plan assets       |       | (2,991                               | )          | (2,447 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (2                                   | )          | (2 | ) | — |   | — |   |
| Amortization of net actuarial losses |       | 924                                  |       | 1,261 |   | 212 |   | 192 |   |
| Total net periodic benefit cost      |       | $                                    | 1,289      |   | $ | 2,016 |   | $ | 803 |   | $ | 763 |   |

 

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| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**               | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts  in thousands)**          | ** ** | **2010**                           | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                         |       | $                                  | 1,248      |   | $ | 1,096 |   | $ | 134 |   | $ | 132 |   |
| Interest cost                        |       | 5,468                              |       | 5,312 |   | 1,048 |   | 1,010 |   |
| Expected return on plan assets       |       | (5,982                             | )          | (4,894 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (4                                 | )          | (4 | ) | — |   | — |   |
| Amortization of net actuarial losses |       | 1,848                              |       | 2,522 |   | 424 |   | 384 |   |
| Total net periodic benefit cost      |       | $                                  | 2,578      |   | $ | 4,032 |   | $ | 1,606 |   | $ | 1,526 |   |

 

TheCompany expects to contribute a total of approximately $14 million to $16million to its funded pension plans during 2010.

 

TheCompany receives a Medicare Part D subsidy for a portion of the cost ofproviding prescription drug benefits under its retiree medical benefitplan.  In March of 2010, newlegislation was signed into law in the U.S. that makes this subsidy fullysubject to federal income tax beginning in 2013.  Previously, this subsidy was essentiallyexempt from federal income tax. Accordingly, the Company recognized a charge of $1.7 million to incometax expense in the three months ended March 31, 2010, reflecting thewrite-off of the deferred tax asset related to this subsidy.

 

**NOTE 6:  FINANCIAL GUARANTEES ANDCOMMITMENTS**

 

Significantfinancial guarantees and commitments are summarized in the following table:

 
| ** **                                 | ** ** | **June 30,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| **(Amounts  in thousands)**                | ** ** | **2010**          | ** ** |
| Letters of credit outstanding              |       | $                 | 3,384      |   |
| Other financial guarantees                 |       | 923               |       |
| Total financial guarantees and commitments |       | $                 | 4,307      |   |

 

Seealso Note 4 above.

 

**NOTE 7:  CONTINGENT LIABILITIES**

 

TheCompany is a defendant in a number of product liability lawsuits, some of whichseek significant or unspecified damages, involving serious personal injuriesfor which there are retentions or deductible amounts under the Company’sinsurance policies. Some of these lawsuits arise out of the Company’s duty toindemnify certain purchasers of the Company’s discontinued operations forlawsuits involving products manufactured prior to the sale of thesebusinesses.  In addition, the Company isa party to a number of other lawsuits arising out of the normal course of itsbusiness, including suits concerning commercial contracts, employee matters,intellectual property rights and other matters. In some instances the Company is the plaintiff and is seeking recoveryof damages. In other instances, the Company is a defendant against whom damagesare being sought.  While there can be noassurance as to the ultimate outcome of these lawsuits, management does notbelieve these lawsuits will have a material adverse effect on the Company’sconsolidated financial position, operating results, or cash flows.

 

InMarch 2010, the Company received an offer from Region 9 of theEnvironmental Protection Agency of the U.S. to resolve its potential liabilityregarding the Operating Industries, Inc. Superfund Site in Monterey Park,California, involving a subsidiary of the former Omark Industries, Inc.,which merged with the Company in 1985. The Company submitted its consent to enter into an administrativesettlement agreement for the Company’s pro rata share of the site’s clean-upcosts as a de minimis participant. Accordingly, the Company recognized a charge of $0.1 million in thethree months ended March 31, 2010 in settlement of this matter.  However, the settlement agreement is subjectto a public comment period of 30 days and other procedures pursuant to theComprehensive Environmental Response, Compensation, and Liability Act.  The Company is awaiting notice from the EPAthat the de minimis settlement agreement has been accepted by a sufficientnumber of parties to begin the public comment process.

 

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TheCompany accrues, by a charge to income, an amount representing management’sbest estimate of the undiscounted probable loss related to any matter deemed bymanagement and its counsel as a reasonably probable loss contingency in lightof all of the then known circumstances.

 

**NOTE 8:  EARNINGS PER SHARE DATA**

 

Sharesused in the denominators of the basic and diluted earnings per sharecomputations were as follows:

 
| ** **                                                                                                                             | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Shares  in thousands)**                                                                                                             | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Shares for basic per share computation — weighted  average common shares outstanding                                              |       | 47,840                                |       | 47,747                              |       | 47,815 |   | 47,743 |   |
| Dilutive effect of common stock equivalents                                                                                            |       | 509                                   |       | 436                                 |       | 524 |   | 438 |   |
| Shares for diluted per share computation                                                                                               |       | 48,349                                |       | 48,183                              |       | 48,339 |   | 48,181 |   |
| Options and stock appreciation rights (“SARs”)  excluded from computation as anti-dilutive because they are out-of-the-money |       | 2,073                                 |       | 2,207                               |       | 1,864 |   | 2,207 |   |

 

Theamount of unvested restricted stock and restricted stock units (“RSUs”)considered participating securities at June 30, 2009 and June 30,2010 was 188 thousand and 150 thousand, respectively.  The allocation of undistributed earnings (netincome) to the participating securities under the two class method had noeffect on the calculation of earnings per share.

 

**NOTE 9:  STOCK-BASED COMPENSATION**

 

TheCompany did not grant any stock-based compensation awards during the six monthsended June 30, 2009 but did grant the following awards during the sixmonths ended June 30, 2010:

 
| **(Amounts  in thousands)**          | ** ** | **2010** | ** ** |
|--------------------------------------|------------|----------|------------|
| SARs granted                         |       | 549      |       |
| RSUs granted                         |       | 118      |       |
|                                 |       |     |       |
| Aggregate fair value of SARs granted |       | $        | 3,091      |   |
| Aggregate fair value of RSUs granted |       | $        | 1,322      |   |

 

TheSARs and RSUs granted in the six months ended June 30, 2010 vest in onetwelfth tranches quarterly over a three-year period and are restricted fromexercise, sale, or other transfer until March 31, 2013.  The SARs granted have a ten-year term fromdate of issuance.

 

Thefollowing assumptions and information was used to estimate the fair value ofSARs in the six months ended June 30, 2010:

 
| ** **                             | ** ** | **2010** | ** ** |
|----------------------------------------|------------|----------|------------|
| Estimated average life                 |       | 6 years  |       |
| Risk-free interest rate                |       | 2.8      | %          |
| Expected volatility                    |       | 49.8     | %          |
| Weighted average volatility            |       | 49.8     | %          |
| Dividend yield                         |       | 0.0      | %          |
| Exercise price                         |       | $        | 11.85      |   |
| Weighted average grant date fair value |       | $        | 5.96       |   |

 

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Asof June 30, 2010, the total unrecognized stock-based compensation expenserelated to previously granted awards was $7.2 million. The weighted averageperiod over which this expense is expected to be recognized is 2.5 years.  The Company’s policy upon the exercise ofoptions, restricted stock awards, RSUs, or SARs has been to issue new sharesinto the public market from the stockholder-approved 2006 Equity IncentivePlan.

 

**NOTE 10:  SEGMENT INFORMATION**

 

TheCompany identifies operating segments primarily based on organizationalstructure and the evaluation of the Chief Operating Decision Maker (ChiefExecutive Officer).  The Company has onereportable segment: Outdoor Products. The other category includes centralized administrative functions, a gearcomponent manufacturing business, gain on sale of land and buildings, and plantclosure and other severance costs. Outdoor Products manufactures and markets cutting chain, bars,sprockets, and accessories for chainsaws, concrete-cutting equipment, lawnmowerblades, and replacement parts and accessories for outdoor equipment.  The accounting policies of the segment arethe same as those described in the summary of significant accounting policies.

 

Certain financialinformation by segment is presented in the table below:

 
| ** **                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Sales:**                  |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products            |       | $                                     | 144,788    |                                | $          | 110,131 |   | $ | 277,917 |   | $ | 221,550 |   |
| Other                       |       | 4,168                                 |       | 3,870                               |       | 7,722 |   | 8,975 |   |
| Total sales                 |       | $                                     | 148,956    |                                | $          | 114,001 |   | $ | 285,639 |   | $ | 230,525 |   |
|                        |       |                                  |       |                                |       |   |   |   |   |
| **Operating income:**       |       |                                  |       |                                |       |   |   |   |   |
| Outdoor Products            |       | $                                     | 28,189     |                                | $          | 14,044 |   | $ | 55,967 |   | $ | 30,513 |   |
| Other                       |       | (5,448                                | )          | (2,084                              | )          | (11,467 | ) | (10,973 | ) |
| Total operating income      |       | $                                     | 22,741     |                                | $          | 11,960 |   | $ | 44,500 |   | $ | 19,540 |   |

 

**NOTE 11:  SUPPLEMENTAL CASH FLOWINFORMATION**

 
| ** **                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| Interest paid               |       | $                                   | 10,369     |   | $ | 10,096 |   |
| Income taxes paid, net      |       | 3,841                               |       | 7,289 |   |
|                             |            |                                     |            |  |  |  |  |

 

**NOTE 12:  FAIR VALUE OF FINANCIALINSTRUMENTS AND CREDIT RISK CONCENTRATION**

 

TheCompany has manufacturing or distribution operations in Brazil, Canada, China,Europe, Japan, Russia, and the U.S. The Company sells to customers in theselocations and other countries throughout the world.  At June 30, 2010, approximately 67% ofaccounts receivable were from customers outside the U.S.  If the U.S. Dollar strengthens againstforeign currencies, it becomes more costly for these foreign customers to paytheir U.S. Dollar balances owed.  Theymay have difficulty in repaying these amounts, and, in turn, the Company’s baddebt expense may increase.  Accountsreceivable are principally from distributors, dealers, mass merchants, chainsawmanufacturers, and other original equipment manufacturers (“OEMs”) and arenormally not collateralized.

