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**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                   | **Quarterly report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|---------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                   |
| **for the  quarterly period ended June 30, 2009.** |
|                                                    |                                                                                                   |
| **OR**                                                  |
|                                                    |                                                                                                   |
| **o**                                                   | **Transition report pursuant to section 13 or  15(d) of the Securities Exchange Act of 1934**     |

 

**Commission filenumber 001-11549**

 

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(503) 653-8881**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No o

 

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

 

| Large accelerated filer  o |   | Accelerated filer x         |
|----------------------------|--------|-----------------------------|
|                       |   |                        |
| Non-accelerated filer o    |   | Smaller reporting company o |

 

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

 

The number of shares outstanding of $0.01 par value commonstock as of August 4, 2009 was 47,691,829 shares.

 

 

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| ** **                                                                                                      | **Page**               |
|-----------------------------------------------------------------------------------------------------------------|------------------------|
|                                                                                                            |                   |
| Part I                                                                                                     | Financial  Information |   |
|                                                                                                            |                   |
| Item  1. Consolidated Financial Statements                                                                      |                   |
|                                                                                                            |                   |
| Unaudited  Consolidated Statements of Income  Three and six months ended June 30, 2009 and 2008            | 3                      |
|                                                                                                            |                   |
| Unaudited  Consolidated Balance Sheets  June 30, 2009 and December 31, 2008                           | 4                      |
|                                                                                                            |                   |
| Unaudited  Consolidated Statements of Cash Flows  Six months ended June 30, 2009 and 2008                  | 5                      |
|                                                                                                            |                   |
| Unaudited  Consolidated Statement of Changes in Stockholders’ Deficit  Six months ended June 30, 2009 | 6                      |
|                                                                                                            |                   |
| Notes to Unaudited Consolidated Financial Statements                                                            | 7                      |
|                                                                                                            |                   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations            | 22                     |
|                                                                                                            |                   |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                             | 34                     |
|                                                                                                            |                   |
| Item 4. Controls and Procedures                                                                                 | 35                     |
|                                                                                                            |                   |
| Part II                                                                                                    | Other Information      |   |
|                                                                                                            |                   |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                    | 36                     |
|                                                                                                            |                   |
| Item 6.  Exhibits                                                                                               | 36                     |
|                                                                                                            |                   |
| Signatures                                                                                                      | 37                     |

 

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**PART I   FINANCIAL INFORMATION**

 

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTSOF INCOME**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                               | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands, except  per share data)**       | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     | ** ** | ** **                            |       |                                |       |   |   |   |   |
| Sales                                                    |       | $                                     | 114,001    |                                | $          | 155,052 |   | $ | 230,525 |   | $ | 288,259 |   |
| Cost  of sales                                           |       | 79,362                                |       | 105,730                             |       | 158,096 |   | 196,459 |   |
| Gross  profit                                            |       | 34,639                                |       | 49,322                              |       | 72,429 |   | 91,800 |   |
| Selling,  general and administrative expenses            |       | 24,015                                |       | 27,592                              |       | 49,186 |   | 52,438 |   |
| Gain  on sale of land and building                       | ** ** | 2,701                                 |       | —                              |       | 2,701 |   | — |   |
| Plant  closure and severance costs                       | ** ** | 1,365                                 |       | 110                                 |       | 6,404 |   | 1,073 |   |
| Operating  income                                        |       | 11,960                                |       | 21,620                              |       | 19,540 |   | 38,289 |   |
| Interest  income                                         |       | 52                                    |       | 389                                 |       | 155 |   | 731 |   |
| Interest  expense                                        |       | (6,425                                | )          | (6,848                              | )          | (12,356 | ) | (13,660 | ) |
| Other  income, net                                       |       | 52                                    |       | 684                                 |       | 38 |   | 771 |   |
| Income  from continuing operations before income taxes   |       | 5,639                                 |       | 15,845                              |       | 7,377 |   | 26,131 |   |
| Provision  for income taxes                              |       | 1,407                                 |       | 5,628                               |       | 2,188 |   | 9,025 |   |
| Income  from continuing operations                       |       | 4,232                                 |       | 10,217                              |       | 5,189 |   | 17,106 |   |
| Discontinued  operations:                                |       |                                  |       |                                |       |   |   |   |   |
| Loss  before income taxes                                |       | —                                |       | (195                                | )          | — |   | (280 | ) |
| Income  tax benefit                                      |       | —                                |       | (74                                 | )          | — |   | (106 | ) |
| Loss  from discontinued operations                       |       | —                                |       | (121                                | )          | — |   | (174 | ) |
| Net  income                                              |       | $                                     | 4,232      |                                | $          | 10,096 |   | $ | 5,189 |   | $ | 16,932 |   |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Basic  income per share:                                 |       |                                  |       |                                |       |   |   |   |   |
| Continuing  operations                                   |       | $                                     | 0.09       |                                | $          | 0.21 |   | $ | 0.11 |   | $ | 0.36 |   |
| Discontinued  operations                                 |       | —                                |       | —                              |       | — |   | — |   |
| Net  income                                              |       | $                                     | 0.09       |                                | $          | 0.21 |   | $ | 0.11 |   | $ | 0.36 |   |
|                                                     |       |                                  |       |                                |       |   |   |   |   |
| Diluted  income per share:                               |       |                                  |       |                                |       |   |   |   |   |
| Continuing  operations                                   |       | $                                     | 0.09       |                                | $          | 0.21 |   | $ | 0.11 |   | $ | 0.35 |   |
| Discontinued  operations                                 |       | —                                |       | —                              |       | — |   | — |   |
| Net  income                                              |       | $                                     | 0.09       |                                | $          | 0.21 |   | $ | 0.11 |   | $ | 0.35 |   |
|                                                     | ** ** |                                  |       |                                |       |   |   |   |   |
| Weighted  average shares used in per share calculations: | ** ** |                                  |       |                                |       |   |   |   |   |
| Basic                                                    |       | 47,747                                |       | 47,392                              |       | 47,743 |   | 47,348 |   |
| Diluted                                                  |       | 48,183                                |       | 48,347                              |       | 48,181 |   | 48,241 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**UNAUDITED CONSOLIDATED BALANCESHEETS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except  share and per share data)**                                                                  | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                                                                                                          |       |              |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                              |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                    |       | $                 | 48,752     |                  | $          | 58,275 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $4,353 and $3,800  respectively                               |       | 63,923            |       | 75,555                |       |
| Inventories,  net                                                                                                             |       | 85,726            |       | 90,302                |       |
| Deferred  income taxes                                                                                                        |       | 6,687             |       | 5,492                 |       |
| Other  current assets                                                                                                         |       | 15,076            |       | 14,940                |       |
| Total  current assets                                                                                                         |       | 220,164           |       | 244,564               |       |
| Property,  plant and equipment, net                                                                                           |       | 116,277           |       | 119,749               |       |
| Deferred  financing costs                                                                                                     |       | 6,444             |       | 6,679                 |       |
| Deferred  income taxes                                                                                                        |       | 25,547            |       | 21,679                |       |
| Intangible  assets                                                                                                            |       | 13,118            |       | 13,864                |       |
| Assets  held for sale                                                                                                         |       | 900               |       | 1,429                 |       |
| Goodwill                                                                                                                      |       | 66,071            |       | 66,071                |       |
| Other  assets                                                                                                                 |       | 25,756            |       | 25,649                |       |
| Total  Assets                                                                                                                 |       | $                 | 474,277    |                  | $          | 499,684 |   |
|                                                                                                                          |       |              |       |                  |       |
| **Liabilities and Stockholders’ Deficit**                                                                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                         |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                 | 1,117      |                  | $          | 31,981 |   |
| Accounts  payable                                                                                                             |       | 20,380            |       | 28,864                |       |
| Accrued  expenses                                                                                                             |       | 46,342            |       | 55,235                |       |
| Deferred  income taxes                                                                                                        |       | 498               |       | 498                   |       |
| Total  current liabilities                                                                                                    |       | 68,337            |       | 116,578               |       |
| Long-term  debt, excluding current maturities                                                                                 |       | 305,657           |       | 293,539               |       |
| Deferred  income taxes                                                                                                        |       | 2,320             |       | 2,223                 |       |
| Employee  benefit obligations                                                                                                 |       | 97,527            |       | 93,898                |       |
| Other  liabilities                                                                                                            |       | 36,860            |       | 36,966                |       |
| Total  liabilities                                                                                                            |       | 510,701           |       | 543,204               |       |
| Commitments  and contingent liabilities                                                                                       |       |              |       |                  |       |
| Stockholders’  equity (deficit):                                                                                         |       |              |       |                  |       |
| Common  stock: par value $0.01 per share, 100,000,000 shares authorized, 47,681,829  and 47,614,236 outstanding, respectively |       | 477               |       | 476                   |       |
| Capital  in excess of par value of stock                                                                                      |       | 580,241           |       | 579,930               |       |
| Accumulated  deficit                                                                                                          |       | (574,359          | )          | (579,548              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (42,783           | )          | (44,378               | )          |
| Total  stockholders’ deficit                                                                                             |       | (36,424           | )          | (43,520               | )          |
| Total  Liabilities and Stockholders’ Deficit                                                                             |       | $                 | 474,277    |                  | $          | 499,684 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**UNAUDITED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                                                                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                                             | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Cash flows from operating activities:**                                                              |       |                               |       |   |   |
| Income  from continuing operations                                                                     |       | $                                  | 5,189      |   | $ | 17,106 |   |
| Adjustments  to reconcile income from continuing operations to net cash used in operating  activities: |       |                               |       |   |   |
| Depreciation  of property, plant and equipment                                                         |       | 9,843                              |       | 10,344 |   |
| Amortization                                                                                           |       | 2,881                              |       | 3,904 |   |
| Stock  compensation and other non-cash charges                                                         |       | 1,758                              |       | 1,161 |   |
| Asset  impairment charges                                                                              |       | 1,987                              |       | — |   |
| Excess  tax (benefit) expense from share-based compensation                                            |       | 149                                |       | (421 | ) |
| Deferred  income tax benefit                                                                           |       | (1,142                             | )          | (589 | ) |
| Gain  on sale of assets                                                                                |       | (2,587                             | )          | (641 | ) |
| Changes  in assets and liabilities:                                                                    |       |                               |       |   |   |
| (Increase)  decrease in accounts receivable                                                            |       | 12,064                             |       | (8,268 | ) |
| (Increase)  decrease in inventories                                                                    |       | 4,641                              |       | (6,071 | ) |
| (Increase)  decrease in other assets                                                                   |       | 2,583                              |       | 1,528 |   |
| Increase  (decrease) in accounts payable                                                               |       | (8,567                             | )          | (2,717 | ) |
| Increase  (decrease) in accrued expenses                                                               |       | (13,477                            | )          | (994 | ) |
| Increase  (decrease) in other liabilities                                                              |       | 3,285                              |       | 1,823 |   |
| Discontinued  operations                                                                               |       | (534                               | )          | (2,892 | ) |
| Net  cash provided by operating activities                                                             |       | 18,073                             |       | 13,273 |   |
| ** **                                                                                             |       |                               |       |   |   |
| **Cash flows from investing activities:**                                                              |       |                               |       |   |   |
| Purchases  of property, plant and equipment                                                            |       | (8,511                             | )          | (11,800 | ) |
| Proceeds  from sale of assets                                                                          |       | 3,256                              |       | 691 |   |
| Acquisition  of Carlton Holdings, Inc.                                                            |       | —                             |       | (64,314 | ) |
| Discontinued  operations                                                                               |       | —                             |       | 1,725 |   |
| Net  cash used in investing activities                                                                 |       | (5,255                             | )          | (73,698 | ) |
| ** **                                                                                             |       |                               |       |   |   |
| **Cash flows from financing activities:**                                                              |       |                               |       |   |   |
| Net  (repayments) borrowings under revolving credit facility                                           |       | (7,000                             | )          | 45,000 |   |
| Repayment  of term loan principal                                                                      |       | (11,746                            | )          | (1,613 | ) |
| Issuance  costs related to debt                                                                        |       | (1,900                             | )          | — |   |
| Excess  tax benefit (expense) from share-based compensation                                            |       | (149                               | )          | 421 |   |
| Proceeds  from exercise of stock options                                                               |       | 91                                 |       | 573 |   |
| Taxes  paid on restricted stock units                                                                  |       | (290                               | )          | — |   |
| Net  cash provided by (used in) financing activities                                                   |       | (20,994                            | )          | 44,381 |   |
|                                                                                                   |       |                               |       |   |   |
| Effect  of exchange rate changes                                                                       |       | (1,347                             | )          | 1,236 |   |
|                                                                                                   |       |                               |       |   |   |
| Net  decrease in cash and cash equivalents                                                             |       | (9,523                             | )          | (14,808 | ) |
| Cash  and cash equivalents at beginning of period                                                      |       | 58,275                             |       | 57,589 |   |
| Cash  and cash equivalents at end of period                                                            |       | $                                  | 48,752     |   | $ | 42,781 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**UNAUDITED CONSOLIDATED STATEMENTOF CHANGES IN STOCKHOLDERS’ DEFICIT**