 

Thecarrying amount of cash and cash equivalents approximates fair value because ofthe short-term maturity of those instruments. The carrying amount of accountsreceivable approximates fair value because the maturity period is short and theCompany has reduced the carrying amount to the estimated net realizable valuewith an allowance for doubtful accounts. The carrying amount of any principal outstanding on the revolving creditfacility approximates fair value because the applicable interest rates arevariable and the maturity period is relatively short on each borrowingtranche.  The fair value of the termloans is determined by reference to prices of recent transactions wherebybuyers and sellers exchange their interests in portions of these loans.  The fair value of the fixed rate 8 7/8%senior subordinated notes is determined by reference to quoted marketprices.  Derivative financial 

 

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instrumentsare carried on the Consolidated Balance Sheets at fair value.  The carrying amount of other financialinstruments approximates fair value because of the short-term maturity periodsand variable interest rates associated with the instruments.

 

Theestimated fair values of the term loans and 8 7/8% senior subordinated notes atJune 30, 2010 and December 31, 2009 are presented below.

 
| ** **                       | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------|------------|
| **(Amounts  in thousands)**      | ** ** | **Carrying  Amount**   | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Term loans                       |       | $                      | 105,422    |                       | $          | 105,422 |   | $ | 107,465 |   | $ | 107,734 |   |
| 8 7/8% senior subordinated notes |       | 175,000                |       | 175,474                    |       | 175,000 |   | 178,500 |   |
|                                  |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

***Derivative Financial Instruments and ForeignCurrency Hedging.***  TheCompany makes regular payments to its wholly-owned subsidiary in Canada, BlountCanada Ltd. (“Blount Canada”), for contract manufacturing services performed byBlount Canada for conversion of raw materials into finished goods. We areexposed to changes in Canadian Dollar to U.S. Dollar exchange rates from thesetransactions since most conversion costs are incurred in Canadian Dollars.  Changes in the Canadian Dollar to U.S. Dollarexchange rates may adversely affect our results of operations and financial position.

 

Since October, 2008, we havemanaged a portion of Canadian Dollar exchange rate exposures with derivativefinancial instruments.  These derivativefinancial instruments are zero-cost collar option combinations, consisting of apurchased call option to buy Canadian Dollars and a written put option to sellCanadian Dollars. We apply cash flow hedge accounting to our CanadianDollar-related derivative financial instruments, and therefore defer the gainsor losses on those instruments in accumulated other comprehensive loss on theConsolidated Balance Sheets until maturity, or if it becomes probable that theforecasted transaction will not occur, at which time the gain or loss isrecognized in the Consolidated Statements of Income.

 

As of June 30, 2010, thecumulative unrealized pre-tax loss on these contracts included in othercomprehensive loss on the Consolidated Balance Sheets was $0.5 million.  During the three and six months ended June 30,2010, gains of $0.7 million and $2.1 million, respectively, were recognized incost of goods sold in the Consolidated Statements of Income at the maturity ofthe related Canadian Dollar derivative financial instruments.  During the three and six months ended June 30,2009, losses of $0.2 million and $1.0 million, respectively, were recognized incost of goods sold in the Consolidated Statements of Income at the maturity ofthe related Canadian Dollar derivative financial instruments.  Gains and losses on these Canadian Dollar derivativefinancial instruments are largely offset in cost of goods sold by the effectsof currency exchange rate changes on the underlying transactions.  Through June 30, 2010, the Company hasnot recognized any amount from these contracts in earnings due toineffectiveness, or due to it becoming probable that the forecasted transactionwill not occur.  The aggregate notionalamount of these Canadian Dollar contracts outstanding was $29.4 million at June 30,2010 and $30.3 million at December 31, 2009.

 

We hedge the interest rateand foreign currency exposure on a portion of our cash and cash equivalentsinvested in Brazil with interest rate swap agreements.  The change in fair value of these instrumentsis recognized in interest income in the Consolidated Statements of Income.  Any change in fair value of these derivativecontracts is fully offset by the change in fair value of the underlyinginvestments.  The Consolidated Statementsof Income include income of $0.1 million for the six months ended June 30,2010 and expense of $1.0 million and $1.6 million, respectively, for the threeand six months ended June 30, 2009, from the change in fair value of theseinterest rate swap contracts.  There waszero impact in the three months ended June 30, 2010.  The aggregate notional amount of these interestrate swap agreements outstanding was zero at June 30, 2010 and $13.0million at December 31, 2009.

 

Underaccounting principles generally accepted in the U.S., the framework formeasuring fair value is based on independent observable inputs of market dataunder the following hierarchy:

 

Level1 — Quoted prices in active markets for identical assets and liabilities.

 

Level2 — Significant observable inputs based on quoted prices for similarinstruments in active markets, quoted prices for identical or similarinstruments in markets that are not active and model-based valuations for whichall significant assumptions are observable.

 

Level3 — Significant unobservable inputs that are supported by little or no marketactivity that are significant to the fair value of the assets or liabilities.

 

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Thefair values of derivatives held by the Company were:

 
| **(Amounts  in thousands)** | ** ** | **Carrying  Value of  Assets  (Liabilities)  on Balance  Sheet** | ** ** | **Assets  (Liabilities)  Measured at  Fair Value** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                        |       |                                                             |       |                                               |       |        |       |        |       |        |       |
| June 30, 2010          |       | $                                                                | (476       | )                                                  | $          | (476        | )          | $           | —     |        | $          | (476 | ) | $ | — |   |
|                        |       |                                                             |       |                                               |       |        |       |        |       |        |       |
| December 31, 2009      |       | 2,052                                                            |       | 2,052                                              |       | —      |       | 2,052       |       | —      |       |
|                             |            |                                                                  |            |                                                    |            |             |            |             |            |             |            |  |  |  |  |  |

 

Thefair value of these Level 2 derivatives was determined using a market approachbased on daily market prices of similar instruments issued by financialinstitutions in an active market.

 

Theamounts included in accumulated other comprehensive loss on the ConsolidatedBalance Sheets are expected to be recognized in the Consolidated Statements of Incomewithin the next twelve months.

 

**NOTE 13:  RECENT ACCOUNTINGPRONOUNCEMENTS**

 

InJanuary 2010, the FASB issued new guidance on fair value measurements anddisclosures which were effective in two phases. The new guidance requiring enhanced disclosures about an entity’s fairvalue measurements was effective for us on January 1, 2010 and resulted inexpanded footnote disclosures about the fair value of our assets.  The new guidance requiring enhanceddisclosures in the roll forward of activity in Level 3 fair value measurementswill be effective for us on January 1, 2011 and will result in expandedfootnote disclosures.

 

**NOTE 14:  CONSOLIDATING FINANCIALINFORMATION**

 

SeeNote 4 for a discussion of the Company’s guarantor subsidiaries.  The following consolidating financialinformation sets forth condensed Consolidating Statements of Income, BalanceSheets, and Statements of Cash Flows of Blount International, Inc., Blount, Inc.,the guarantor subsidiaries and the non-guarantor subsidiaries:

 

**Condensed Consolidating Statements of Income Information**

 
| **(Amounts in thousands)**                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended  June 30, 2010** |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                      |       | $                                | —     |              | $          | 117,916                     |       | $                                 | 4,167      |             | $          | 85,693           |       | $ | (58,820 | ) | $ | 148,956 |   |
| Cost of sales                              |       | —                           |       | 82,402            |       | 2,776                       |       | 68,681                            |       | (57,402          | )          | 96,457           |       |
| Gross profit                               |       | —                           |       | 35,514            |       | 1,391                       |       | 17,012                            |       | (1,418           | )          | 52,499           |       |
| Operating expenses                         |       | —                           |       | 20,407            |       | 619                         |       | 8,732                             |       | —           |       | 29,758           |       |
| Operating income                           |       | —                           |       | 15,107            |       | 772                         |       | 8,280                             |       | (1,418           | )          | 22,741           |       |
| Other income (expense), net                |       | (2,840                           | )          | (3,398            | )          | 165                         |       | (302                              | )          | —           |       | (6,375           | )          |
| Income (loss) before income taxes          |       | (2,840                           | )          | 11,709            |       | 937                         |       | 7,978                             |       | (1,418           | )          | 16,366           |       |
| Provision (benefit) for income taxes       |       | (1,006                           | )          | 4,249             |       | 367                         |       | 2,313                             |       | —           |       | 5,923            |       |
| Income (loss) before equity in affiliates  |       | (1,834                           | )          | 7,460             |       | 570                         |       | 5,665                             |       | (1,418           | )          | 10,443           |       |
| Equity in earnings of affiliated companies |       | 12,277                           |       | 4,817             |       | —                      |       | —                            |       | (17,094          | )          | —           |       |
| Net income                                 |       | $                                | 10,443     |              | $          | 12,277                      |       | $                                 | 570        |             | $          | 5,665            |       | $ | (18,512 | ) | $ | 10,443 |   |

 

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| **(Amounts in thousands)**                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Six Months Ended June 30,  2010**   | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                      |       | $                                | —     |              | $          | 221,437                     |       | $                                 | 7,722      |             | $          | 171,049          |       | $ | (114,569 | ) | $ | 285,639 |   |
| Cost of sales                              |       | —                           |       | 153,056           |       | 5,509                       |       | 137,611                           |       | (113,051         | )          | 183,125          |       |
| Gross profit                               |       | —                           |       | 68,381            |       | 2,213                       |       | 33,438                            |       | (1,518           | )          | 102,514          |       |
| Operating expenses                         |       | —                           |       | 39,730            |       | 1,181                       |       | 17,103                            |       | —           |       | 58,014           |       |
| Operating income                           |       | —                           |       | 28,651            |       | 1,032                       |       | 16,335                            |       | (1,518           | )          | 44,500           |       |
| Other income (expense), net                |       | (5,648                           | )          | (6,736            | )          | 331                         |       | (829                              | )          | —           |       | (12,882          | )          |
| Income (loss) before income taxes          |       | (5,648                           | )          | 21,915            |       | 1,363                       |       | 15,506                            |       | (1,518           | )          | 31,618           |       |
| Provision (benefit) for income taxes       |       | (2,396                           | )          | 9,299             |       | 578                         |       | 4,911                             |       | —           |       | 12,392           |       |
| Income (loss) before equity in affiliates  |       | (3,252                           | )          | 12,616            |       | 785                         |       | 10,595                            |       | (1,518           | )          | 19,226           |       |
| Equity in earnings of affiliated companies |       | 22,478                           |       | 9,862             |       | —                      |       | —                            |       | (32,340          | )          | —           |       |
| Net income                                 |       | $                                | 19,226     |              | $          | 22,478                      |       | $                                 | 785        |             | $          | 10,595           |       | $ | (33,858 | ) | $ | 19,226 |   |

 

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| **(Amounts in thousands)**                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                       |       |                             |       |              |       |                       |       |                              |       |             |       |             |       |
| **Three Months Ended  June 30, 2009** |       |                             |       |              |       |                       |       |                              |       |             |       |             |       |
| Sales                                      |       | $                                | —     |              | $          | 81,829                     |       | $                                 | 5,091      |             | $          | 60,348           |       | $ | (33,267 | ) | $ | 114,001 |   |
| Cost of sales                              |       | —                           |       | 60,448            |       | 4,704                      |       | 48,399                            |       | (34,189          | )          | 79,362           |       |
| Gross profit                               |       | —                           |       | 21,381            |       | 387                        |       | 11,949                            |       | 922              |       | 34,639           |       |
| Operating expenses, net                    |       | —                           |       | 16,661            |       | 1,060                      |       | 4,958                             |       | —           |       | 22,679           |       |
| Operating income (loss)                    |       | —                           |       | 4,720             |       | (673                       | )          | 6,991                             |       | 922              |       | 11,960           |       |
| Other income (expense), net                |       | (2,899                           | )          | (3,229            | )          | 97                         |       | (290                              | )          | —           |       | (6,321           | )          |
| Income (loss) before income taxes          |       | (2,899                           | )          | 1,491             |       | (576                       | )          | 6,701                             |       | 922              |       | 5,639            |       |
| Provision (benefit) for income taxes       |       | (892                             | )          | 1,628             |       | 81                         |       | 590                               |       | —           |       | 1,407            |       |
| Income (loss) before equity in affiliates  |       | (2,007                           | )          | (137              | )          | (657                       | )          | 6,111                             |       | 922              |       | 4,232            |       |
| Equity in earnings of affiliated companies |       | 6,239                            |       | 6,376             |       | —                     |       | —                            |       | (12,615          | )          | —           |       |
| Net income (loss)                          |       | $                                | 4,232      |              | $          | 6,239                      |       | $                                 | (657       | )                | $          | 6,111            |       | $ | (11,693 | ) | $ | 4,232 |   |

** **
| **(Amounts in thousands)**                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                       |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Six Months Ended June 30,  2009**   |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                      |       | $                                | —     |              | $          | 165,983                     |       | $                                 | 13,874     |             | $          | 127,490          |       | $ | (76,822 | ) | $ | 230,525 |   |
| Cost of sales                              |       | —                           |       | 118,877           |       | 12,246                      |       | 104,278                           |       | (77,305          | )          | 158,096          |       |
| Gross profit                               |       | —                           |       | 47,106            |       | 1,628                       |       | 23,212                            |       | 483              |       | 72,429           |       |
| Operating expenses, net                    |       | —                           |       | 34,892            |       | 5,322                       |       | 12,675                            |       | —           |       | 52,889           |       |
| Operating income (loss)                    |       | —                           |       | 12,214            |       | (3,694                      | )          | 10,537                            |       | 483              |       | 19,540           |       |
| Other income (expense), net                |       | (5,766                           | )          | (6,233            | )          | 242                         |       | (406                              | )          | —           |       | (12,163          | )          |
| Income (loss) before income taxes          |       | (5,766                           | )          | 5,981             |       | (3,452                      | )          | 10,131                            |       | 483              |       | 7,377            |       |
| Provision (benefit) for income taxes       |       | (2,350                           | )          | 3,911             |       | (1,381                      | )          | 2,008                             |       | —           |       | 2,188            |       |
| Income (loss) before equity in affiliates  |       | (3,416                           | )          | 2,070             |       | (2,071                      | )          | 8,123                             |       | 483              |       | 5,189            |       |
| Equity in earnings of affiliated companies |       | 8,605                            |       | 6,535             |       | —                      |       | —                            |       | (15,140          | )          | —           |       |
| Net income (loss)                          |       | $                                | 5,189      |              | $          | 8,605                       |       | $                                 | (2,071     | )                | $          | 8,123            |       | $ | (14,657 | ) | $ | 5,189 |   |

 

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**Condensed Consolidating Balance Sheet Information**

 
| **(Amounts  in thousands)**                     | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **June 30, 2010**                          | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                            |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| **Assets**                                      |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
|                                            |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| Cash and cash equivalents                       |       | $                                | —     |              | $          | 9,605                      |       | $                               | —     |             | $          | 63,387           |       | $ | (180 | ) | $ | 72,812 |   |
| Accounts receivable, net                        |       | —                           |       | 44,257            |       | 2,161                      |       | 31,319                          |       | —           |       | 77,737           |       |
| Intercompany receivables                        |       | —                           |       | 200,177           |       | 91,267                     |       | 39,154                          |       | (330,598         | )          | —           |       |
| Inventories, net                                |       | —                           |       | 55,989            |       | 2,282                      |       | 32,200                          |       | (6,969           | )          | 83,502           |       |
| Other current assets                            |       | —                           |       | 17,268            |       | 66                         |       | 7,321                           |       | —           |       | 24,655           |       |
| Total current assets                            |       | —                           |       | 327,296           |       | 95,776                     |       | 173,381                         |       | (337,747         | )          | 258,706          |       |
| Investments in affiliated companies             |       | 280,821                          |       | 291,342           |       | —                     |       | —                          |       | (572,163         | )          | —           |       |
| Property, plant, and equipment, net             |       | —                           |       | 57,278            |       | 6,123                      |       | 48,187                          |       | —           |       | 111,588          |       |
| Goodwill and other assets                       |       | —                           |       | 99,622            |       | 12,784                     |       | 17,058                          |       | —           |       | 129,464          |       |
| Total Assets                                    |       | $                                | 280,821    |              | $          | 775,538                    |       | $                               | 114,683    |             | $          | 238,626          |       | $ | (909,910 | ) | $ | 499,758 |   |
|                                            |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity**  |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
|                                            |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| Current maturities of long-term debt            |       | $                                | —     |              | $          | 4,924                      |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 4,924 |   |
| Accounts payable                                |       | —                           |       | 21,475            |       | 1,817                      |       | 8,240                           |       | (180             | )          | 31,352           |       |
| Intercompany payables                           |       | 269,757                          |       | 39,582            |       | 1,725                      |       | 19,534                          |       | (330,598         | )          | —           |       |
| Other current liabilities                       |       | —                           |       | 40,580            |       | 1,453                      |       | 15,047                          |       | —           |       | 57,080           |       |
| Total current liabilities                       |       | 269,757                          |       | 106,561           |       | 4,995                      |       | 42,821                          |       | (330,778         | )          | 93,356           |       |
| Long-term debt, excluding current maturities    |       | —                           |       | 275,498           |       | —                     |       | —                          |       | —           |       | 275,498          |       |
| Other liabilities                               |       | 779                              |       | 112,658           |       | 241                        |       | 6,941                           |       | —           |       | 120,619          |       |
| Total liabilities                               |       | 270,536                          |       | 494,717           |       | 5,236                      |       | 49,762                          |       | (330,778         | )          | 489,473          |       |
| Stockholders’ equity                       |       | 10,285                           |       | 280,821           |       | 109,447                    |       | 188,864                         |       | (579,132         | )          | 10,285           |       |
| Total Liabilities and Stockholders’ Equity |       | $                                | 280,821    |              | $          | 775,538                    |       | $                               | 114,683    |             | $          | 238,626          |       | $ | (909,910 | ) | $ | 499,758 |   |

 

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**Condensed Consolidating Balance Sheet Information**

 
| **(Amounts  in thousands)**                                | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **December 31, 2009**                                 | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| Cash and cash equivalents                                  |       | $                                | —     |              | $          | —                     |       | $                               | —     |             | $          | 55,314           |       | $ | (244 | ) | $ | 55,070 |   |
| Accounts receivable, net                                   |       | —                           |       | 46,172            |       | 1,212                      |       | 27,091                          |       | —           |       | 74,475           |       |
| Intercompany receivables                                   |       | —                           |       | 203,935           |       | 87,710                     |       | 45,712                          |       | (337,357         | )          | —           |       |
| Inventories, net                                           |       | —                           |       | 53,475            |       | 2,539                      |       | 22,409                          |       | (244             | )          | 78,179           |       |
| Deferred income taxes                                      |       | —                           |       | 4,274             |       | —                     |       | 1,254                           |       | —           |       | 5,528            |       |
| Other current assets                                       |       | —                           |       | 15,787            |       | 5,754                      |       | 8,077                           |       | (5,656           | )          | 23,962           |       |
| Total current assets                                       |       | —                           |       | 323,643           |       | 97,215                     |       | 159,857                         |       | (343,501         | )          | 237,214          |       |
| Investments in affiliated companies                        |       | 262,141                          |       | 291,517           |       | —                     |       | —                          |       | (553,658         | )          | —           |       |
| Property, plant, and equipment, net                        |       | —                           |       | 56,807            |       | 6,633                      |       | 51,030                          |       | —           |       | 114,470          |       |
| Goodwill and other assets                                  |       | —                           |       | 103,501           |       | 12,784                     |       | 15,597                          |       | —           |       | 131,882          |       |
| Total Assets                                               |       | $                                | 262,141    |              | $          | 775,468                    |       | $                               | 116,632    |             | $          | 226,484          |       | $ | (897,159 | ) | $ | 483,566 |   |
|                                                       |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity (Deficit)**   |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                       |       |                            |       |             |       |             |       |
| Current maturities of long-term debt                       |       | $                                | —     |              | $          | 5,013                      |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 5,013 |   |
| Accounts payable                                           |       | —                           |       | 28,797            |       | 629                        |       | 8,013                           |       | (5,900           | )          | 31,539           |       |
| Intercompany payables                                      |       | 267,989                          |       | 49,940            |       | (544                       | )          | 19,972                          |       | (337,357         | )          | —           |       |
| Other current liabilities                                  |       | —                           |       | 35,129            |       | 2,001                      |       | 13,985                          |       | —           |       | 51,115           |       |
| Total current liabilities                                  |       | 267,989                          |       | 118,879           |       | 2,086                      |       | 41,970                          |       | (343,257         | )          | 87,667           |       |
| Long-term debt, excluding current maturities               |       | —                           |       | 280,852           |       | —                     |       | —                          |       | —           |       | 280,852          |       |
| Other liabilities                                          |       | 892                              |       | 113,596           |       | 324                        |       | 6,975                           |       | —           |       | 121,787          |       |
| Total liabilities                                          |       | 268,881                          |       | 513,327           |       | 2,410                      |       | 48,945                          |       | (343,257         | )          | 490,306          |       |
| Stockholders’ equity (deficit)                        |       | (6,740                           | )          | 262,141           |       | 114,222                    |       | 177,539                         |       | (553,902         | )          | (6,740           | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit) |       | $                                | 262,141    |              | $          | 775,468                    |       | $                               | 116,632    |             | $          | 226,484          |       | $ | (897,159 | ) | $ | 483,566 |   |