**Blount International, Inc. and Subsidiaries**

 
| **(Amounts in thousands)**                                     | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess********of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other********Comprehensive  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|-----------|------------|
|                                                           |       |       |       |              |       |                                 |       |                     |       |                                              |       |      |       |
| Balance  December 31, 2008                                |       | 47,614     |       | $                 | 476        |                                 | $          | 579,930                  |       | $                                                 | (579,548   | )         | $          | (44,378 | ) | $ | (43,520 | ) |
|                                                           |       |       |       |              |       |                                 |       |                     |       |                                              |       |      |       |
| Net  income                                                    |       |       |       |              |       |                                 |       | 5,189                    |       |                                              |       | 5,189     |       |
| Other  comprehensive income:                                   |       |       |       |              |       |                                 |       |                     |       |                                              |       |      |       |
| Foreign  currency translation adjustment                       |       |       |       |              |       |                                 |       |                     |       | (8                                                | )          | (8        | )          |
| Unrealized  gains                                              |       |       |       |              |       |                                 |       |                     |       | 1,603                                             |       | 1,603     |       |
| Comprehensive  income, net                                     |       |       |       |              |       |                                 |       |                     |       |                                              |       | 6,784     |       |
| Stock  options, stock appreciation rights and restricted stock |       | 68         |       | 1                 |       | (349                                 | )          |                     |       |                                              |       | (348      | )          |
| Stock  compensation expense                                    |       |       |       |              |       | 660                                  |       |                     |       |                                              |       | 660       |       |
| Balance  June 30, 2009                                    |       | 47,682     |       | $                 | 477        |                                 | $          | 580,241                  |       | $                                                 | (574,359   | )         | $          | (42,783 | ) | $ | (36,424 | ) |

 

Other comprehensive income for the three and six months ended June 30,2009 was $3.3 million and $1.6 million, respectively.  Other comprehensive income (loss) for thethree and six months ended June 30, 2008 was $(1.0) million and $0.5million, respectively.

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**UNAUDITED NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1: BASIS OF PRESENTATION**

 

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

 

The accompanying financial data as of June 30, 2009 andfor the three and six months ended June 30, 2009 and 2008 has beenprepared by the Company, without audit, pursuant to the rules andregulations of the U.S. Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accountingprinciples generally accepted in the U.S. have been condensed or omittedpursuant to such rules and regulations. The December 31, 2008consolidated balance sheet was derived from audited financial statements, butdoes not include all disclosures required by accounting principles generallyaccepted in the U.S.  These consolidatedfinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2008.

 

***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 net income or net stockholders’ deficit.

 

***Subsequent Events Review.***  We have performed an evaluation of subsequentevents through August 7, 2009, which is the date the financial statementswere issued.

 

**NOTE 2:  ACQUISITION OF CARLTON HOLDINGS, INC.**

 

On May 2, 2008, weacquired all of the outstanding stock of Carlton Holdings, Inc. and its subsidiaries(“Carlton”), a manufacturer of cutting chain for chainsaws located nearPortland, Oregon.  The Company paid atotal of $66.2 million in cash for Carlton, including related acquisition costsof $1.5 million, and also assumed liabilities totaling $21.3 million.  Carlton had $1.8 million in cash on the dateof acquisition, resulting in a net cash outflow of $64.4 million for theacquisition.  The acquisition wasfinanced with a combination of cash on hand and $58.5 million borrowed underour revolving credit facility.  Theoperating results of Carlton are included in the consolidated financialstatements from May 2, 2008 forward. We accounted for the acquisition in accordance with Financial AccountingStandards (“FAS”) No. 141, “Business Combinations” (“FAS No. 141”).  Accordingly, Carlton’s assets and liabilitieswere recorded at their estimated fair values on the date of acquisition.

 

The following unaudited pro forma results present theestimated effect as if the acquisition had occurred on the first day of eachperiod presented.   The unaudited proforma results include the historical results of Carlton, pro forma purchaseaccounting effects, the pro forma interest expense effects of additionalborrowings to fund the transaction and the related pro forma income taxeffects.  In addition to the pro formaamortization of tangible and intangible asset adjustments to fair value, theunaudited pro forma results for each period presented include a charge of $1.7million to expense the adjustment of inventory to estimated fair value.

 

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| ** **                 | ** ** | **Three Months Ended June 30, 2008** | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **As Reported**                           | ** ** | **Pro Forma**                           | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
| Sales                      |       | $                                         | 155,052    |                                    | $          | 160,463 |   | $ | 288,259 |   | $ | 308,402 |   |
| Net  income                |       | 10,096                                    |       | 9,832                                   |       | 16,932 |   | 16,650 |   |
| Basic  income per share    |       | $                                         | 0.21       |                                    | $          | 0.20 |   | $ | 0.36 |   | $ | 0.36 |   |
| Diluted  income per share  |       | $                                         | 0.21       |                                    | $          | 0.20 |   | $ | 0.35 |   | $ | 0.35 |   |

 

**NOTE 3: DISCONTINUED OPERATIONS**

 

On November 5, 2007, we sold our Forestry Division,which constituted the majority of our Industrial and Power Equipment segment,to Caterpillar Forest Products Inc., a subsidiary of Caterpillar Inc., forgross proceeds of $79.1 million.  Underthe terms of the related asset purchase agreement, $8.8 million of the grossproceeds was initially held in escrow for up to three years from thetransaction date.  As of June 30,2009, $6.1 million of these proceeds remain in escrow.  We recognized a pretax gain of $26.0 million,net of related transaction expenses, on the sale in 2007.  The Forestry Division is reported asdiscontinued operations for all periods presented.  The 2008 results consist of wind-down andexit activities related to this business.

 

Discontinued operations are summarized as follows:

 
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Sales                                                     |       | $                                  | —     |   | $ | — |   |
| Operating  loss before taxes from discontinued operations |       | —                             |       | (280 | ) |
| Income  tax benefit                                       |       | —                             |       | (106 | ) |
| Loss  from discontinued operations                        |       | $                                  | —     |   | $ | (174 | ) |

 

**NOTE 4: 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 January 2009, we announced our intentto close our manufacturing facility in Milan, Tennessee during the secondquarter of 2009.  Products previouslymanufactured in that facility are now produced in our other manufacturingfacilities.  During the three monthsended June 30, 2009, we recognized a total of $0.5 million in plantclosure costs.  For the six months ended June 30,2009, we have recognized a total of $3.8 million in charges related to thisplant closure, consisting of $2.0 million in asset impairment charges, $1.0million in employee severance and benefit costs and $0.8 million in otherexpenses.  Of these charges, $0.1 millionand $0.2 million, respectively, are recognized in cost of goods sold on theConsolidated Statements 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.***  Wetook actions during the first half of 2009 to reduce the number of employees atcertain of our other locations.  Duringthe three and six months ended June 30, 2009, we recognized a total of$1.0 million and $2.8 million, respectively, in severance charges related tothis reduction in force.  Since December 31,2008, we have reduced our number of employees by approximately 600 positions,or 17% of our total workforce.  Werecognized severance charges of $0.1 million and $1.1 million, respectively,during the three and six months ended June 30, 2008 for similar actionsinvolving a fewer number of employees.

 

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**NOTE 5: INVENTORIES, NET**

 

Inventories consisted of the following:

 
| ** **                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**  | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Raw  materials and supplies |       | $                 | 11,809     |                  | $          | 14,260 |   |
| Work  in progress           |       | 14,078            |       | 14,169                |       |
| Finished  goods             |       | 59,839            |       | 61,873                |       |
| Total  inventories, net     |       | $                 | 85,726     |                  | $          | 90,302 |   |

 

**NOTE 6: LONG-TERM DEBT**

 

Long-term debt consisted of the following:

 
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Revolving  credit facility        |       | $                 | 23,750     |                  | $          | 30,750 |   |
| Term  loans                       |       | 108,024           |       | 119,770               |       |
| 8  7/8% senior subordinated notes |       | 175,000           |       | 175,000               |       |
| Total  debt                       |       | 306,774           |       | 325,520               |       |
| Less  current maturities          |       | (1,117            | )          | (31,981               | )          |
| Long-term  debt                   |       | $                 | 305,657    |                  | $          | 293,539 |   |

 

The weighted average interest rate on outstanding debt as of June 30, 2009 was 6.37%.

 

***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 104.438% through July 31, 2009; 102.219% from August 1,2009 through July 31, 2010; and at 100% on August 1, 2010 andthereafter.  These notes are issued bythe Company’s wholly-owned subsidiary, Blount, Inc., and are fully andunconditionally, jointly and severally, guaranteed by the Company and all ofits domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 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 16.

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation (“GECC”) as Agent on May 15,2003.  The agreement was amended andrestated on August 9, 2004, and has had several subsequentamendments.  The senior credit facilitiesconsist of a revolving credit facility and a term loan facility.

 

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

 

·                  The maturitydate was extended to August 9, 2010;

 

·                  We reduced totalavailability under the revolver from $150.0 million to $90.0 million;

 

·                  The interestrate was increased from the LIBOR rate plus 1.75% or the U.S. prime interestrate, with no minimum, to the LIBOR rate plus 5.0%, or U.S. prime interest rateplus 3.25%, with a minimum rate of 7.5%, on all outstanding principal; and

 

·                  The commitmentfee on unused borrowing capacity was increased from 0.375% to 1.0%.

 

We paid fees and expensesof $1.9 million to amend the revolving credit facility. The revolving creditfacility principal balance outstanding was classified as current on the December 31,2008 Consolidated Balance Sheet because before the maturity date was extendedby the amendment, the maturity date was less than 12 months from the balancesheet date at the time.  There were nochanges to financial covenants, nor did this amendment affect the term loanfacility.

 

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As of June 30, 2009,the revolving credit facility provided for total borrowing capacity up to $90.0million, reduced by outstanding letters of credit and further restricted by aspecific leverage ratio and first lien credit facilities leverage ratio. As of June 30, 2009, the Company had theability to borrow an additional $62.2 million under the terms of the revolvingcredit agreement. Interest is payable monthly in arrears on any prime rateborrowing and at the individual maturity dates for any LIBOR-basedborrowing.  Any outstanding principal isdue in its entirety on the maturity date of August 9, 2010.

 

The term loan facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and also matures onAugust 9, 2010.  The term loanfacility requires quarterly payments of $0.3 million, with a final payment of$106.6 million due on the maturity date. Once repaid, principal under the term loan facility may not bere-borrowed by the Company.

 

The amended and restated senior credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenants relating, among other categories, toinvestments, acquisitions, loans and advances, indebtedness and the sale ofstock or assets.  The Company was incompliance with all debt covenants through June 30, 2009.

 

The amended and restatedsenior 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.

 

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

 

The revolving credit facility and the term loan facilitymature on August 9, 2010.  Beforethese facilities mature, we will need to obtain replacement financing.  Our liquidity, capital structure and creditprofile have changed significantly during the terms of these agreements.   In the current global financial markets,credit facilities are generally more difficult to obtain and terms aregenerally less favorable to borrowers than in comparable market conditionsexisting at the time these facilities were established.  We are continuing our discussions withvarious financial institutions regarding the potential replacement of ourcredit facilities prior to the August 2010 maturity date.  However, given the conditions in globalcredit markets, any replacement financing will likely be more expensive and maycontain more restrictive terms than our existing credit facilities.