 

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**Condensed Consolidating Cash Flows Information**

 
| **(Amounts  in thousands)**                                              | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Six Months Ended June 30,  2010**                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by operating activities                                |       | $                                | —     |              | $          | 25,281                      |       | $                                 | 1,485      |             | $          | 4,561            |       | $ | 64 |   | $ | 31,391 |   |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Purchases of property, plant, and equipment, net  of proceeds from sales |       | —                           |       | (6,110            | )          | (35                         | )          | (2,474                            | )          | —           |       | (8,619           | )          |
| Advances from affiliates, net                                            |       | —                           |       | —            |       | —                      |       | 5,690                             |       | (5,690           | )          | —           |       |
| Net cash provided by (used in) investing  activities                     |       | —                           |       | (6,110            | )          | (35                         | )          | 3,216                             |       | (5,690           | )          | (8,619           | )          |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net repayments under revolving credit facility                           |       | —                           |       | (3,400            | )          | —                      |       | —                            |       | —           |       | (3,400           | )          |
| Repayment of term loan principal                                         |       | —                           |       | (2,043            | )          | —                      |       | —                            |       | —           |       | (2,043           | )          |
| Advances to affiliates, net                                              |       | (74                              | )          | (4,123            | )          | (1,450                      | )          | (43                               | )          | 5,690            |       | —           |       |
| Other                                                                    |       | 74                               |       | —            |       | —                      |       | —                            |       | —           |       | 74               |       |
| Net cash used in financing activities                                    |       | —                           |       | (9,566            | )          | (1,450                      | )          | (43                               | )          | 5,690            |       | (5,369           | )          |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Effect of exchange rate changes                                          |       | —                           |       | —            |       | —                      |       | 339                               |       | —           |       | 339              |       |
| Net increase in cash and cash equivalents                                |       | —                           |       | 9,605             |       | —                      |       | 8,073                             |       | 64               |       | 17,742           |       |
| Cash and cash equivalents at beginning of period                         |       | —                           |       | —            |       | —                      |       | 55,314                            |       | (244             | )          | 55,070           |       |
| Cash and cash equivalents at end of period                               |       | $                                | —     |              | $          | 9,605                       |       | $                                 | —     |             | $          | 63,387           |       | $ | (180 | ) | $ | 72,812 |   |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Six Months Ended June 30,  2009**                                 |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by operating activities                                |       | $                                | —     |              | $          | 2,708                       |       | $                                 | 3,799      |             | $          | 11,347           |       | $ | 219 |   | $ | 18,073 |   |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Purchase of property, plant, and equipment                               |       | —                           |       | (3,857            | )          | (391                        | )          | (4,263                            | )          | —           |       | (8,511           | )          |
| Proceeds from sale of assets                                             |       | —                           |       | —            |       | 42                          |       | 3,214                             |       | —           |       | 3,256            |       |
| Advances to affiliates, net                                              |       | —                           |       | —            |       | —                      |       | (17,472                           | )          | 17,472           |       | —           |       |
| Net cash used in investing activities                                    |       | —                           |       | (3,857            | )          | (349                        | )          | (18,521                           | )          | 17,472           |       | (5,255           | )          |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net borrowings under revolving credit facility                           |       | —                           |       | (7,000            | )          | —                      |       | —                            |       | —           |       | (7,000           | )          |
| Repayment of term loan principal                                         |       | —                           |       | (11,746           | )          | —                      |       | —                            |       | —           |       | (11,746          | )          |
| Issuance costs related to debt                                           |       | —                           |       | (1,900            | )          | —                      |       | —                            |       | —           |       | (1,900           | )          |
| Advances from (to) affiliates, net                                       |       | 348                              |       | 21,610            |       | (3,450                      | )          | (1,036                            | )          | (17,472          | )          | —           |       |
| Other                                                                    |       | (348                             | )          | —            |       | —                      |       | —                            |       | —           |       | (348             | )          |
| Net cash provided by (used in) financing  activities                     |       | —                           |       | 964               |       | (3,450                      | )          | (1,036                            | )          | (17,472          | )          | (20,994          | )          |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Effect of exchange rate changes                                          |       | —                           |       | —            |       | —                      |       | (1,347                            | )          | —           |       | (1,347           | )          |
|                                                                     |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net decrease in cash and cash equivalents                                |       | —                           |       | (185              | )          | —                      |       | (9,557                            | )          | 219              |       | (9,523           | )          |
| Cash and cash equivalents at beginning of period                         |       | $                                | —     |              | $          | 185                         |       | $                                 | —     |             | $          | 59,158           |       | $ | (1,068 | ) | $ | 58,275 |   |
| Cash and cash equivalents at end of period                               |       | $                                | —     |              | $          | —                      |       | $                                 | —     |             | $          | 49,601           |       | $ | (849 | ) | $ | 48,752 |   |

 

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**ITEM 2.**  **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Thefollowing discussion and analysis should be read in conjunction with ourunaudited Consolidated Financial Statements included elsewhere in this report.

 

**Operating Results**

 

**Three months ended June 30, 2010 (unaudited) compared to threemonths ended June 30, 2009 (unaudited).**

 

Thetable below provides a summary of results and the primary contributing factorsto the year-over-year change.

 
| ** **                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                                             | ** ** | **2010**                              | ** ** | **2009**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not sum due to rounding)**                             | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Sales                                                                 |       | $                                     | 149.0      |       | $          | 114.0      |       | $ | 35.0 |   |   |   |   |   |
|                                                                  |       |                                  |       |       |       |       |       | $ | 35.6 |   | Sales volume |   |
|                                                                  |       |                                  |       |       |       |       |       | (1.3 | ) | Selling price and mix |   |
|                                                                  |       |                                  |       |       |       |       |       | 0.6 |   | Foreign currency translation |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Gross profit                                                          |       | 52.5                                  |       | 34.6       |       | 17.9       |       |   |   |   |   |
| *Gross margin*                                                        | * *   | *35.2*                                | *%*        | *30.4*     | *%*        |       |       | 11.8 |   | Sales volume |   |
|                                                                  |       |                                  |       |       |       |       |       | (1.3 | ) | Selling price and mix |   |
|                                                                  |       |                                  |       |       |       |       |       | 8.7 |   | Product cost and mix |   |
|                                                                  |       |                                  |       |       |       |       |       | (1.4 | ) | Foreign currency translation |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Selling, General, and  Administrative Expenses (“SG&A”) |       | 29.8                                  |       | 24.0       |       | 5.7        |       |   |   |   |   |
|                                                                  |       |                                  |       |       |       |       |       | 3.4 |   | Compensation and benefits expense |   |
|                                                                  |       |                                  |       |       |       |       |       | 0.6 |   | Advertising |   |
|                                                                  |       |                                  |       |       |       |       |       | 1.1 |   | Strategic initiatives |   |
|                                                                  |       |                                  |       |       |       |       |       | 0.4 |   | Foreign warehouse closure |   |
|                                                                  |       |                                  |       |       |       |       |       | 0.3 |   | Foreign currency translation |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Plant closure and  severance costs                                    |       | —                                |       | 1.4        |       | (1.4       | )          |   |   |   |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Gain on sale of land and  building                                    |       | —                                |       | 2.7        |       | (2.7       | )          |   |   |   |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Operating income                                                      |       | 22.7                                  |       | 12.0       |       | 10.8       |       |   |   |   |   |
| *Operating margin*                                                    | * *   | *15.3*                                | *%*        | *10.5*     | *%*        |       |       | 17.9 |   | Increase in gross profit |   |
|                                                                  |       |                                  |       |       |       |       |       | (5.7 | ) | Increase in SG&A |   |
|                                                                  |       |                                  |       |       |       |       |       | 1.4 |   | Plant closure and severance costs |   |
|                                                                  |       |                                  |       |       |       |       |       | (2.7 | ) | Gain on sale of land and building |   |
|                                                                  |       |                                  |       |       |       |       |       |   |   |   |   |
| Net income                                                            |       | $                                     | 10.4       |       | $          | 4.2        |       | $ | 6.2 |   |   |   |   |   |
|                                                                  |       |                                  |       |       |       |       |       | 10.8 |   | Increase in operating income |   |
|                                                                  |       |                                  |       |       |       |       |       | (4.5 | ) | Increase in income tax provision |   |
|                                                                       |            |                                       |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

Salesin the three months ended June 30, 2010 increased by $35.0 million (30.7%)from the same period in 2009, primarily due to increased unit volume of $35.6million.  Changes in average sellingprice and mix lowered sales revenue by $1.3 million on a quarter-over-quartercomparative basis.  Lower average sellingprices were attributable to a higher proportion of OEM sales versus replacementmarket sales in the comparable prior year quarter.  International sales increased by $29.3million (40.2%), while domestic sales increased by $5.6 million (13.7%).  The increase in international sales reflectedimproved world-wide market conditions and increased demand for our productsfollowing the severe global recession experienced in 2009.  During the second quarter of 2009, we werecautious about extending credit to certain higher risk geographical areasduring the global recession, which we believe contributed to a slowdown insales and orders last year from portions of our international customerbase.  As international market conditionsand credit concerns have improved, our international sales have increased.

 

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Consolidated order backlog at June 30, 2010 was$124.5 million compared to $105.7 million at March 31, 2010.  Backlog in the Outdoor Products segmentincreased $17.9 million, while the backlog for gear components increased by$0.9 million during the second quarter of 2010.

 

Grossprofit increased $17.9 million (51.6%) from the second quarter of 2009 to thesecond quarter of 2010.  Higher unitsales volume and improved product cost and mix drove the increase in grossprofit.  These positive factors werepartially offset by negative movements in average selling prices and mix and inforeign currency exchange rates.  Ourmanufacturing costs were favorably affected during the second quarter of 2010by higher production volumes, including the elimination of idle manufacturing days.  The higher production volumes drove improvedabsorption rates when compared to the second quarter of 2009.  Year-over-year steel costs are estimated tobe $1.6 million lower for the comparable second quarter periods, although weexpect steel costs to increase later in 2010. Gross margin in the second quarter of 2010 was 35.2% of sales comparedto 30.4% in the second quarter of 2009.