 

**NOTE 7: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS**

 

TheCompany sponsors defined benefit pension plans covering substantially all ofits employees in the U.S., Canada and Belgium. The Company also sponsors various other post-employment medical andbenefit plans covering many of its current and former employees.  The U.S. defined benefit pension planand the associated nonqualified plan are frozen.  Employees who currentlyparticipate in these U.S. plans no longer accrue benefits and new employees arenot eligible to participate.  All retirement benefits accrued up to thetime of the freeze were preserved.

 

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Thecomponents of net periodic benefit cost for these plans, including amountsrecognized both in continuing and discontinued operations are as follows:

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**                 | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)**            | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                         | ** ** | $                                    | 548        |   | $ | 987 |   | $ | 66 |   | $ | 63 |   |
| Interest  cost                        | ** ** | 2,656                                |       | 2,765 |   | 505 |   | 538 |   |
| Expected  return on plan assets       | ** ** | (2,447                               | )          | (3,565 | ) | — |   | — |   |
| Amortization  of prior service cost   | ** ** | (2                                   | )          | (2 | ) | — |   | 2 |   |
| Amortization  of net actuarial losses | ** ** | 1,261                                |       | 288 |   | 192 |   | 208 |   |
| Total  net periodic benefit cost      | ** ** | $                                    | 2,016      |   | $ | 473 |   | $ | 763 |   | $ | 811 |   |

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**               | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)**            | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service  cost                         | ** ** | $                                  | 1,096      |   | $ | 1,974 |   | $ | 132 |   | $ | 126 |   |
| Interest  cost                        | ** ** | 5,312                              |       | 5,530 |   | 1,010 |   | 1,076 |   |
| Expected  return on plan assets       | ** ** | (4,894                             | )          | (7,130 | ) | — |   | — |   |
| Amortization  of prior service cost   | ** ** | (4                                 | )          | (4 | ) | — |   | 4 |   |
| Amortization  of net actuarial losses | ** ** | 2,522                              |       | 576 |   | 384 |   | 416 |   |
| Total  net periodic benefit cost      | ** ** | $                                  | 4,032      |   | $ | 946 |   | $ | 1,526 |   | $ | 1,622 |   |

 

The Company expects tocontribute a total of approximately $12 million to $14 million to its fundedpension plans during 2009.

 

The Company also sponsors adefined contribution 401(k) plan covering most employees in the U.S.

 

**NOTE 8: COMMITMENTS**

 

Significant financial guarantees and commitments aresummarized in the following table:

 
| ** **                                  | ** ** | **June 30,** | ** ** |
|---------------------------------------------|------------|-------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2009**          | ** ** |
| Letters  of credit outstanding              |       | $                 | 4,123      |   |
| Other  financial guarantees                 |       | 1,088             |       |
| Total  financial guarantees and commitments |       | $                 | 5,211      |   |

 

**NOTE 9: CONTINGENT LIABILITIES**

 

The Company is a defendant in a number of product liabilitylawsuits, some of which seek significant or unspecified damages, involvingserious personal injuries for which there are retentions or deductible amountsunder the Company’s insurance policies. Some of these lawsuits arise out of theCompany’s duty to indemnify certain purchasers of the Company’s discontinuedoperations for lawsuits involving products manufactured prior to the sale ofthese businesses.  In addition, theCompany is a party to a number of other suits arising out of the normal courseof its business, including suits concerning commercial contracts, employeematters, intellectual property rights and other matters.  In some instances the Company is theplaintiff, and is seeking recovery of damages. In others, the Company is adefendant against whom damages are being sought.  While there can be no assurance as to theirultimate outcome, management does not believe these lawsuits will have amaterial adverse effect on the Company’s consolidated financial position,operating results or cash flows.

 

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

 

**NOTE 10: EARNINGS PER SHARE DATA**

 

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

 
| ** **                                                                                                                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Shares in thousands)**                                                                                                               | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Shares  for basic per share computation — weighted average common shares outstanding                                               | ** ** | 47,747                                |       | 47,392                              |       | 47,743 |   | 47,348 |   |
| Dilutive  effect of common stock equivalents                                                                                            | ** ** | 436                                   |       | 955                                 |       | 438 |   | 893 |   |
| Shares  for diluted per share computation                                                                                               | ** ** | 48,183                                |       | 48,347                              |       | 48,181 |   | 48,241 |   |
| Options  and stock appreciation rights (“SARs”) excluded from computation as  anti-dilutive because they are out-of-the-money | ** ** | 2,207                                 |       | 1,675                               |       | 2,207 |   | 1,677 |   |

 

The amount of unvested restricted stock and restricted stockunits (“RSUs”) considered participating securities at June 30, 2008 and June 30,2009 was 335 thousand and 188 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 11: STOCK-BASED COMPENSATION**

 

The Company did not makeany stock-based compensation awards during the six months ended June 30,2009, but did make the following awards during the six months ended June 30,2008:

 
| **(Amounts in thousands)**                                                           | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------|------------|
| SARs  granted                                                                        |       | 305      |       |
| Shares  of restricted stock granted                                                  |       | 54       |       |
| RSUs  granted                                                                        |       | 125      |       |
|                                                                                 |       |     |       |
| Aggregate  fair value of SARs granted                                                |       | $        | 1,259      |   |
| Aggregate  fair value of restricted stock and RSUs granted                           |       | $        | 2,148      |   |
| Effect  of accelerated expense recognition due to grantee retirement-eligible status |       | $        | 897        |   |

 

Under terms of theCompany’s stock compensation plans, employee grantees who are retirementeligible receive continued vesting after retirement.  In such circumstances, stock-basedcompensation expense is recognized on an accelerated basis.  The effect of such accelerated expenserecognition for 2009 was to reduce by $0.7 million the expense that otherwisewould have been recognized in 2009 on stock compensation grants made andexpensed in earlier years.

 

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The following assumptions were used to estimate the fairvalue of SARs in the six months ended June 30, 2008:

 
| ** **                              | ** ** | **2008** | ** ** |
|-----------------------------------------|------------|----------|------------|
| Estimated  average life                 |       | 6 years  |       |
| Risk-free  interest rate                |       | 2.7      | %          |
| Expected  volatility                    |       | 32.4     | %          |
| Weighted  average volatility            |       | 32.4     | %          |
| Dividend  yield                         |       | 0.0      | %          |
| Weighted  average grant date fair value |       | $        | 4.37       |   |
|                                         |            |          |            |  |

 

As of June 30, 2009, the total unrecognized stock-basedcompensation expense related to previously granted awards was $1.3 million. Theweighted average period over which this expense is expected to be recognized is11 months.  The Company’s policy upon theexercise of options, restricted stock awards, RSUs or SARs has been to issuenew shares into the market place.

 

**NOTE 12: SEGMENT INFORMATION**

 

The Company identifies operating segments primarily based onorganizational structure and the evaluation of the Chief Operating DecisionMaker (Chief Executive Officer). The Company has one reportable segment:Outdoor Products.  The other categoryincludes centralized administrative functions, a gear component manufacturingbusiness, gain on sale of land and buildings and plant closure and otherseverance costs.  See also Note 3regarding the disposition of the primary operating unit making up the Company’sformer Industrial and Power Equipment segment. Outdoor Products manufacturesand markets cutting chain, bars, sprockets and accessories for chainsaw use,concrete-cutting equipment and lawnmower blades and accessories for yard careequipment.  The accounting policies ofthe segment are the same as those described in the summary of significantaccounting policies.

 

Certain financial information by segment is presented in thetable below:

 
| ** **                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Sales:**                 |       |                                  |       |                                |       |   |   |   |   |
| Outdoor  Products          |       | $                                     | 110,131    |                                | $          | 146,356 |   | $ | 221,550 |   | $ | 272,583 |   |
| Other                      |       | 3,870                                 |       | 8,696                               |       | 8,975 |   | 15,676 |   |
| Total  sales               |       | $                                     | 114,001    |                                | $          | 155,052 |   | $ | 230,525 |   | $ | 288,259 |   |
|                       |       |                                  |       |                                |       |   |   |   |   |
| **Operating income:**      |       |                                  |       |                                |       |   |   |   |   |
| Outdoor  Products          |       | $                                     | 14,044     |                                | $          | 24,631 |   | $ | 30,513 |   | $ | 46,692 |   |
| Other                      |       | (2,084                                | )          | (3,011                              | )          | (10,973 | ) | (8,403 | ) |
| Operating  income          |       | $                                     | 11,960     |                                | $          | 21,620 |   | $ | 19,540 |   | $ | 38,289 |   |

 

**NOTE 13: SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Interest  paid             |       | $                                  | 10,096     |   | $ | 11,508 |   |
| Income  taxes paid, net    |       | 7,289                              |       | 8,214 |   |
|                            |            |                                    |            |  |  |  |  |

 

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**NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATION**

 

The Company has manufacturing or distribution operations inBrazil, Canada, China, Europe, Japan, Russia and the U.S. The Company sells tocustomers in these locations and other countries throughout the world. At June 30,2009, approximately 70% of accounts receivable were from customers outside theU.S. If the U.S. Dollar strengthens against foreign currencies, as it didduring the latter half of 2008, it becomes more costly for these foreigncustomers to pay their U.S. Dollar balances owed.  They may have difficulty in repaying theseamounts, and in turn, the Company’s bad debt expense may increase.  Accounts receivable are principally fromdistributors, dealers, mass merchants, chainsaw manufacturers and otherOriginal Equipment Manufacturers (“OEMs”) and are normally not collateralized.

 

The carrying amount of cash and cash equivalents approximatesfair value because of the short term maturity of those instruments. Thecarrying amount of accounts receivable approximates fair value because thematurity period is short and the Company has reduced the carrying amount to theestimated net realizable value with an allowance for doubtful accounts.  The carrying amount of the revolving creditfacility approximates fair value because the applicable interest rates arevariable and the maturity period is relatively short.  The fair value of the term loans isdetermined by reference to prices of recent transactions whereby buyers andsellers 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.  The carrying amount of otherfinancial instruments approximates fair value because of the short termmaturity periods and variable interest rates associated with the instruments.

 

The estimated fair values of the term loans and 8 7/8% seniorsubordinated notes at June 30, 2009 and December 31, 2008 arepresented below.  See also Note 6.

 
| ** **                        | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------|------------|
| **(Amounts in thousands)**        | ** ** | **Carrying  Amount**   | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Term  loans                       |       | $                      | 108,024    |                       | $          | 103,703 |   | $ | 119,770 |   | $ | 107,194 |   |
| 8  7/8% senior subordinated notes |       | 175,000                |       | 175,730                    |       | 175,000 |   | 159,478 |   |
|                                   |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

***Derivative Financial Instruments and ForeignCurrency Hedging.***  The Company makesregular payments to its wholly-owned subsidiary in Canada, Blount Canada Ltd. (“BlountCanada”) for contract manufacturing services performed by Blount Canada forconversion of raw materials into finished goods. We are exposed to changes inCanadian Dollar to U.S. Dollar exchange rates from these transactions sincemost 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 financialposition.

 

Since October, 2008, we have managed a portion ofCanadian Dollar exchange rate exposures with derivative financialinstruments.  These derivative financialinstruments are zero-cost collar option combinations, consisting of a purchasedcall option to buy Canadian Dollars and a written put option to sell CanadianDollars. We apply cash flow hedge accounting to our Canadian Dollar-relatedderivative financial instruments and therefore defer the gains or losses onthose instruments in Accumulated Other Comprehensive Income until maturity.

 

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 on the Consolidated Statements of Income at the maturity ofthe related Canadian Dollar derivative financial instruments.  Gains and losses on these Canadian Dollarderivative financial instruments are offset in cost of goods sold by thecurrency exchange rate effects on the underlying transactions.  During 2008, none of these contracts maturedand no amounts were recognized in the Consolidated Statements of Income.  Through June 30, 2009, the Company hasnot recognized any amount from these contracts in earnings due toineffectiveness.  As of June 30,2009, the aggregate notional amount of these Canadian Dollar contractsoutstanding was $44.0 million.

 

We hedge the interest rate and foreign currencyexposure on a portion of our cash and cash equivalents invested in Brazil withinterest rate swap agreements.  Thechange in fair value of these instruments is recognized in interest income onthe Consolidated Statements of Income. Any change in fair value on these derivative contracts is fully offsetby the change in fair value of the underlying investments.  The Consolidated Statements of Income includeexpense of $1.0 million and $1.6 million, respectively, for the three and sixmonths ended June 30, 2009, and $0.6 million and $0.5 million,respectively, for the three and six months ended June 30, 2008 from thechange in fair value of these interest rate swap contracts.

 

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As of December 31,2008, the fair 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** | ** ** | **Quoted Prices  in Active  Markets  Inputs  Level 1** | ** ** | **Significant  Other  Observable  Inputs  Level 2** | ** ** | **Significant  Unobservable  Inputs  Level 3** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|
| Interest  rate swaps included in cash and cash equivalents on the Consolidated Balance  Sheets                           |       | $                                                               | 446        |                                               | $          | 446                                                    |       | —                                              |       | $                                              | 446        |   | — |   |
| Foreign  currency zero-cost collar forward contracts included in current liabilities  on the Consolidated Balance Sheets |       | (1,837                                                          | )          | (1,837                                             | )          | —                                                 |       | (1,837                                              | )          | —                                         |       |
|                                                                                                                          |            |                                                                 |            |                                                    |            |                                                        |            |                                                     |            |                                                |            |  |  |  |

 

As of June 30, 2009,the fair 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** | ** ** | **Quoted Prices  in Active  Markets  Inputs********Level 1** | ** ** | **Significant  Other  Observable  Inputs********Level 2** | ** ** | **Significant  Unobservable  Inputs********Level 3** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| Interest  rate swaps included in cash and cash equivalents on the Consolidated Balance  Sheets                      |       | $                                                               | (1,393     | )                                                        | $          | (1,393                                                       | )          | —                                                    |       | $                                                    | (1,393     | ) | — |   |
| Foreign  currency zero-cost collar forward contracts included in current assets on the  Consolidated Balance Sheets |       | 714                                                             |       | 714                                                      |       | —                                                       |       | 714                                                       |       | —                                               |       |
|                                                                                                                     |            |                                                                 |            |                                                          |            |                                                              |            |                                                           |            |                                                      |            |  |  |  |

 

As specified in FAS No. 157,“Fair Value Measurements” (“FAS No. 157”), the framework for measuringfair value is based on independent observable inputs of market data and isbased on the following hierarchy:

 

Level 1 – Quoted pricesin active markets for identical assets and liabilities.

 

Level 2 – Significantobservable inputs based on quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active and model-based valuations for which all significant assumptions areobservable.

 

Level 3 – Significantunobservable inputs that are supported by little or no market activity that aresignificant to the fair value of the assets or liabilities.

 

**NOTE 15: RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “FairValue Measurements” (“FAS No. 157”). FAS No. 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generallyaccepted in the U. S., and expands disclosures about fair valuemeasurements.  We adopted FAS No. 157 for financial assets andliabilities on January 1, 2008, with no immediate effect on the consolidatedfinancial statements.  As permitted byFASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”,we elected to defer the adoption of SFAS No. 157 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis.

 

In December 2007,the FASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”).  FAS No. 141(R) replaces FAS No. 141.The provisions of FAS No. 141(R) were effective for us on January 1,2009.  The impact of adopting FAS No. 141(R) willdepend on the nature, terms and size of any business combinations completedafter the effective date.  In addition,certain transaction-related expenses that would have been capitalized as partof a transaction under FAS No. 141 are expensed as incurred under FAS No. 141(R) beginningJanuary 1, 2009.

 

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In December 2007,the FASB issued FAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements” (“FAS No. 160”). FAS No. 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements. The provisions of FAS No. 160 wereeffective for us on January 1, 2009.   The adoption of FAS No. 160 did not have a material impact on ourfinancial position or results of operations.

 

In March 2008, the FASB issued FAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133” (“FAS No. 161”).  FAS No. 161 requiresenhanced disclosures about an entity’s derivative and hedging activities.  The provisions of FAS No. 161 wereeffective for us on January 1, 2009, and have resulted in expandeddisclosures about our derivative instruments and hedging activities.

 

In April 2008, theFASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination ofthe Useful Life of Intangible Assets” (“FSP No. 142-3”).  FSP No. 142-3 amends the factors thatshould be considered in developing assumptions used to determine useful livesof recognized intangible assets under FAS No. 142, “Goodwill and OtherIntangible Assets”. The provisions of FSP No. 142-3 were effective for uson January 1, 2009.  The impact ofadopting FSP No. 142-3 depends on the nature, terms and size of anybusiness combinations completed after the effective date.

 

In June 2008, theFASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities”.  This FSP addresses whether instruments grantedin share-based payment transactions are participating securities prior tovesting and, therefore, need to be included in the earnings allocation incomputing earnings per share under the two-class method described in paragraphs60 and 61 of FASB Statement No. 128, “Earnings per Share”.  Theprovisions of this FSP were effective for us on January 1, 2009. There was no impact on the calculation of earnings per share as a result of theadoption of this FSP.

 

In December 2008,the FASB issued FASB Staff Position No. FAS 132(R)-1, “Employers’Disclosures about Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”).  FSP No. 132(R)-1 amends FASB Statement No. 132,“Employers’ Disclosures about Pensions and Other Postretirement Benefits”, toprovide guidance on an employer’s disclosures about plan assets of a definedbenefit pension or other postretirement plan. The provisions of FSP No. 132(R)-1 will be effective for us in our2009 Form 10-K, and will result in expanded disclosures in the notes toour consolidated financial statements.

 

In April 2009, theFASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures aboutFair Value of Financial Instruments.”  This FSP amends FASB Statement No. 107,“Disclosures about Fair Value of Financial Instruments”, to require disclosuresabout fair value of financial instruments for interim periods.  This FSPalso amends APB Opinion No. 28, “Interim Financial Reporting,” to requirethose disclosures in summarized financial information at interim reportingperiods.  This FSP is effective for interim reporting periods ending afterJune 15, 2009, with early adoption permitted.  We have elected toadopt this FSP effective with the first quarter of 2009. With this earlyadoption, we have also elected to adopt FSP FAS 157-4, “Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That are Not Orderly” andFSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments”.  The impact of adopting these variousFSPs resulted in expanded disclosures in the notes to our consolidated financialstatements.

 

In May 2009, theFASB issued FAS No. 165, “Subsequent Events” (“FAS No. 165”).  FAS No. 165 sets out general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or available to be issued.  FAS No. 165 requires disclosure of thedate through which subsequent events have been evaluated, the nature of anyevent and an estimate of its financial effect or disclosure that such estimatecannot be made.  The provisions of FAS No. 165were adopted by us in the quarter ended June 30, 2009 and have resulted inadditional disclosure regarding subsequent events.

 

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**NOTE 16: CONSOLIDATING FINANCIAL INFORMATION**

 

SeeNote 6 for a discussion of the Company’s guarantor subsidiaries.  The following consolidating financialinformation sets forth condensed consolidating statements of operations,balance sheets and statements of cash flows of Blount International, Inc.,Blount, Inc., the guarantor subsidiaries and the non-guarantorsubsidiaries:

 

**Condensed Consolidating Statement of IncomeInformation**

 
| **(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) from continuing operationsbefore 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) from continuing operations                    |       | (2,007                           | )          | (137                    | )          | (657                        | )          | 6,111                             |       | 922              |       | 4,232            |       |
| Equity in earnings of affiliated companies                  |       | 6,239                            |       | 6,376                   |       | —                      |       | —                            |       | (12,615          | )          | —           |       |
| Net income                                                  |       | $                                | 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                                          |       | —                           |       | 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) from continuing operationsbefore 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) from continuing operations                    |       | (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                                                  |       | $                                | 5,189      |                    | $          | 8,605                       |       | $                                 | (2,071     | )                | $          | 8,123            |       | $ | (14,657 | ) | $ | 5,189 |   |

 

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**Condensed Consolidating Statement of IncomeInformation**

 
| **(Amounts in thousands)**                                  | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended  June 30, 2008**                  |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                       |       | $                                | —     |                    | $          | 99,770                      |       | $                                 | 23,427     |             | $          | 116,884          |       | $ | (85,029 | ) | $ | 155,052 |   |
| Cost of sales                                               |       | —                           |       | 69,208                  |       | 20,175                      |       | 100,908                           |       | (84,561          | )          | 105,730          |       |
| Gross profit                                                |       | —                           |       | 30,562                  |       | 3,252                       |       | 15,976                            |       | (468             | )          | 49,322           |       |
| Operating expenses                                          |       | —                           |       | 14,856                  |       | 2,864                       |       | 9,982                             |       | —           |       | 27,702           |       |
| Operating income                                            |       | —                           |       | 15,706                  |       | 388                         |       | 5,994                             |       | (468             | )          | 21,620           |       |
| Other income (expense), net                                 |       | (4,250                           | )          | (2,380                  | )          | 153                         |       | 702                               |       | —           |       | (5,775           | )          |
| Income (loss) from continuing operationsbefore income taxes |       | (4,250                           | )          | 13,326                  |       | 541                         |       | 6,696                             |       | (468             | )          | 15,845           |       |
| Provision (benefit) for income taxes                        |       | (1,754                           | )          | 5,580                   |       | 221                         |       | 1,581                             |       | —           |       | 5,628            |       |
| Income (loss) from continuing operations                    |       | (2,496                           | )          | 7,746                   |       | 320                         |       | 5,115                             |       | (468             | )          | 10,217           |       |
| Loss from discontinued operations                           |       | —                           |       | (121                    | )          | —                      |       | —                            |       | —           |       | (121             | )          |
| Equity in earnings of affiliated companies                  |       | 12,592                           |       | 4,967                   |       | 53                          |       | —                            |       | (17,612          | )          | —           |       |
| Net income                                                  |       | $                                | 10,096     |                    | $          | 12,592                      |       | $                                 | 373        |             | $          | 5,115            |       | $ | (18,080 | ) | $ | 10,096 |   |

** **
| **(Amounts in thousands)**                                  | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Six Months Ended June 30,  2008**                    |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                       |       | $                                | —     |                    | $          | 194,453                     |       | $                                 | 33,871     |             | $          | 178,825          |       | $ | (118,890 | ) | $ | 288,259 |   |
| Cost of sales                                               |       | —                           |       | 137,698                 |       | 29,055                      |       | 147,295                           |       | (117,589         | )          | 196,459          |       |
| Gross profit                                                |       | —                           |       | 56,755                  |       | 4,816                       |       | 31,530                            |       | (1,301           | )          | 91,800           |       |
| Operating expenses                                          |       | —                           |       | 30,832                  |       | 3,877                       |       | 18,802                            |       | —           |       | 53,511           |       |
| Operating income                                            |       | —                           |       | 25,923                  |       | 939                         |       | 12,728                            |       | (1,301           | )          | 38,289           |       |
| Other income (expense), net                                 |       | (8,800                           | )          | (4,168                  | )          | 289                         |       | 521                               |       | —           |       | (12,158          | )          |
| Income (loss) from continuing operationsbefore income taxes |       | (8,800                           | )          | 21,755                  |       | 1,228                       |       | 13,249                            |       | (1,301           | )          | 26,131           |       |
| Provision (benefit) for income taxes                        |       | (3,916                           | )          | 9,334                   |       | 547                         |       | 3,060                             |       | —           |       | 9,025            |       |
| Income (loss) from continuing operations                    |       | (4,884                           | )          | 12,421                  |       | 681                         |       | 10,189                            |       | (1,301           | )          | 17,106           |       |
| Loss from discontinued operations                           |       | —                           |       | (174                    | )          | —                      |       | —                            |       | —           |       | (174             | )          |
| Equity in earnings of affiliated companies                  |       | 21,816                           |       | 9,569                   |       | 78                          |       | —                            |       | (31,463          | )          | —           |       |
| Net income                                                  |       | $                                | 16,932     |                    | $          | 21,816                      |       | $                                 | 759        |             | $          | 10,189           |       | $ | (32,764 | ) | $ | 16,932 |   |

 