 

Fluctuationsin currency exchange rates decreased our gross profit in the second quarter of2010 compared to 2009 by $1.4 million on a consolidated basis.  The translation of stronger foreigncurrencies into a weaker U.S. Dollar resulted in higher reported sales revenuefrom our sales outside the U.S. (primarily in Canada).  However, higher reported manufacturing costsin Brazil and Canada, as a result of stronger currencies in those countries,more than offset the favorable impact that translation of stronger foreigncurrencies had on sales.

 

SG&Awas $29.8 million in the second quarter of 2010, compared to $24.0 million inthe second quarter of 2009, representing an increase of $5.7 million(23.9%).  As a percentage of sales,SG&A decreased from 21.1% in the second quarter of 2009 to 20.0% in thesecond quarter of 2010, primarily due to the increase in sales revenue, whichoutpaced the increase in SG&A spending. Compensation and benefits expense for the quarter increased by $3.4million on a year-over-year basis, reflecting annual merit increases, increasedincentive compensation attributable to improved operating results, higherstock-based compensation expense, and increased employee benefit costs.  Advertising expense increased by $0.6 millionin the second quarter of 2010 compared to the second quarter of 2009, as we hadreduced our advertising programs during the 2009 economic downturn.  We incurred $1.1 million in consulting andother costs related to several strategic initiatives we began in the secondquarter including projects to improve the efficiency of our manufacturingprocesses and supply chain.  The closureof our warehouse and distribution center in France, and consolidation of thesefunctions into our European distribution center in Belgium in the secondquarter of 2010, resulted in costs of $0.4 million.  Operating expenses increased $0.3 millionfrom the prior year due to the weaker U.S. Dollar and its effect on thetranslation of foreign expenses.

 

OnJune 25, 2009, we sold the land and building representing our formerEuropean headquarters and distribution center. These operations were moved to new, nearby leased facilities.  We recognized a pre-tax gain of $2.7 millionon the sale.  We took actions during 2009to consolidate manufacturing operations and reduce the number of employees atcertain of our locations.  During thethree months ended June 30, 2009, we recognized a total of $1.4 million inplant closure and severance charges related to these actions.

 

Operatingincome increased by $10.8 million from the second quarter of 2009 to the secondquarter of 2010.  The operating marginfor the second quarter of 2010 was 15.3% of sales compared to 10.5% for thesecond quarter of 2009.  The improvementwas due to higher sales volume and gross profit, partially offset by increasedSG&A expenses.  The change in the secondquarter of 2010 compared to 2009 was also impacted by the restructuring chargesand the gain on the sale of land and building in 2009 that were not repeated in2010.

 

Interestexpense was $6.4 million in both the second quarter of 2010 and the secondquarter of 2009. 

 

Thefollowing table summarizes our income tax provision in 2010 and 2009:

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| Income before income taxes  |       | $                                    | 16,366     |   | $ | 5,639 |   |
| Provision for income taxes  |       | 5,923                                |       | 1,407 |   |
| Effective tax rate          |       | 36.2                                 | %          | 25.0 | % |
|                             |            |                                      |            |  |  |  |  |

 

Theeffective tax rate for the second quarter of 2010 was higher than the federalstatutory rate of 35% due to state income taxes and taxes recognized oninterest and dividends from certain of our foreign locations.  The effective tax rate for the second quarterof 2009 was reduced from the federal statutory rate by the impact of lowertaxes on our 

 

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foreignoperations.  Taxes on our foreignoperations were lower due to increased deductions for tax purposes, which arenot recognized as expenses for book purposes. Additionally, our effective tax rate in 2009 was reduced by federal andstate tax credits.  The effective taxrate in both periods was increased by additional tax expense recognized oninterest and dividends from certain of our foreign locations.

 

Netincome in the second quarter of 2010 was $10.4 million, or $0.22 per dilutedshare, compared to $4.2 million, or $0.09 per diluted share, in the second quarterof 2009.

 

***Segment Results. ***The following table reflects segment sales andoperating results for 2010 and 2009:

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                             | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
| Sales:                      |       |                                 |       |   |   |   |   |
| Outdoor Products            |       | $                                    | 144,788    |   | $ | 110,131 |   | 31.5 | % |
| Other                       |       | 4,168                                |       | 3,870 |   | 7.7 |   |
| Total sales                 |       | $                                    | 148,956    |   | $ | 114,001 |   | 30.7 | % |
| Operating income:           |       |                                 |       |   |   |   |   |
| Outdoor Products            |       | $                                    | 28,189     |   | $ | 14,044 |   | 100.7 | % |
| Other                       |       | (5,448                               | )          | (2,084 | ) | 161.5 |   |
| Operating income            |       | $                                    | 22,741     |   | $ | 11,960 |   | 90.1 | % |

 

***Outdoor Products Segment.***** **Sales for the OutdoorProducts segment increased by $34.7 million (31.5%) in the second quarter of2010 compared to the second quarter of 2009, primarily due to an increase inunit volume of $35.2 million, reflecting improved international market conditionsand strong customer demand for our products. Segment sales were reduced by $1.1 million from the effect of loweraverage selling prices, driven by product mix and a higher relative proportionof sales to OEM customers as opposed to sales in the replacement market in thecomparative quarterly periods.  Sales ofwood-cutting chainsaw components were up 35.9%, sales of concrete-cuttingproducts were up 33.8%, and sales of outdoor care products were up 14.5%.  Sales to OEM customers increased by 39.3%, whilereplacement market sales increased by 29.1%. International sales increased 40.6% for the three month comparableperiod, while domestic sales increased by 13.8%.

 

Segmentcontribution to operating income increased $14.1 million (100.7%) in the secondquarter of 2010 compared to the second quarter of 2009.  Increased sales unit volume ($11.6 million)and lower product cost and mix ($8.5 million) drove the improvement incontribution to operating income.  Thesepositive factors were partially offset by the effects of lower average sellingprices and mix ($1.1 million), fluctuations in foreign currency translationrates ($1.8 million), and higher SG&A expenses ($3.0 million).  Our product costs were positively affected inthe second quarter of 2010 compared to the second quarter of 2009 by higherproduction volumes, including the elimination of idle manufacturing days. Thehigher production volumes drove improved absorption rates when compared to thesecond quarter of 2009.  Capacityutilization in our Outdoor Products segment is estimated at 92% for the secondquarter of 2010, compared to 60% for the second quarter of 2009.  In addition, steel costs on a year-over-yearcomparative basis were lower by an estimated $1.8 million, although we expectsteel costs to increase in the second half of 2010.  SG&A expenses were higher primarily dueto increased compensation costs ($1.4 million), advertising expenses ($0.6million), and severance costs for the closure of our warehouse and distributionfunction in France ($0.4 million).

 

***Other.***  The other category includes centralizedadministrative functions, the results of our gear components manufacturingbusiness, certain post-retirement benefit plan costs, plant closure andseverance costs, and other restructuring costs. Sales of gear-related products increased by 7.7% from the second quarterof 2009 compared to the second quarter of 2010, primarily due to increased unitvolume.  The contribution to operatingincome from our gear components business increased by $0.3 million in thesecond quarter of 2010, as a result of increased volume.  Central administrative expenses were up $3.7million for the comparable period, primarily due to increased compensation andbenefits expenses attributable to annual merit increases, increased incentivecompensation from improved operating results, higher stock-based compensationcosts, increased employee benefit costs, and costs incurred in conjunction withseveral strategic initiatives to improve manufacturing and supply chain efficiency.  Additionally, the gain on the sale of landand building and costs for plant closure and severance recognized in the secondquarter of 2009 were not repeated in 2010.

 

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**Six months ended June 30,2010 (unaudited) compared to six months ended June 30, 2009 (unaudited).**

 

The table below provides a summary of results andthe primary contributing factors to the year-over-year change.

 
| ** **                                | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                 | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not sum due to rounding)** | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Sales                                     |       | $                                  | 285.6      |       | $          | 230.5      |       | $ | 55.1 |   |   |   |   |   |
|                                      |       |                               |       |       |       |       |       | $ | 58.8 |   | Sales volume |   |
|                                      |       |                               |       |       |       |       |       | (5.9 | ) | Selling price and mix |   |
|                                      |       |                               |       |       |       |       |       | 2.2 |   | Foreign currency translation |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Gross profit                              |       | 102.5                              |       | 72.4       |       | 30.1       |       |   |   |   |   |
| *Gross margin*                            |       | 35.9                               | %          | 31.4       | %          |       |       | 23.2 |   | Sales volume |   |
|                                      |       |                               |       |       |       |       |       | 15.0 |   | Product cost and mix |   |
|                                      |       |                               |       |       |       |       |       | (5.9 | ) | Selling price and mix |   |
|                                      |       |                               |       |       |       |       |       | (2.2 | ) | Foreign currency translation |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| SG&A                                  |       | 58.0                               |       | 49.2       |       | 8.8        |       |   |   |   |   |
|                                      |       |                               |       |       |       |       |       | 4.8 |   | Compensation and benefits expense |   |
|                                      |       |                               |       |       |       |       |       | 1.0 |   | Advertising |   |
|                                      |       |                               |       |       |       |       |       | 1.1 |   | Strategic initiatives |   |
|                                      |       |                               |       |       |       |       |       | 0.4 |   | Foreign warehouse closure |   |
|                                      |       |                               |       |       |       |       |       | 1.1 |   | Foreign currency translation |   |
|                                      |       |                               |       |       |       |       |       | 0.4 |   | Other |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Plant closure and  severance costs        |       | —                             |       | 6.4        |       | (6.4       | )          |   |   |   |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Gain on sale of land and  building        |       | —                             |       | 2.7        |       | (2.7       | )          |   |   |   |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Operating income                          |       | 44.5                               |       | 19.5       |       | 25.0       |       |   |   |   |   |
| *Operating margin*                        |       | 15.6                               | %          | 8.5        | %          |       |       | 30.1 |   | Increase in gross profit |   |
|                                      |       |                               |       |       |       |       |       | (8.8 | ) | Increase in SG&A |   |
|                                      |       |                               |       |       |       |       |       | 6.4 |   | Plant closure and severance costs |   |
|                                      |       |                               |       |       |       |       |       | (2.7 | ) | Gain on sale of land and building |   |
|                                      |       |                               |       |       |       |       |       |   |   |   |   |
| Net Income                                |       | $                                  | 19.2       |       | $          | 5.2        |       | $ | 14.0 |   |   |   |   |   |
|                                      |       |                               |       |       |       |       |       | 25.0 |   | Increase in operating income |   |
|                                      |       |                               |       |       |       |       |       | (0.1 | ) | Other |   |
|                                      |       |                               |       |       |       |       |       | (0.7 | ) | Increase in net interest expense |   |
|                                      |       |                               |       |       |       |       |       | (10.2 | ) | Increase in income tax provision |   |
|                                           |            |                                    |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