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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, 2009**                                   | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Assets**                                               |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Cash and cash equivalents                                |       | $                                | —     |                    | $          | —                      |       | $                               | —     |             | $          | 49,601           |       | $ | (849 | ) | $ | 48,752 |   |
| Accounts receivable, net                                 |       | —                           |       | 37,742                  |       | 1,853                       |       | 24,328                          |       | —           |       | 63,923           |       |
| Intercompany receivables                                 |       | —                           |       | 219,124                 |       | 81,403                      |       | 33,323                          |       | (333,850         | )          | —           |       |
| Inventories, net                                         |       | —                           |       | 59,214                  |       | 2,650                       |       | 23,478                          |       | 384              |       | 85,726           |       |
| Other current assets                                     |       | —                           |       | 14,679                  |       | 67                          |       | 7,017                           |       | —           |       | 21,763           |       |
| Total current assets                                     |       | —                           |       | 330,759                 |       | 85,973                      |       | 137,747                         |       | (334,315         | )          | 220,164          |       |
| Investments in affiliated companies                      |       | 239,588                          |       | 261,862                 |       | —                      |       | —                          |       | (501,450         | )          | —           |       |
| Property, plant and equipment, net                       |       | —                           |       | 58,076                  |       | 6,938                       |       | 51,263                          |       | —           |       | 116,277          |       |
| Goodwill and other assets                                |       | —                           |       | 113,919                 |       | 12,784                      |       | 11,133                          |       | —           |       | 137,836          |       |
| Total Assets                                             |       | $                                | 239,588    |                    | $          | 764,616                     |       | $                               | 105,695    |             | $          | 200,143          |       | $ | (835,765 | ) | $ | 474,277 |   |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity (Deficit)** |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Current maturities of long-term debt                     |       | $                                | —     |                    | $          | 1,117                       |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 1,117 |   |
| Accounts payable                                         |       | —                           |       | 14,649                  |       | (317                        | )          | 6,897                           |       | (849             | )          | 20,380           |       |
| Intercompany payables                                    |       | 275,094                          |       | 40,609                  |       | 564                         |       | 17,583                          |       | (333,850         | )          | —           |       |
| Other current liabilities                                |       | —                           |       | 31,163                  |       | 2,377                       |       | 13,300                          |       | —           |       | 46,840           |       |
| Total current liabilities                                |       | 275,094                          |       | 87,538                  |       | 2,624                       |       | 37,780                          |       | (334,699         | )          | 68,337           |       |
| Long-term debt, excluding current maturities             |       | —                           |       | 305,657                 |       | —                      |       | —                          |       | —           |       | 305,657          |       |
| Other liabilities                                        |       | 918                              |       | 131,833                 |       | —                      |       | 3,956                           |       | —           |       | 136,707          |       |
| Total liabilities                                        |       | 276,012                          |       | 525,028                 |       | 2,624                       |       | 41,736                          |       | (334,699         | )          | 510,701          |       |
| Stockholders’ equity (deficit)                      |       | (36,424                          | )          | 239,588                 |       | 103,071                     |       | 158,407                         |       | (501,066         | )          | (36,424          | )          |
| Total Liabilities and Stockholders’Equity (Deficit) |       | $                                | 239,588    |                    | $          | 764,616                     |       | $                               | 105,695    |             | $          | 200,143          |       | $ | (835,765 | ) | $ | 474,277 |   |
|                                                          |            |                                  |            |                         |            |                             |            |                                 |            |                  |            |                  |            |  |  |  |  |  |  |  |

 

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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, 2008**                               | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Assets**                                               |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Cash and cash equivalents                                |       | $                                | —     |                    | $          | 185                         |       | $                               | —     |             | $          | 59,158           |       | $ | (1,068 | ) | $ | 58,275 |   |
| Accounts receivable, net                                 |       | —                           |       | 47,155                  |       | 4,367                       |       | 24,033                          |       | —           |       | 75,555           |       |
| Intercompany receivables                                 |       | —                           |       | 189,459                 |       | 77,478                      |       | 5,022                           |       | (271,959         | )          | —           |       |
| Inventories, net                                         |       | —                           |       | 58,143                  |       | 5,568                       |       | 26,736                          |       | (145             | )          | 90,302           |       |
| Deferred income taxes                                    |       | —                           |       | 4,729                   |       | —                      |       | 763                             |       | —           |       | 5,492            |       |
| Other current assets                                     |       | —                           |       | 9,461                   |       | 162                         |       | 5,317                           |       | —           |       | 14,940           |       |
| Total current assets                                     |       | —                           |       | 309,132                 |       | 87,575                      |       | 121,029                         |       | (273,172         | )          | 244,564          |       |
| Investments in affiliated companies                      |       | 229,389                          |       | 256,374                 |       | —                      |       | —                          |       | (485,763         | )          | —           |       |
| Property, plant and equipment, net                       |       | —                           |       | 58,093                  |       | 11,646                      |       | 50,010                          |       | —           |       | 119,749          |       |
| Goodwill and other assets                                |       | —                           |       | 111,983                 |       | 11,883                      |       | 13,509                          |       | (2,004           | )          | 135,371          |       |
| Total Assets                                             |       | $                                | 229,389    |                    | $          | 735,582                     |       | $                               | 111,104    |             | $          | 184,548          |       | $ | (760,939 | ) | $ | 499,684 |   |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’  Equity (Deficit)** |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                     |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Current maturities of long-term debt                     |       | $                                | —     |                    | $          | 31,981                      |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 31,981 |   |
| Accounts payable                                         |       | —                           |       | 16,358                  |       | 3,656                       |       | 9,918                           |       | (1,068           | )          | 28,864           |       |
| Intercompany payables                                    |       | 271,959                          |       | —                  |       | —                      |       | —                          |       | (271,959         | )          | —           |       |
| Other current liabilities                                |       | —                           |       | 35,714                  |       | 3,052                       |       | 16,967                          |       | —           |       | 55,733           |       |
| Total current liabilities                                |       | 271,959                          |       | 84,053                  |       | 6,708                       |       | 26,885                          |       | (273,027         | )          | 116,578          |       |
| Long-term debt, excluding current maturities             |       | —                           |       | 293,539                 |       | —                      |       | —                          |       | —           |       | 293,539          |       |
| Other liabilities                                        |       | 950                              |       | 128,601                 |       | —                      |       | 5,540                           |       | (2,004           | )          | 133,087          |       |
| Total liabilities                                        |       | 272,909                          |       | 506,193                 |       | 6,708                       |       | 32,425                          |       | (275,031         | )          | 543,204          |       |
| Stockholders’ equity (deficit)                      |       | (43,520                          | )          | 229,389                 |       | 104,396                     |       | 152,123                         |       | (485,908         | )          | (43,520          | )          |
| Total Liabilities and Stockholders’Equity (Deficit) |       | $                                | 229,389    |                    | $          | 735,582                     |       | $                               | 111,104    |             | $          | 184,548          |       | $ | (760,939 | ) | $ | 499,684 |   |

 

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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,  2009**                             |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) operating activities                  |       | $                                | 2,319      |                    | $          | 389                         |       | $                                 | 3,799      |             | $          | 11,347           |       | $ | 219 |   | $ | 18,073 |   |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Purchase of property, plant & equipment                     |       | —                           |       | (3,857                  | )          | (391                        | )          | (4,263                            | )          | —           |       | (8,511           | )          |
| Proceeds from sale of assets                                         |       | —                           |       | —                  |       | 42                          |       | 3,214                             |       | —           |       | 3,256            |       |
| Net cash used in investing activities                                |       | —                           |       | (3,857                  | )          | (349                        | )          | (1,049                            | )          | —           |       | (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                                        |       | (1,971                           | )          | 23,929                  |       | (3,450                      | )          | (18,508                           | )          | —           |       | —           |       |
| Other                                                                |       | (348                             | )          | —                  |       | —                      |       | —                            |       | —           |       | (348             | )          |
| Net cash provided by (used in) financing activities                  |       | (2,319                           | )          | 3,283                   |       | (3,450                      | )          | (18,508                           | )          | —           |       | (20,994          | )          |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Effect of exchange rate changes                                      |       | —                           |       | —                  |       | —                      |       | (1,347                            | )          | —           |       | (1,347           | )          |
| Net increase (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 |   |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Six Months Ended June 30, 2008**                              | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Net cash provided by (used in) operating activities                  |       | $                                | 3,876      |                    | $          | 9,069                       |       | $                                 | 3,000      |             | $          | (1,713           | )          | $ | (959 | ) | $ | 13,273 |   |
| ** **                                                           |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Purchase of property, plant and equipment,net of proceeds from sales |       | —                           |       | (5,514                  | )          | (1,777                      | )          | (3,818                            | )          |             |       | (11,109          | )          |
| Acquisition of Carlton                                               |       | —                           |       | (64,314                 | )          | —                      |       | —                            |       | —           |       | (64,314          | )          |
| Discontinued operations                                              |       | —                           |       | 1,725                   |       | —                      |       | —                            |       | —           |       | 1,725            |       |
| Net cash used in investing activities                                |       | —                           |       | (68,103                 | )          | (1,777                      | )          | (3,818                            | )          | —           |       | (73,698          | )          |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Net borrowings under revolving credit facility                       |       | —                           |       | 45,000                  |       | —                      |       | —                            |       | —           |       | 45,000           |       |
| Repayment of term loan principal                                     |       | —                           |       | (1,613                  | )          | —                      |       | —                            |       | —           |       | (1,613           | )          |
| Advances from (to) affiliates                                        |       | (4,870                           | )          | 5,135                   |       | (779                        | )          | 514                               |       | —           |       | —           |       |
| Other                                                                |       | 994                              |       | —                  |       | —                      |       | —                            |       | —           |       | 994              |       |
| Net cash provided by (used in) financing activities                  |       | (3,876                           | )          | 48,522                  |       | (779                        | )          | 514                               |       | —           |       | 44,381           |       |
|                                                                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Effect of exchange rate changes                                      |       | —                           |       | —                  |       | —                      |       | 1,236                             |       | —           |       | 1,236            |       |
| Net increase (decrease) in cash and cash  equivalents                |       | —                           |       | (10,512                 | )          | 444                         |       | (3,781                            | )          | (959             | )          | (14,808          | )          |
| Cash and cash equivalents at beginning of period                     |       | —                           |       | 10,512                  |       | 121                         |       | 46,956                            |       | —           |       | 57,589           |       |
| Cash and cash equivalents at end of period                           |       | $                                | —     |                    | $          | —                      |       | $                                 | 565        |             | $          | 43,175           |       | $ | (959 | ) | $ | 42,781 |   |

 

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**ITEM 2.**  **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

**Operating Results**

 

**Three months ended June 30, 2009 (unaudited)compared to three months ended June 30, 2008 (unaudited).**

 

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

 
| ** **                                 | ** ** | **Three Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                  | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not foot due to rounding)** |       |                                  |       |       |       |       |       |       |       |   |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Sales                                      |       | $                                     | 114.0      |       | $          | 155.1      |       | $          | (41.1      | ) |   |   |   |   |
|                                       |       |                                  |       |       |       |       |       | (44.3      | )          | Sales volume |   |
|                                       |       |                                  |       |       |       |       |       | 6.6        |       | Selling price  and mix |   |
|                                       |       |                                  |       |       |       |       |       | (3.4       | )          | Foreign currency  translation |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Gross profit                               |       | 34.6                                  |       | 49.3       |       | (14.7      | )          |       |       |   |   |
| *Gross margin*                             | * *   | *30.4*                                | *%*        | *31.8*     | *%*        |       |       | (15.6      | )          | Sales volume |   |
|                                       |       |                                  |       |       |       |       |       | 6.6        |       | Selling price  and mix |   |
|                                       |       |                                  |       |       |       |       |       | (6.2       | )          | Product cost and  mix |   |
|                                       |       |                                  |       |       |       |       |       | 0.5        |       | Foreign currency  translation |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Operating expenses                         |       | 22.7                                  |       | 27.7       |       | (5.0       | )          |       |       |   |   |
|                                       |       |                                  |       |       |       |       |       | (2.7       | )          | Gain on sale of  land and building |   |
|                                       |       |                                  |       |       |       |       |       | 1.3        |       | Plant closure  and severance costs |   |
|                                       |       |                                  |       |       |       |       |       | (2.2       | )          | Compensation  expense |   |
|                                       |       |                                  |       |       |       |       |       | 1.1        |       | Employee benefit  plans |   |
|                                       |       |                                  |       |       |       |       |       | 0.8        |       | Provision for  bad debts |   |
|                                       |       |                                  |       |       |       |       |       | (0.9       | )          | Depreciation |   |
|                                       |       |                                  |       |       |       |       |       | (0.9       | )          | Advertising |   |
|                                       |       |                                  |       |       |       |       |       | (1.3       | )          | Foreign currency  translation |   |
|                                       |       |                                  |       |       |       |       |       | (0.2       | )          | Other |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Operating income                           |       | 12.0                                  |       | 21.6       |       | (9.7       | )          |       |       |   |   |
| *Operating margin*                         | * *   | *10.5*                                | *%*        | *13.9*     | *%*        |       |       | (14.7      | )          | Decrease in  gross profit |   |
|                                       |       |                                  |       |       |       |       |       | 2.7        |       | Gain on sale of  land and building |   |
|                                       |       |                                  |       |       |       |       |       | (1.3       | )          | Plant closure  and severance costs |   |
|                                       |       |                                  |       |       |       |       |       | 3.6        |       | Decrease in Selling, General   & Administration (“SG&A”) |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Income from continuing operations          |       | 4.2                                   |       | 10.2       |       | (6.0       | )          |       |       |   |   |
|                                       |       |                                  |       |       |       |       |       | (9.7       | )          | Decrease in  operating income |   |
|                                       |       |                                  |       |       |       |       |       | 0.1        |       | Decrease in net  interest expense |   |
|                                       |       |                                  |       |       |       |       |       | (0.6       | )          | Decrease in  other income |   |
|                                       |       |                                  |       |       |       |       |       | 4.2        |       | Decrease in  income tax provision |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Loss from discontinued operations          |       | —                                |       | (0.1       | )          | 0.1        |       |       |       |   |   |
|                                       |       |                                  |       |       |       |       |       | 0.2        |       | Decrease in  operating loss |   |
|                                       |       |                                  |       |       |       |       |       | (0.1       | )          | Decrease in tax  benefit |   |
|                                       |       |                                  |       |       |       |       |       |       |       |   |   |
| Net income                                 |       | $                                     | 4.2        |       | $          | 10.1       |       | $          | (5.9       | ) |   |   |   |   |

 

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On May 2, 2008, weacquired all of the outstanding stock of Carlton, a manufacturer of cuttingchain for chainsaws located near Portland, Oregon.  We paid a total of $66.2 million in cash forCarlton, including related acquisition costs of $1.5 million, and also assumedliabilities totaling $21.3 million. Carlton had $1.8 million in cash on the date of acquisition, resultingin a net cash outflow of $64.4 million for the acquisition.  The acquisition was financed with acombination of cash on hand and $58.5 million borrowed under the Company’srevolving credit facility.  The operatingresults of Carlton are included in the Company’s consolidated financialstatements from May 2, 2008 forward. The Company accounted for the acquisition in accordance with FAS No. 141.  Accordingly, Carlton’s assets and liabilitieswere recorded at their estimated fair values on the date of acquisition.

 

Sales in the three months ended June 30, 2009 decreasedby $41.1 million (26.5%) from the same period in 2008.  This sales decrease was primarily due todecreased unit volume of $44.3 million. $6.6 million of selling price and mix improvements partially offset thisvolume-related decrease in sales.  Thetranslation of foreign currency-denominated sales transactions, given thestronger U.S. Dollar in comparison to the second quarter of 2008, reducedconsolidated sales by $3.4 million in the comparative period.  International sales decreased by $32.6million (30.9%) and domestic sales decreased by $8.4 million (17.0%).  The decrease in international sales reflectedworldwide weakness in demand and poor market conditions related to the globalrecession, as well as the unfavorable effects from movement in foreign currencyexchange rates compared to 2008.  We havecontinued to be cautious about extending credit to certain higher riskgeographical areas during the current global recession, which we believe hascontributed to a slowdown in sales and orders from our international customerbase.  The decrease in U.S. sales isattributed to poor economic conditions and weakness in demand for ourproducts.  We believe that most of ourcustomers have reduced or delayed orders for our products, and reduced theirexisting inventories of our products, over their concerns about the state ofthe economy and lower order rates from their customers.

 

Consolidated order backlog at June 30, 2009 was $80.5million compared to $84.1 million at March 31, 2009.  Backlog in the Outdoor Products segmentdecreased $2.8 million, while the backlog for gear components decreased by $0.8million during the second quarter of 2009.

 

Gross profit decreased $14.7 million (29.8%) from the secondquarter of 2008 to the second quarter of 2009. Much lower sales volume and increases in product costs were partiallyoffset by improved pricing and mix and the net favorable effects of movement inforeign currency exchange rates.  Thehigher product costs included higher year-over-year steel costs, estimated at$1.2 million, which represent a moderated pace compared to our first quarter2009 experience.  Our manufacturing costswere also adversely affected during the second quarter of 2009 by lowerproduction volumes, including a higher number of idle manufacturing days, whichcaused lower absorption rates and higher period expenses for fixed andsemi-variable manufacturing costs.  Grossmargin in the second quarter of 2009 was 30.4% of sales compared to 31.8% in2008.  Gross margin was favorablyaffected by improved pricing and mix, as well as the net favorable foreignexchange effects, offset by the negative gross margin impact of lowerproduction levels.

 

Fluctuations in currency exchange rates increased our grossprofit in the second quarter of 2009 compared to 2008 by $0.5 million on aconsolidated basis.  The translation ofweaker foreign currencies into a stronger U.S. Dollar resulted in lowerreported sales revenue from our sales in Europe, offset by lower reportedmanufacturing costs in Brazil and Canada.

 

SG&A was $24.0 million in the second quarter of 2009,compared to $27.6 million in the second quarter of 2008, representing adecrease of $3.6 million (13.0%).  As apercentage of sales, SG&A increased from 17.8% in the second quarter of2008 to 21.1% in the second quarter of 2009. This increase as a percent of sales was due to the sharp decrease insales revenue.  Compensation expensedecreased by $2.2 million year-over-year, reflecting reductions in staffinglevels implemented in the first half of 2009 and a $0.3 million decrease instock compensation expense because no awards have been granted to date in2009.  Additionally, annual meritincreases traditionally implemented in the first quarter of the fiscal yearwere deferred for many of our employees. Employee benefit expenses increased by $1.1 million, primarily due tohigher costs for our U.S. and Canadian defined benefit pension plans.  Expense for these plans is higher in 2009than it was in 2008 due to increased amortization of actuarial losses andreduced return on plan assets following the significant market-related decreasein the value of the related pension assets experienced during 2008.  Our provision for bad debts increased by $0.8million in the comparable quarterly periods, as the global recession hasadversely affected our expectations for the collectability of some of ourreceivables.  Depreciation expense was$0.9 million lower in 2009 than in the comparable quarter, primarily because

 

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our enterprise resource planning software system became fullydepreciated in the third quarter of 2008. Advertising expense decreased by $0.9 million as we have reduced or deferredexpenditures based on the slowdown in our business.  International operating expenses decreased$1.3 million from the prior year due to the stronger U.S. Dollar and its effecton the translation of foreign expenses.

 

On June 25, 2009, we sold the land and buildingrepresenting our former European headquarters and distribution center.  These operations have moved to new, nearbyleased facilities.  We recognized apre-tax gain of $2.7 million on the sale.

 

In January 2009, we announced our intent to close ourmanufacturing facility in Milan, Tennessee, during the second quarter of2009.  Products previously manufacturedin that facility are now produced in our other manufacturing facilities.  During the three months ended June 30,2009, we recognized a total of $0.5 million in plant closure costs.  Of these charges, $0.1 million are recognizedin cost of goods sold on the Consolidated Statements of Income for the threemonths ended June 30, 2009.  Theland and building are currently being marketed for sale and are included inassets held for sale on the Consolidated Balance Sheets.

 

We also took actions during the first half of 2009 to reducethe number of employees at certain of our other locations.  During the three months ended June 30,2009, we recognized a total of $1.0 million in severance charges related tothis reduction in force.  We recognizedseverance charges of $0.1 million during the three months ended June 30,2008 for similar actions involving a fewer number of employees.

 

Operating income decreased by $9.7 million from the secondquarter of 2008 to the second quarter of 2009, resulting in an operating marginfor 2009 of 10.5% of sales compared to 13.9% for 2008. The decrease was due tolower sales and gross profit, as well as plant closure and severance costsincurred in 2009, partially offset by the gain on sale of the land and buildingin Belgium.

 

Interestexpense was $6.4 million in the second quarter of 2009 compared to $6.8 millionin the second quarter of 2008.  Thedecrease was due to slightly lower average outstanding debt balances in thecomparable periods, as well as slightly lower average interest rates on ourvariable rate debt.  However, thevariable interest rate on our revolver balance increased significantly when weextended the maturity date by one year with an amendment signed on April 30,2009.

 

Otherincome decreased $0.6 million.  Otherincome in 2008 included a gain on the sale of temporary cash investments.

 

Thefollowing table summarizes our income tax provision for continuing operationsin 2009 and 2008:

 
| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)**                             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Income  from continuing operations before income taxes |       | $                                    | 5,639      |   | $ | 15,845 |   |
| Provision  for income taxes                            |       | 1,407                                |       | 5,628 |   |
| Effective  tax rate                                    |       | 25.0                                 | %          | 35.5 | % |
|                                                        |            |                                      |            |  |  |  |  |

 

The effective tax rate for the second quarter of 2009 wasreduced from the federal statutory rate by the impact of lower taxes on ourforeign operations.  Taxes on our foreignoperations are lower due to increased deductions for tax purposes which are notrecognized as expenses for book purposes. Additionally, our effective tax rate in 2009 was reduced by federal andstate tax credits.  Partially offsettingthese tax rate reductions were additional tax expenses recognized on interestand dividends from certain of our foreign locations.  The effective tax rate in the second quarterof 2008 was reduced from the federal statutory rate by the impact of lower taxrates on our foreign operations.

 

Incomefrom continuing operations in the second quarter of 2009 was $4.2 million, or$0.09 per diluted share, compared to $10.2 million, or $0.21 per diluted share,in the second quarter of 2008.

 

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Discontinued operations are summarized as follows:

 
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Sales                                                     |       | $                                    | —     |   | $ | — |   |
| Operating  loss before taxes from discontinued operations |       | —                               |       | (195 | ) |
| Income  tax benefit                                       |       | —                               |       | (74 | ) |
| Loss  from discontinued operations                        |       | $                                    | —     |   | $ | (121 | ) |

 

The 2008 results consisted of wind-down and exit activitiesrelated to our discontinued Forestry Division, which was sold on November 5,2007.

 

***Segment Results. ***Thefollowing table reflects segment sales and operating results for 2009 and 2008:

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                             | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| Sales:                     |       |                                 |       |   |   |   |   |
| Outdoor  Products          | ** ** | $                                    | 110,131    |   | $ | 146,356 |   | (24.8 | )% |
| Other                      | ** ** | 3,870                                |       | 8,696 |   | (55.5 | ) |
| Total  sales               | ** ** | $                                    | 114,001    |   | $ | 155,052 |   | (26.5 | )% |
| Operating  income:         |       |                                 |       |   |   |   |   |
| Outdoor  Products          | ** ** | $                                    | 14,044     |   | $ | 24,631 |   | (43.0 | )% |
| Other                      | ** ** | (2,084                               | )          | (3,011 | ) | (30.8 | ) |
| Operating  income          | ** ** | $                                    | 11,960     |   | $ | 21,620 |   | (44.7 | )% |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment decreased $36.2million (24.8%) in the second quarter of 2009 compared to the second quarter of2008.  Sales volume decreased by $39.3million, reflecting weak market conditions and lower shipments for all productlines, geographic regions and sales channels. Improved price and product mix of $6.4 million partially offset thevolume decline.  Fluctuations in foreigncurrency exchange rates further reduced reported segment sales revenue by $3.4million compared to the second quarter of 2008. Sales of wood-cutting chainsaw components were down 27.8% and sales ofoutdoor care products were down 6.8%. Sales of concrete-cutting products were down 35.7% due to continued weakmarket conditions in the construction equipment industry.  Sales to OEM customers decreased by 25.7%,while replacement market sales declined by 24.5%.  International sales decreased 30.9% for thethree month comparable periods, while domestic sales declined by 9.1%.