Sales in the six months ended June 30, 2010increased by $55.1 million (23.9%) from the same period in 2009, primarily dueto increased unit volume of $58.8 million. Changes in average selling price and mix lowered sales revenue by $5.9million on a year-over-year comparative basis. Lower average selling prices were attributable to increased sales tolarge volume customers, as well as a higher proportion of OEM sales in thefirst half of 2010 compared to the first half of 2009.  The translation of foreigncurrency-denominated sales transactions, given the weaker U.S. Dollar incomparison to the first half of 2009, increased consolidated sales by $2.2million year-to-date in 2010. International sales increased by $53.9 million (36.6%), while domesticsales increased by $1.2 million (1.5%). The increase in international sales reflected improved world-wide marketconditions and demand for our products following the severe global recessionexperienced in 2009, as well as favorable effects from movement in foreigncurrency exchange rates compared to 2009. During the first half of 2009, we were cautious about extending creditto certain higher risk geographical areas during the global recession, which webelieve contributed to a slowdown in sales and orders from portions of ourinternational customer base.  Asinternational market conditions and credit concerns have improved, ourinternational sales have increased.  Therelatively small increase in domestic sales is attributable to the timing ofour seasonal programs in the U.S., which are designed to assist distributors instocking for the spring end-user selling cycle. These seasonal programs were launched in the fourth quarter of 2009rather than in the first quarter of 2010, which resulted in reduced customerbuying patterns in the first half of 2010 compared to the first half of 2009.

 

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Consolidated order backlog at June 30, 2010 was$124.5 million compared to $79.7 million at December 31, 2009.  Backlog in the Outdoor Products segmentincreased $43.1 million, while the backlog for gear components increased by$1.7 million during the first half of 2010.

 

Gross profit increased $30.1 million (41.5%) fromthe first half of 2009 to the first half of 2010.  Higher unit sales volume and improved productcost and mix drove the increase in gross profit.  These positive factors were partially offsetby negative movements in average selling prices and mix and in foreign currencyexchange rates.  Our manufacturing costswere favorably affected during the first half of 2010 by higher productionvolumes, including the elimination of idle manufacturing days.  The higher production volumes drove improvedabsorption rates when compared to the first half of 2009.  Year-over-year steel costs are estimated tobe $5.8 million lower from the first half of 2009 to the first half of 2010,although we expect steel costs to increase later in 2010.  Gross margin in the first half of 2010 was35.9% of sales compared to 31.4% in the first half of 2009.

 

Fluctuations in currency exchange rates decreasedour gross profit in the first half of 2010 compared to 2009 by $2.2 million ona consolidated basis.  The translation ofstronger foreign currencies into a weaker U.S. Dollar resulted in higherreported sales revenue from our sales outside the U.S. (primarily in Europe andCanada).  However, higher reportedmanufacturing costs in Brazil and Canada, as a result of stronger currencies inthose countries, more than offset the favorable impact that translation ofstronger foreign currencies had on sales.

 

SG&A was $58.0 million in the first half of2010, compared to $49.2 million in the first half of 2009, representing anincrease of $8.8 million (17.9%).  As apercentage of sales, SG&A decreased from 21.3% in the first half of 2009 to20.3% in the first half of 2010, primarily due to the increase in salesrevenue, which outpaced the increase in SG&A spending.  Compensation and benefits expense for thefirst half of 2010 increased by $4.8 million on a year-over-year basis,reflecting annual merit increases, increased incentive compensationattributable to improved operating results, higher stock-based compensationexpense, and increased employee benefit costs. Advertising expense increased by $1.0 million in the first half of 2010compared to the first half of 2009 as we limited our advertising programsduring 2009.  We incurred $1.1 million inconsulting and other costs related to several strategic initiatives we began inthe second quarter including projects to improve the efficiency of ourmanufacturing processes and supply chain. The closure of our warehouse and distribution center in France, andconsolidation of these functions in our European distribution center in Belgiumduring the second quarter of 2010, resulted in costs of $0.4 million in thefirst half of 2010.  Operating expensesincreased $1.1 million from the prior year due to the weaker U.S. Dollar andits effect on the translation of foreign expenses.

 

OnJune 25, 2009, we sold the land and building representing our formerEuropean headquarters and distribution center. These operations were moved to new, nearby leased facilities.  We recognized a pre-tax gain of $2.7 millionon the sale.  We took actions during 2009to consolidate manufacturing operations and reduce the number of employees atcertain of our locations.  During the sixmonths ended June 30, 2009, we recognized a total of $6.4 million in plantclosure and severance charges related to these actions.

 

Operating income increased by $25.0 million from thefirst half of 2009 to the first half of 2010, resulting in an operating marginfor the first half of 2010 of 15.6% of sales compared to 8.5% for the firsthalf of 2009.  The increase was due tohigher sales volume and gross profit, partially offset by increased SG&Aexpenses and unfavorable foreign exchange effects.  In addition, the restructuring charges andthe gain on sale of land and building recognized in 2009 were not repeated in2010.

 

Interestexpense was $12.9 million in the first half of 2010 compared to $12.4 millionin the first half of 2009.  The increasewas due to higher average interest rates on our variable rate debt, partiallyoffset by lower average outstanding debt balances in the comparableperiods.  The variable interest rates onour term loans increased significantly when we amended and restated our seniorcredit facilities in December 2009, although the impact of increased rateswas partially offset by lower average borrowings.

 

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Thefollowing table summarizes our income tax provision in 2010 and 2009:

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Income before income taxes  |       | $                                  | 31,618     |   | $ | 7,377 |   |
| Provision for income taxes  |       | 12,392                             |       | 2,188 |   |
| Effective tax rate          |       | 39.1                               | %          | 29.7 | % |
|                             |            |                                    |            |  |  |  |  |

 

The effective tax rate for the first half of 2010was higher than the federal statutory rate of 35% due to state income taxes andthe $1.7 million impact of the change in tax deductibility related to theMedicare Part D prescription drug benefit we provide to certain of ourU.S. retirees.  These increases to theeffective tax rate were partially offset by the positive effects fromsettlement of our IRS audit and the related release of reserves for some of ourpreviously recorded uncertain tax positions. The effective tax rate for the first half of 2009 was reduced from thefederal statutory rate by the impact of lower taxes on our foreignoperations.  Taxes on our foreignoperations were lower due to increased deductions for tax purposes which arenot recognized as expense for book purposes. Additionally, our effective tax rate in 2009 was reduced by federal andstate tax credits.  The effective taxrate is increased in both periods by additional tax expenses recognized oninterest and dividends from certain of our foreign locations.

 

TheCompany sponsors various post-employment retiree medical benefit plans forcertain employees in the U.S.  TheCompany expects health care reform regulations to eventually have an impact onthe liability and expense of this plan, but at this time not enoughinformation is available to make a reasonable estimate of the impact.  The Company receives a Medicare Part Dsubsidy for a portion of the cost of providing prescription drug benefits underits retiree medical benefit plan.  In March of2010, new legislation was signed into law in the U.S. that makes this subsidyfully subject to federal income tax beginning in 2013.  Previously, this subsidy was essentiallyexempt from federal income tax. Accordingly, the Company recognized a charge of $1.7 million to incometax expense in the six months ended June 30, 2010, reflecting thewrite-off of the deferred tax asset related to this subsidy.

 

Netincome in the first half of 2010 was $19.2 million, or $0.40 per diluted share,compared to $5.2 million, or $0.11 per diluted share, in the first half of2009.

 

***Segment Results. ***The following table reflectssegment sales and operating results for 2010 and 2009:

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)** | ** ** | **2010**                           | ** ** | **2009** | ** ** | **Percent   Change** | ** ** |
| Sales:                      |       |                               |       |   |   |   |   |
| Outdoor Products            |       | $                                  | 277,917    |   | $ | 221,550 |   | 25.4 | % |
| Other                       |       | 7,722                              |       | 8,975 |   | (14.0 | ) |
| Total sales                 |       | 285,639                            |       | 230,525 |   | 23.9 | % |
| Operating income:           |       |                               |       |   |   |   |   |
| Outdoor Products            |       | 55,967                             |       | 30,513 |   | 83.4 | % |
| Other                       |       | (11,467                            | )          | (10,973 | ) | 4.5 |   |
| Total operating income      |       | $                                  | 44,500     |   | $ | 19,540 |   | 127.7 | % |

 

***Outdoor Products Segment.***** **Sales for the OutdoorProducts segment increased by $56.4 million (25.4%) in the first half of 2010compared to the first half of 2009, primarily due to an increase in unit volumeof $59.7 million, reflecting improved international market conditions andstrong customer demand for our products. Fluctuations in foreign currency exchange rates further increasedreported segment sales revenue by $2.2 million compared to the first half of2009.  Segment sales were reduced by $5.5million from the effect of lower average selling prices driven by product mixand a higher relative proportion of sales to OEM and large volumecustomers.  Sales of wood-cuttingchainsaw components were up 29.6%, sales of concrete-cutting products were up23.2%, and sales of outdoor care products were up 8.6% year-over-year.  Sales of our outdoor care products werepositively affected in the first half of 2009 by weather conditions in theMidwest and East Coast areas of the U.S., which stimulated demand for suchproducts, and by the positive market reception of promotional activities thatwe implemented at that time.  Sales toOEM customers increased by 31.5%, while replacement market sales increased by23.6%.  International sales increased 36.9%for the six month comparable period, while domestic sales increased by 2.9%.