 

Segment contribution to operating income decreased $10.6million (43.0%) in the second quarter of 2009 compared to the second quarter of2008.  The favorable effects of improvedprice and mix ($6.4 million), the positive effects of fluctuations in foreigncurrency translation rates ($1.8 million) and lower SG&A expenses ($2.0million) were offset by lower sales volume ($13.8 million) and higher productcost and mix ($7.1 million).  The higherproduct cost and mix, excluding the foreign currency exchange effect, include$1.6 million in higher steel costs on a year-over-year basis and the unfavorableeffects of lower production volumes.  Ourmanufacturing costs were adversely affected during the second quarter of 2009by lower production volumes, including a higher number of idle manufacturingdays, which caused lower absorption rates and higher period expenses for fixedand semi-variable manufacturing costs. The decrease in SG&A expense is largely attributable to the effectsof cost-cutting measures we implemented in the first half of 2009 to reduce headcount and operating expenses.  These costreductions were partially offset by increased legal costs, higher expenses forour defined benefit pension plans and an increase in the provision for baddebts.

 

***Other.***  Theother category includes centralized administrative functions, the activity ofour gear components manufacturing business, gain on sale of land and buildingand plant closure and severance costs. Sales of gear-related products decreased 55.5% from the second quarterof 2008 to the second quarter of 2009. Lower volume of $5.0 million was partially offset by a $0.2 millionfavorable effect of price and mix improvements. The contribution to operatingincome from our gear components business decreased $0.5 million (53.0%)year-over-year due to the

 

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lower sales volume, partially offset by reduced expenses fromcost cutting actions taken during 2009. Central administrative expenses were unchanged for the comparableperiods, largely due to lower compensation expense, partially offset by highercosts for our employee benefit plans.  Werecognized a gain on the sale of property in Belgium of $2.7 million in the secondquarter of 2009.  Plant closure andseverance costs were $1.4 million in the second quarter of 2009 compared to$0.1 million for severance expenses recognized in the second quarter of 2008.

 

**Six months ended June 30, 2009 (unaudited)compared to six months ended June 30, 2008 (unaudited).**

 

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

 
| ** **                                  | ** ** | **Six Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                   | ** ** | **2009**                            | ** ** | **2008**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not foot due to  rounding)** | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Sales                                       |       | $                                   | 230.5      |       | $          | 288.3      |       | $          | (57.7      | ) |   |   |   |   |
|                                        |       |                                |       |       |       |       |       | (66.0      | )          | Sales volume |   |
|                                        |       |                                |       |       |       |       |       | 14.5       |       | Selling price  and mix |   |
|                                        |       |                                |       |       |       |       |       | (6.3       | )          | Foreign currency  translation |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Gross profit                                |       | 72.4                                |       | 91.8       |       | (19.4      | )          |       |       |   |   |
| *Gross margin*                              | * *   | *31.4*                              | *%*        | *31.8*     | *%*        |       |       | (26.5      | )          | Sales volume |   |
|                                        |       |                                |       |       |       |       |       | 14.5       |       | Selling price  and mix |   |
|                                        |       |                                |       |       |       |       |       | (8.4       | )          | Product cost and  mix |   |
|                                        |       |                                |       |       |       |       |       | 1.0        |       | Foreign currency  translation |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Operating expenses                          |       | 52.9                                |       | 53.5       |       | (0.6       | )          |       |       |   |   |
|                                        |       |                                |       |       |       |       |       | (2.7       | )          | Gain on sale of  land and building |   |
|                                        |       |                                |       |       |       |       |       | 3.6        |       | Plant closure  costs |   |
|                                        |       |                                |       |       |       |       |       | 1.7        |       | Increase in  other severance costs |   |
|                                        |       |                                |       |       |       |       |       | (3.5       | )          | Compensation  expense |   |
|                                        |       |                                |       |       |       |       |       | 2.2        |       | Employee benefit  plans |   |
|                                        |       |                                |       |       |       |       |       | 2.5        |       | Professional  services |   |
|                                        |       |                                |       |       |       |       |       | 0.8        |       | Provision for  bad debts |   |
|                                        |       |                                |       |       |       |       |       | (1.4       | )          | Depreciation |   |
|                                        |       |                                |       |       |       |       |       | (0.9       | )          | Advertising |   |
|                                        |       |                                |       |       |       |       |       | (2.5       | )          | Foreign currency  translation |   |
|                                        |       |                                |       |       |       |       |       | (0.4       | )          | Other |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Operating income                            |       | 19.5                                |       | 38.3       |       | (18.7      | )          |       |       |   |   |
| *Operating margin*                          | * *   | *8.5*                               | *%*        | *13.3*     | *%*        |       |       | (19.4      | )          | Decrease in  gross profit |   |
|                                        |       |                                |       |       |       |       |       | 2.7        |       | Gain on sale of  land and building |   |
|                                        |       |                                |       |       |       |       |       | (5.3       | )          | Plant closure  and severance costs |   |
|                                        |       |                                |       |       |       |       |       | 3.3        |       | Decrease in  SG&A |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Income from continuing operations           |       | 5.2                                 |       | 17.1       |       | (11.9      | )          |       |       |   |   |
|                                        |       |                                |       |       |       |       |       | (18.7      | )          | Decrease in  operating income |   |
|                                        |       |                                |       |       |       |       |       | 0.7        |       | Decrease in net  interest expense |   |
|                                        |       |                                |       |       |       |       |       | (0.7       | )          | Decrease in  other income |   |
|                                        |       |                                |       |       |       |       |       | 6.8        |       | Decrease in  income tax provision |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Loss from discontinued operations           |       | —                              |       | (0.2       | )          | 0.2        |       |       |       |   |   |
|                                        |       |                                |       |       |       |       |       | 0.3        |       | Decrease in  operating loss |   |
|                                        |       |                                |       |       |       |       |       | (0.1       | )          | Decrease in tax  benefit |   |
|                                        |       |                                |       |       |       |       |       |       |       |   |   |
| Net income                                  |       | $                                   | 5.2        |       | $          | 16.9       |       | $          | (11.7      | ) |   |   |   |   |

 

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Sales in the six months ended June 30, 2009 decreased by$57.7 million (20.0%) from the same period in 2008.  This sales decrease was primarily due todecreased unit volume of $66.0 million. This volume-related decrease was partially mitigated by the inclusion ofCarlton sales for six months of 2009 and only 2 months of 2008.  Partially offsetting the volume decrease was$14.5 million of selling price and mix improvements.  The translation of foreigncurrency-denominated sales transactions, given the stronger U.S. Dollar incomparison to the second quarter of 2008, reduced consolidated sales by $6.3million in the comparative period. International sales decreased by $46.7 million (24.1%) and domesticsales decreased by $11.0 million (11.7%). The decrease in international sales reflected worldwide weakness indemand and poor market conditions related to the global recession, as well asthe $6.3 million unfavorable foreign currency exchange rate impact on reportedsales compared to 2008.  We havecontinued to be cautious about extending credit to certain higher riskgeographical areas during the current global recession, which we believe hascontributed to a slowdown in sales and orders from our international customerbase.  The decrease in U.S. sales isattributed to poor economic conditions related to the U.S. recession andweakness in demand for our products.  Webelieve that most of our customers have reduced or delayed orders for ourproducts, and reduced their existing inventories of our products, over theirconcerns about the state of the economy and lower order rates from theircustomers.

 

Consolidated order backlog at June 30, 2009 was $80.5million compared to $103.5 million at December 31, 2008.  Backlog in the Outdoor Products segmentdecreased $20.3 million, while the backlog for gear components decreased by$2.7 million during the first half of 2009.

 

Gross profit decreased $19.4 million (21.1%) from the firsthalf of 2008 to the first half of 2009. Much lower sales volumes and increases in product costs were partiallyoffset by improved pricing and the net favorable effects of movement in foreigncurrency exchange rates.  The higherproduct costs were attributable to higher steel costs, estimated at $5.3million, along with other cost increases. Our manufacturing costs were adversely affected during the first half of2009 by lower production volumes, including a higher number of idlemanufacturing days, which caused lower absorption rates and higher periodexpenses for fixed and semi-variable manufacturing costs.  Gross margin in the first half of 2009 was31.4% of sales compared to 31.8% in the first half of 2008.  Gross margin was favorably affected by improvedpricing and mix, as well as the net favorable foreign exchange effects, offsetby the negative gross margin impact of lower volumes and higher steel costs.

 

Fluctuations in currency exchange rates increased our grossprofit year-to-date in 2009 compared to the first half of 2008 by $1.0 millionon a consolidated basis.  The translationof weaker foreign currencies into a stronger U.S. Dollar resulted in lowerreported sales revenue from our sales in Europe, offset by lower reportedmanufacturing costs in Brazil and Canada.

 

SG&A was $49.2 million in the first half of 2009,compared to $52.4 million in the first half of 2008, representing a decrease of$3.2 million (6.2%).  As a percentage ofsales, SG&A increased from 18.2% in the first half of 2008 to 21.3% in thefirst half of 2009.  This increase inpercent of sales was largely due to the sharp decrease in sales revenue.  Compensation expense decreased by $3.5million year-over-year, reflecting reductions in staffing levels implemented inthe first half of 2009 and a $1.7 million decrease in stock compensationexpense because no awards have been granted to date in 2009.  Additionally, annual merit increasestraditionally implemented in the first quarter of the fiscal year were deferredfor most of our salaried employees. Employee benefit expenses increased by $2.2 million, primarily due tohigher costs for our U.S. and Canadian defined benefit pension plans.  Expense for these plans is higher in 2009than it was in 2008 due to increased amortization of actuarial losses andreduced return on plan assets following the significant market-related decreasein the value of the related pension assets. We expect 2009 pension expense to be $6.0 million to $6.5 million higherthan it was in 2008.  Professionalservices expense increased by $2.5 million due primarily to higher legalcosts.  The provision for bad debtsincreased by $0.8 million in the first half of 2009 compared to the first halfof 2008, as the global recession has adversely affected our expectations forthe collectability of some of our receivables. Depreciation expense was $1.4 million lower in the first half of 2009than in the comparable 2008 period primarily because our enterprise resourceplanning software system became fully depreciated in the third quarter of2008.  Advertising expense decreased by$0.9 million, as we have reduced or deferred expenditures based on the slowdownin our business.  International operatingexpenses decreased $2.5 million from the prior year due to the stronger U.S.Dollar in comparison to the first half of 2008 and its effect on thetranslation of foreign expenses.

 

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On June 25, 2009, we sold the land and buildingrepresenting our former European headquarters and distribution center.  These operations have moved to new, nearbyleased facilities.  We recognized apre-tax gain of $2.7 million on the sale.

 

During the first half of 2009, we recognized a total of $3.8million in charges related to the closure of our manufacturing plant in Milan,Tennessee, consisting of $2.0 million in asset impairment charges, $1.0 millionin employee severance and benefit costs and $0.8 million in otherexpenses.  Of these charges, $0.2 millionare recognized in cost of goods sold on the Consolidated Statements of Incomefor the six months ended June 30, 2009.

 

We also took actions during the first half of 2009 to reducethe number of employees at certain of our other locations.  During the six months ended June 30,2009, we recognized a total of $2.8 million in severance charges related tothis reduction in force.  Since December 31,2008, we have reduced our number of employees by approximately 600 positions,or 17% of our total workforce.  Werecognized severance charges of $1.1 million during the six months ended June 30,2008 for similar actions involving a fewer number of employees.  We expect to incur a total of $7.0 million to$8.0 million of plant closure and severance costs for 2009.

 

Operating income decreased by $18.7  million from the first half of 2008 to thefirst half of 2009, resulting in an operating margin for 2009 of 8.5% of salescompared to 13.3% for 2008. The decrease was due to lower sales and grossprofit, as well as increased plant closure and severance costs, partiallyoffset by reduced SG&A expenses and the gain on sale of property inBelgium.

 

Interestexpense was $12.4 million in the first half of 2009 compared to $13.7 millionin the first half of 2008.  The decreasewas due to lower average interest rates on our variable rate debt, partiallyoffset by higher average outstanding debt balances.

 

Otherincome decreased $0.7 million reflecting the sale in 2008 of temporary cashinvestments.