 

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Segmentcontribution to operating income increased $25.5 million (83.4%) in the firsthalf of 2010 compared to the first half of 2009.  Increased sales unit volume ($23.5 million)and lower product cost and mix ($14.4 million) were the primary factors drivingthe improvement.  These positive factorswere partially offset by the effects of lower average selling prices and mix($5.5 million), fluctuations in foreign currency translation rates ($3.3million), and higher SG&A expenses ($3.5 million).  Our product costs were positively affectedduring the first half of 2010 compared to the first half of 2009 by higherproduction volumes, including the elimination of idle manufacturing days. Thehigher production volumes drove improved absorption rates when compared to thefirst half of 2009.  Capacity utilizationin our Outdoor Products segment is estimated at 90% for the first six months of2010 compared to 65% for the first six months of 2009.  In addition, steel costs on a year-over-yearcomparative basis were lower by an estimated $6.0 million, although we expectsteel costs to increase in the second half of 2010. SG&A expenses werehigher primarily due to increased compensation costs ($1.5 million),advertising expenses ($1.0 million), and severance costs for the closure of ourwarehouse and distribution function in France and other actions ($0.5 million).

 

***Other.***  The other category includes centralizedadministrative functions, the results of our gear components manufacturingbusiness, certain post-retirement benefit plan costs, gain on sale of land andbuilding, plant closure and severance costs, and other restructuringcosts.  Sales of gear-related productsdecreased by 14.0% from the first half of 2009 to the first half of 2010primarily due to reduced unit volume. The sales decrease included lower volume of $0.9 million and a $0.4million unfavorable effect of mix changes. The contribution to operating income from our gear components businesswas slightly higher by $0.3 million on a year-over-year basis.  Central administrative expenses were up $0.8million for the comparable periods, due to higher costs for compensation andbenefits due to annual merit increases, increased incentive compensation fromimproved operating results, higher stock-based compensation costs, increasedemployee benefit costs, and costs incurred in conjunction with severalstrategic initiatives to improve manufacturing and supply chainefficiency.  In addition, the plantclosure and severance costs of $6.4 million, and a pre-tax gain of $2.7 millionon the sale of property in Belgium, both recognized in the first half of 2009,were not repeated in 2010.

 

**Financial Condition, Liquidity and Capital Resources**

 

Totaldebt at June 30, 2010 was $280.4 million compared to $285.9 million at December 31,2009:

 
| ** **                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts  in thousands)**      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Revolving credit facility        |       | $                 | —     |                  | $          | 3,400 |   |
| Term loans                       |       | 105,422           |       | 107,465               |       |
| 8 7/8% senior subordinated notes |       | 175,000           |       | 175,000               |       |
| Total debt                       |       | 280,422           |       | 285,865               |       |
| Less current maturities          |       | (4,924            | )          | (5,013                | )          |
| Long-term debt                   |       | $                 | 275,498    |                  | $          | 280,852 |   |

 

***8 7/8% Senior Subordinated Notes.***  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at the option of the Company, in whole or in part, at redemptionprices of 102.219% through July 31, 2010; and at 100% on August 1,2010 and thereafter (see further discussion following).  These notes are issued by the Company’swholly-owned subsidiary, Blount, Inc., and are fully and unconditionally,jointly and severally, guaranteed by the Company and all of its domesticsubsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8%senior subordinated notes are 100% owned, directly or indirectly, by theCompany.  While the Company and all ofits domestic subsidiaries guarantee these 8 7/8% senior subordinated notes,none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”)guarantee these notes.  See also Note 14.

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as Agent on May 15, 2003.  The agreement was amended and restated on August 9,2004, underwent several subsequent amendments, and was amended and restatedagain on December 4, 2009.  Thesenior credit facilities consist of a revolving credit facility and a term loanfacility.

 

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***April 2009 Amendment to Revolving Credit Facility***.  On April 30, 2009, we entered into anamendment to the revolving credit facility as follows:

 

·                  The maturity date wasextended to August 9, 2010.

 

·                  We reduced totalavailability under the revolving credit facility from $150.0 million to $90.0million.

 

·                  The interest rate wasincreased from the LIBOR rate plus 1.75% or the U.S. prime interest rate, withno minimum, to the LIBOR rate as defined in the credit agreement (the “LIBORRate”) plus 5.00% or the U.S. index rate as defined in the credit agreement(the “U.S. Index Rate”) plus 3.25%, with a minimum rate of 7.50%, on alloutstanding principal.  The Company mayelect to borrow amounts under either the LIBOR Rate or the U.S. Index Rate.

 

·                  The commitment fee on unusedborrowing capacity was increased from 0.375% to 1.00%.

 

·                  The Company incurred feesand third party costs of $2.0 million related to the amendment.

 

**December 2009Amendment and Restatement of Credit Facilities.**  On December 4, 2009, the senior creditfacility was amended and restated as follows:

 

·                  The maturity date for boththe revolving credit facility and the term loan facility was extended to February 9,2012.

 

·                  We reduced total availabilityunder the revolving credit facility from $90.0 million to $60.0 million.

 

·                  The interest rate on theterm loan facility was increased from LIBOR plus 1.75% or the U.S. prime rateto the LIBOR Rate plus 3.50%, or the index rate as defined in the creditagreement (the “Index Rate”) plus 2.50%, with a minimum rate of 5.50%.  The Company may elect to borrow amounts forspecific periods under either the LIBOR Rate or Index Rate.

 

·                  The maximum allowed leverageratio, as defined in the credit agreement, was increased from 4.25 to 4.50.

 

·                  Existing term loansrepresenting $3.9 million of the total of $107.5 million term loan principaloutstanding at the time were not affected by this amendment and restatement,and the terms for this portion of the term loans remain unchanged, includinginterest at the prime rate and a maturity date of August 9, 2010.  The principal amount of these unchanged termloans is included in current maturities of long-term debt on the ConsolidatedBalance Sheets.

 

·                  The Company incurred feesand third party costs of $3.3 million related to the amendment and restatement.

 

Therevolving credit facility provides for total available borrowings up to $60.0million, reduced by outstanding letters of credit and further restricted by aspecific leverage ratio and credit facility leverage ratio.  As of June 30, 2010, the Company had theability to borrow an additional $56.7 million under the terms of the revolvingcredit agreement.  The revolving creditfacility bears interest at the LIBOR Rate plus 5.00%, or the U.S. Index Rateplus 3.25%, with a minimum interest rate of 7.50%, and matures on February 9,2012.  Interest is payable on theindividual maturity dates for each LIBOR-based borrowing, and monthly on U.S.Index Rate borrowings.  Any outstandingprincipal is due in its entirety on the maturity date.

 

Theterm loan facility bears interest at the LIBOR Rate plus 3.50%, or the IndexRate plus 2.50%, with a minimum interest rate of 5.50%, and matures on February 9,2012.  The term loan facility requiresquarterly principal payments of $0.3 million, and an additional principalpayment of $3.9 million on August 9, 2010, with a final payment of $99.7million due on the maturity date.  Oncerepaid, principal under the term loan facility may not be re-borrowed by theCompany.

 

Theamended and restated senior credit facilities contain financial covenantsrelating to:

 

·                  Maximum capitalexpenditures.

 

·                  Minimum fixed chargecoverage ratio, defined as EBITDA divided by cash payments for interest, taxes,capital expenditures, scheduled debt principal payments, and certain otheritems.

 

·                  Maximum leverage ratio,defined as total debt divided by EBITDA.

 

·                  Maximum credit facilityleverage ratio, defined as principal outstanding under the senior credit facilitiesdivided by EBITDA.

 

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| ** **                                             | ** ** | **As of June 30, 2010** | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| **Financial  Covenants**                               | ** ** | **Requirement**              | ** ** | **Actual** | ** ** |
| Maximum capital expenditures per year                  |       | $                            | 32,500     |   | $ | 8,641 |   |
| Minimum fixed charge coverage ratio last 12 months     |       | 1.15                         |       | 2.33 |   |
| Maximum leverage ratio last 12 months                  |       | 4.50                         |       | 2.58 |   |
| Maximum credit facility leverage ratio last 12  months |       | 2.50                         |       | 0.99 |   |
|                                                        |            |                              |            |  |  |  |  |

 

Inaddition, there are covenants or restrictions relating to, among othercategories, acquisitions, investments, loans and advances, indebtedness,dividends on our stock, and the sale of stock or assets.  We were in compliance with all debt covenantsas of June 30, 2010.  Non-compliancewith these covenants, if it were to become an event of default under the termsof the credit agreement, could result in severe limitations to our overallliquidity, and the term loan lenders could require actions for immediaterepayment of outstanding amounts, potentially requiring the sale of ourassets.  Such non-compliance, if any,could also result in an event of default under the indenture agreement relatedto the 8 7/8% senior subordinated notes. Our debt is not subject to any triggers that would require early paymentof debt due to any adverse change in our credit rating.

 

Theamended and restated senior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of Company assets, the issuance ofstock under certain circumstances, or upon the Company’s annual generation ofexcess cash flow, as determined under the credit agreement.

 

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

 

Our debt instruments andgeneral credit are rated by both Standard & Poor’s and Moody’s.  There were no changes to these ratings duringthe three or six months ended June 30, 2010.  As of June 30, 2010, the credit ratingsfor the Company were as follows:

 
| ** **                | ** ** | **Standard &  Poor’s** | ** ** | **Moody’s** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------|------------|
| Senior credit facility    |       | BB+                                  |       | Ba1              |       |
| Senior subordinated notes |       | B                                    |       | B2               |       |
| General credit rating     |       | BB- /Stable                          |       | Ba3              |       |

 

**August 2010Amendment and Restatement of Credit Facilities and Repayment of Notes.**  On August 9, 2010, the Company enteredinto an amendment and restatement of its senior credit facilities whichincluded the following terms:

 

·                  A term B loan facility wasestablished with maximum borrowings of $275.0 million.

 

·                  A term A loan facility wasestablished with maximum borrowings of $75.0 million.

 

·                  Maximum borrowings under therevolving credit facility were increased to $75.0 million.

 

·                  The maturity dates wereextended to August 2015 for the revolving credit facility and the term Aloan and to August 2016 for the term B loan.

 

·                  The LIBOR interest rate onthe revolving credit facility and term A facility was changed to LIBOR plus3.50%.

 

·                  The LIBOR interest rate onthe term B facility was changed to LIBOR plus 4.00% with a minimum rate of5.50%.

 

·                  Certain financial and othercovenants were amended and revised.

 

·                  The Company expects to payapproximately $6.3 million in fees and transaction costs in connection withthese transactions.

 

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TheCompany then drew $350.0 million under these facilities and repaid theprincipal outstanding under its previous term loan facility.  In addition, the Company notified the trusteeof its 8 7/8% senior subordinated notes due August 1, 2012 of its intentto redeem the notes at 100% of principal in September 2010, following theexpiration of the required redemption notification period, and deposited $175.0million with the trustee for that purpose. 

 

Weintend to fund working capital, capital expenditures, debt servicerequirements, and obligations under our post-employment benefit plans for thenext twelve months through cash flows generated from operations and the amountsavailable under our revolving credit facility. We expect our financial resources will be sufficient to cover anyadditional increases in working capital and capital expenditures.  There can be no assurance, however, thatthese resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs, including, but not limited to,the postponement of discretionary contributions to post-employment benefitplans, the postponement of capital expenditures, restructuring of our creditfacilities, and issuance of new debt or equity securities.

 

Ourinterest expense may vary in the future because the revolving credit facilityand term loan interest rates are variable, including both new term loanfacilities.  The interest rate is fixedon the senior subordinated notes, but we have taken actions to repay that fixedrate debt and replace it with variable rate debt as described above.  We are required under the terms of the August 2010amendment and restatement of our credit facilities to hedge 35% of term loanprincipal outstanding with fixed or maximum interest rate derivatives.  Our weighted average interest rate on alldebt was 7.58% as of June 30, 2010, compared to 7.54% as of December 31,2009.

 

Cashand cash equivalents at June 30, 2010 were $72.8 million, compared to$55.1 million at December 31, 2009. As of June 30, 2010, the majority of our cash was held at ourforeign operations.

 

Cashprovided by operating activities is summarized in the following table:

 
| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)**            | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Net income                             |       | $                                  | 19,226     |   | $ | 5,189 |   |
| Non-cash items                         |       | 15,264                             |       | 12,889 |   |
| Subtotal                               |       | 34,490                             |       | 18,078 |   |
| Changes in assets and liabilities, net |       | (2,525                             | )          | 529 |   |
| Discontinued operations, net           |       | (574                               | )          | (534 | ) |
| Cash provided by operating activities  |       | $                                  | 31,391     |   | $ | 18,073 |   |

 

Non-cashitems consist of expenses for depreciation of property, plant, and equipment;amortization; stock compensation and other non-cash charges; asset impairmentcharges; the tax benefit or expense from share-based compensation; deferredincome taxes; and gains or losses on disposal of assets.

 

Duringthe first six months of 2010, operating activities provided $31.4 million ofcash.  Income from continuing operationsplus non-cash items totaled $34.5 million in the first half of 2010, reflectingincreased income and non-cash items compared with the first half of 2009. Theincreased amount of non-cash items in 2010 is primarily due to higher levels ofdepreciation of property, plant, and equipment, fluctuations in deferred incometaxes, and the non-recurring gain on the sale of land and building recognizedin 2009.  Partially offsetting theseincreases was the non-recurrence of an asset impairment charge of $2.0 millionrecognized in 2009 related to the closure of our manufacturing plant in Milan,Tennessee.  The net change in workingcapital components and other assets and liabilities during the first six monthsof 2010 used $2.5 million in cash.  Anincrease in accounts receivable of $5.7 million, reflecting increased saleslevels in the second quarter, an increase of $5.7 million in inventories tosupport higher shipment levels, and a decrease in other liabilities of $2.8million, all used cash during the period. These uses were partially offset by a decrease in other assets of $3.5million, including the collection of income taxes receivable in certainjurisdictions, and an increase in accrued expenses of $8.0 million.

 

Discontinuedoperations used $0.6 million in cash during the first half of 2010 as certainaccrued obligations and liabilities related to these former operations werepaid.  Cash payments during the firsthalf of 2010 also included $10.4 million for interest and $3.8 million forincome taxes. The Company expects to contribute a total of $14 million to $16million to its defined benefit pension plans during 2010, with a majority of itexpected to be paid in the second half of the year.

 

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Duringthe first six months of 2009, operating activities provided $18.1 million ofcash.  Income from continuing operationsplus non-cash items totaled $18.1 million in the first half of 2009, reflectingreduced income compared with the first half of 2008. The net change in workingcapital components and other assets and liabilities during the same periodprovided $0.5 million in cash flow from operating activities.  Decreases in accounts receivable of $12.1million, inventories of $4.6 million and other assets of $2.6 million, togetherwith an increase in other liabilities of $3.3 million, all positively affectedcash flows from operating activities. These positive effects were partially offset by reductions in accountspayable and accrued expenses of $22.0 million. Discontinued operations used $0.5 million in cash during the first halfof 2009 as certain accrued obligations and liabilities related to these formeroperations were paid.  Cash payments duringthe first half of 2009 also included $10.1 million for interest and $7.3million for income taxes.

 

Cashused in investing activities is summarized as follows:

 
| ** **                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)**                 | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Purchases of property, plant, and equipment |       | $                                  | (8,641     | ) | $ | (8,511 | ) |
| Proceeds from sale of assets                |       | 22                                 |       | 3,256 |   |
| Net cash used in investing activities       |       | $                                  | (8,619     | ) | $ | (5,255 | ) |

 

Purchasesof property, plant, and equipment are primarily for productivity improvements,expanded manufacturing capacity, and replacement of consumable tooling andequipment. Generally, about one-third of our capital spending representsreplacement of consumable tooling, dies and existing equipment, with theremainder devoted to capacity and productivity improvements.  During 2010, we expect to invest $21 millionto $25 million in available cash for capital expenditures, compared to $17.3million for the full year in 2009.

 

Cashused in financing activities is summarized as follows:

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts  in thousands)**                             | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Net decrease in debt principal outstanding              |       | $                                  | (5,443     | ) | $ | (18,746 | ) |
| Issuance costs related to debt                          |       | —                             |       | (1,900 | ) |
| Proceeds and tax effects from stock-based  compensation |       | 74                                 |       | (348 | ) |
| Net cash used in financing activities                   |       | $                                  | (5,369     | ) | $ | (20,994 | ) |

 

Cashused in financing activities in the first half of 2010 consisted of netrepayments of principal on our revolving credit and term debt facilities of$5.4 million.  Cash used in financingactivities in the first half of 2009 consisted of $18.7 million in netrepayments of principal on our revolving credit and term debt facilities.  We also incurred $1.9 million in costs toamend and extend the maturity date of our revolving credit facility in thefirst half of 2009.

 

**Critical Accounting Policies**

 

Therehave been no material changes to our critical accounting policies and estimatesfrom the information provided in Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” included in our Form 10-Kfor the fiscal year ended December 31, 2009.

 

**Recent Accounting Pronouncements**

 

Inthe opinion of management, there are currently no recent accountingpronouncements to be adopted that are expected to have a significant effect onour financial reporting.

 

**Forward Looking Statements**

 

“Forwardlooking statements,” as defined by the Private Securities Litigation Reform Actof 1995, used in this report, including without limitation our “outlook,” “guidance,”“expectations,”  “beliefs,” “plans,” “indications,”“estimates,” “anticipations,” and their variants, are based upon availableinformation and upon assumptions that the Company believes are reasonable;however, these forward looking statements involve certain risks and should notbe 

 

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consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning availability and estimated costs of financing,the global economic climate, foreign currency exchange rates, the cost to theCompany of commodities in general, and of steel in particular, the anticipatedlevel of applicable interest rates, and the anticipated effects of discontinuedoperations involve certain estimates and assumptions. To the extent that these,or any other such assumptions, are not realized going forward, or otherunforeseen factors arise, actual results for the periods subsequent to the dateof this report may differ materially.

 

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

 

Weare exposed to market risks from changes in interest rates, foreign currencyexchange rates, and commodity prices, including raw materials such as steel. Wemanage our exposure to these market risks through our regular operating andfinancing activities, and, when deemed appropriate, through the use ofderivatives. When utilized, derivatives are used as risk management tools andnot for trading or speculative purposes.

 

Wemanage our ratio of fixed to variable rate debt with the objective of achievinga mix that management believes is appropriate. Our 8 7/8% senior subordinatednotes carry a fixed interest rate.  Theinterest rates are variable on our term and revolver loans and we are subjectto market risk from movement in benchmark rates.

 

Seealso, the Market Risk section of Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in our most recent Form 10-K,filed with the SEC on March 9, 2010, for further discussion of marketrisk.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s SecuritiesExchange Act of 1934 reports is recorded, processed, summarized, and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andregulations, and that such information is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can only provide reasonable assurance of achieving thedesired control objectives.  Managementis required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

 

TheCompany, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures and internal controls over financial reporting (as defined in Rules 13a-15(e) and15d-15(e) and Rules 13a-15(f) and 15d-15(f) respectively,under the Securities Exchange Act of 1934) were effective at the reasonableassurance level.

 

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

 

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**PART II     OTHER INFORMATION**

 

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

**4.1 Second Amended andRestated Credit Agreement dated as of December 4, 2009 among Blount, Inc.,Gear Products, Inc., Omark Properties, Inc., Windsor Forestry ToolsLLC, the other credit parties signatory thereto, General Electric CapitalCorporation, and the other Lenders party thereto.

 

**31.1 Certificationpursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins,President and Chief Executive Officer.

 

**31.2 Certificationpursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness,Senior Vice President and Chief Financial Officer.

 

**32.1 Certificationpursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins,President and Chief Executive Officer.

 

**32.2 Certificationpursuant to section 906 of the Sarbanes-Oxley Act of 2002 by Calvin E. Jenness,Senior Vice President and Chief Financial Officer.

 

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

 

Blount International, Inc.

P.O. Box 22127

Portland, Oregon  97269-2127

 

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**SIGNATURES**

 

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

 
| BLOUNT INTERNATIONAL, INC.                                                                                                    |   |                                    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|
|                     Registrant |   |                                    |
|                                                                                                                               |   |                                    |
|                                                                                                                               |   |                                    |
| /s/ Calvin E. Jenness                                                                                                              |   | /s/ Mark V. Allred                      |
| Calvin E. Jenness                                                                                                                  |   | Mark V. Allred                          |
| Senior Vice President and                                                                                                          |   | Vice President and Corporate Controller |
| Chief Financial Officer                                                                                                            |   | (Principal Accounting Officer)          |
| (Principal Financial Officer)                                                                                                      |   |                                    |
|                                                                                                                               |   |                                    |
|                                                                                                                               |   |                                    |
| Dated: August 9, 2010                                                                                                         |   |                                    |

 

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