 

Thefollowing table summarizes our income tax provision for continuing operationsin 2009 and 2008:

 
| ** **                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Income  from continuing operations before income taxes |       | $                                  | 7,377      |   | $ | 26,131 |   |
| Provision  for income taxes                            |       | 2,188                              |       | 9,025 |   |
| Effective  tax rate                                    |       | 29.7                               | %          | 34.5 | % |
|                                                        |            |                                    |            |  |  |  |  |

 

The effective tax rate for the first half of 2009 was reducedfrom the federal statutory rate by the impact of lower taxes on our foreignoperations.  Taxes on our foreignoperations are lower due to increased deductions for tax purposes which are notrecognized as expense for book purposes. Additionally, our effective tax rate in 2009 was reduced by federal andstate tax credits.  Partially offsettingthese tax rate reductions were additional tax expenses recognized on interestand dividends from certain of our foreign locations.  The effective tax rate in the first half of2008 was also reduced from the federal statutory rate by the impact of lowertax rates on our foreign operations.

 

Incomefrom continuing operations in the first half of 2009 was $5.2 million, or $0.11per diluted share, compared to $17.1 million, or $0.35 per diluted share, inthe first half of 2008.

 

Discontinued operations are summarized as follows:

 
| ** **                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Sales                                                     |       | $                                  | —     |   | $ | — |   |
| Operating  loss before taxes from discontinued operations |       | —                             |       | (280 | ) |
| Income  tax benefit                                       |       | —                             |       | (106 | ) |
| Loss  from discontinued operations                        |       | $                                  | —     |   | $ | (174 | ) |

 

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The 2008 results consisted of wind-down and exit activitiesrelated to our discontinued Forestry Division, which was sold on November 5,2007.

 

***Segment Results. ***Thefollowing table reflects segment sales and operating results for 2009 and 2008:

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                           | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| Sales:                     |       |                               |       |   |   |   |   |
| Outdoor  Products          | ** ** | $                                  | 221,550    |   | $ | 272,583 |   | (18.7 | )% |
| Other                      | ** ** | 8,975                              |       | 15,676 |   | (42.7 | ) |
| Total  sales               | ** ** | $                                  | 230,525    |   | $ | 288,259 |   | (20.0 | )% |
| Operating  income:         |       |                               |       |   |   |   |   |
| Outdoor  Products          | ** ** | $                                  | 30,513     |   | $ | 46,692 |   | (34.7 | )% |
| Other                      | ** ** | (10,973                            | )          | (8,403 | ) | 30.6 |   |
| Operating  income          | ** ** | $                                  | 19,540     |   | $ | 38,289 |   | (49.0 | )% |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment decreased $51.0million (18.7%) in the first half of 2009 compared to the first half of2008.  Lower sales volume reduced salesby $58.2 million, despite an increase in sales of Carlton products during thesix months of 2009 compared with only two months of 2008.  This lower sales volume reflected weak marketconditions and lower shipments for all product lines, geographic regions andsales channels due to the global recession. Improved price and product mix of $13.5 million partially offset thevolume decline.  Fluctuations in foreigncurrency exchange rates further reduced reported segment sales revenue by $6.3million compared to the first half of 2008. Sales of wood-cutting chainsaw components were down 19.3% and sales ofoutdoor care products were down 10.3%. Sales of concrete-cutting products were down 35.8% due to continued weakmarket conditions in the construction equipment industry.  Sales to OEM customers decreased by 18.2%,while replacement market sales decreased by 18.9%.  International sales declined 24.1% for thefirst half comparable periods, while domestic sales decreased 5.7%.

 

Segment contribution to operating income decreased $16.2million (34.7%) in the first half of 2009 compared to the first half of2008.  The favorable effects of improvedprice and mix ($13.5 million) and the positive effects of fluctuations inforeign currency translation rates ($3.5 million) were offset by lower salesvolume ($23.8 million) and higher product cost and mix ($9.4 million).  The higher product cost and mix include $5.7million in higher steel costs on a year-over-year basis. Higher professionalservices costs, primarily legal fees, were offset by reduced compensation costsand lower depreciation charges.

 

***Other.***  Theother category includes centralized administrative functions, the activity ofour gear components manufacturing business, gain on sale of land and buildingand plant closure and severance costs. Sales of gear-related products decreased 42.7% from the first half of2008 to the first half of 2009.  Lowervolume of $7.7 million was partially offset by a $1.0 million favorable effectof price and mix improvements. The contribution to operating income from ourgear components business decreased $0.6 million (40.1%) year-over-year due tothe lower sales volume, partially offset by reduced expenses from cost cuttingactions taken during 2009.  Centraladministrative expenses were down $0.6 million (7.2%) for the comparableperiods, largely due to lower compensation and audit expenses, partially offsetby higher costs for employee benefit plans. We recognized a pre-tax gain of $2.7 million on the sale of property inBelgium during the first half of 2009. Plant closure and severance costs were $6.4 million in the first half of2009 compared to $1.1 million in the first half of 2008.

 

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**Financial Condition, Liquidity and CapitalResources**

 

Totaldebt at June 30, 2009 was $306.8 million compared to $325.5 million at December 31,2008:

 
| ** **                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| Revolving  credit facility        |       | $                 | 23,750     |                  | $          | 30,750 |   |
| Term  loans                       |       | 108,024           |       | 119,770               |       |
| 8  7/8% senior subordinated notes |       | 175,000           |       | 175,000               |       |
| Total  debt                       |       | 306,774           |       | 325,520               |       |
| Less  current maturities          |       | (1,117            | )          | (31,981               | )          |
| Long-term  debt                   |       | $                 | 305,657    |                  | $          | 293,539 |   |

 

***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 104.438% through July 31, 2009; 102.219% from August 1,2009 through July 31, 2010; and at 100% on August 1, 2010 andthereafter.  These notes are issued bythe Company’s wholly-owned subsidiary, Blount, Inc., and are fully andunconditionally, jointly and severally, guaranteed by the Company and all ofits domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 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 16.

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement with GECCas Agent on May 15, 2003.  Theagreement was amended and restated on August 9, 2004, and has had severalsubsequent amendments.  The senior creditfacilities consist of a revolving credit facility and a term loan facility.

 

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

 

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

 

·                  We reduced total availability under the revolver from$150.0 million to $90.0 million;

 

·                  The interest rate was increased from the LIBOR rateplus 1.75% or the U.S. prime interest rate, with no minimum, to the LIBOR rateplus 5.0%, or U.S. prime interest rate plus 3.25%, with a minimum rate of 7.5%,on all outstanding principal; and

 

·                  The commitment fee on unused borrowing capacity wasincreased from 0.375% to 1.0%.

 

We paid fees and expensesof $1.9 million to amend the revolving credit facility. The revolving creditfacility principal balance outstanding was classified as current on the December 31,2008 Consolidated Balance Sheet because before the maturity date was extendedby the amendment, the maturity date was less than 12 months from the balancesheet date at the time.  There were nochanges to financial covenants, nor did this amendment affect the term loanfacility.

 

As of June 30, 2009,the revolving credit facility provided for total available borrowings up to$90.0 million, reduced by outstanding letters of credit and further restrictedby a specific leverage ratio and first lien credit facilities leverage ratio.As of June 30, 2009, the Company hadthe ability to borrow an additional $62.2 million under the terms of therevolving credit agreement. Interest is payable monthly in arrears on any primerate borrowing and at the individual maturity dates for any LIBOR-basedborrowing.  Any outstanding principal isdue in its entirety on the maturity date of August 9, 2010.

 

The term loan facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and also matures onAugust 9, 2010.  The term loanfacility requires quarterly payments of $0.3 million, with a final payment of$106.6 million due on the maturity date. Once repaid, principal under the term loan facility may not bere-borrowed by the Company.

 

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The amended and restated senior credit facilities containfinancial covenant requirements relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio.  Inaddition, there are covenants relating, among other categories, to investments,acquisitions, loans and advances, indebtedness, and the sale of stock orassets.  The Company was in compliancewith all debt covenants through June 30, 2009.  While management expects the Company toremain in compliance with all debt covenants, a further decline in operatingresults could make remaining in compliance more difficult in the future.

 

The amended and restatedsenior 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.

 

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

 

The revolving credit facility and the term loan facilitymature on August 9, 2010.  Beforethese facilities mature, we will need to obtain replacement financing.  Our liquidity, capital structure and creditprofile have changed significantly during the term of these agreements.   In the current global financial markets,credit facilities are generally more difficult to obtain and terms are generallyless favorable to borrowers than in comparable market conditions existing atthe time these facilities were established. We are continuing our discussions with various financial institutionsregarding the potential replacement of our credit facilities prior to the August 2010maturity date.  However, given theconditions in global credit markets, any replacement financing will likely bemore expensive and may contain more restrictive terms than our existing creditfacilities.

 

Our debt instruments and general credit are rated byboth Standard & Poor’s and Moody’s. There were no changes to these ratings during the three or six monthsended June 30, 2009.  As of June 30,2009, the credit ratings for 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              |       |

 

Weintend to fund working capital, capital expenditures, debt service requirementsand obligations under our pos-employment benefit plans for the next twelvemonths through cash flows generated from operations and the amounts availableunder our revolving credit facility.  Weexpect our financial resources will be sufficient to cover any additional increasesin working capital and capital expenditures. There can be no assurance, however, that these resources will besufficient to meet our needs.  We mayalso consider other options available to us in connection with future liquidityneeds, including, but not limited to, the postponement of discretionarycontributions to post-employment benefit plans, the postponement of capitalexpenditures, restructuring of our credit facilities and issuance of new debtor equity securities.

 

Interestexpense was $12.4 million in the first half of 2009 compared to $13.7 millionin the first half of 2008.  The decreasewas due to lower average interest rates on our variable rate debt, partiallyoffset by higher average outstanding debt balances.  Our interest expense may vary in the futurebecause the revolving credit facility and term loan interest rates arevariable. In addition, given the current condition of credit markets, anyreplacement financing will likely involve a higher interest rate premium overbenchmark interest rates than we currently pay. The interest rate is fixed onthe senior subordinated notes.  Ourweighted average interest rate on all debt was 6.37% as of June 30, 2009compared to 6.42% as of December 31, 2008. Cash and cash equivalents at June 30,2009 were $48.8 million compared to $58.3 million at December 31,2008.  As of June 30, 2009, all ofour cash was held at our foreign operations.

 

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Cashprovided by operating activities is summarized in the following table:

 
| ** **                              | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| **(Amounts in thousands)**              | ** ** | **2009**                      | ** ** | **2008** | ** ** |
| Income from  continuing operations      |       | $                             | 5,189      |   | $ | 17,106 |   |
| Non-cash items                          |       | 12,889                        |       | 13,758 |   |
| Subtotal                                |       | 18,078                        |       | 30,864 |   |
| Changes in  assets and liabilities, net |       | 529                           |       | (14,699 | ) |
| Discontinued  operations, net           |       | (534                          | )          | (2,892 | ) |
| Cash provided by operating activities   |       | $                             | 18,073     |   | $ | 13,273 |   |

 

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 property, plant and equipment.

 

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 period provided$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 paymentsduring the first half of 2009 also included $10.1 million for interest and $7.3million for income taxes. We expect to contribute a total of approximately $12to $14 million to our funded pension plans during 2009, with the majority of itexpected to be paid in the second half of the year.

 

Duringthe six months ended June 30, 2008, operating activities provided $13.3million of cash.  Income from continuingoperations plus non-cash items totaled $30.9 million in the first six months of2008, reflecting improved operating results offset by a lower amount ofnon-cash items.  The reduction in non-cashitems reflects higher depreciation and amortization expenses offset byfluctuations in the deferred income tax provision.  In addition, purchase accounting for theCarlton acquisition resulted in non-cash charges of $1.9 million recognized inthe first six months of 2008.  Non-cashcharges related to the Carlton acquisition purchase accounting totaled $3.5million for 2008, and we expect will approximate $1.8 million in each of 2009and 2010.  The positive operating cashflow from these items was partially offset by the net increase in workingcapital and other assets and liabilities during the period, including anincrease in accounts receivable of $8.3 million, an increase in inventories of$6.1 million and a reduction in accounts payable and accrued expenses of $3.7million.  Discontinued operations used$2.9 million in cash during the first six months of 2008, as certainobligations and liabilities related to the sale of our Forestry Division werepaid in 2008.  Cash payments during thefirst six months of 2008 also included $11.5 million for interest and $8.2million for income taxes.

 

Cashused in investing activities is summarized as follows:

 
| ** **                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Proceeds  from sale of assets               |       | $                                  | 3,256      |   | $ | 691 |   |
| Purchases  of property, plant and equipment |       | (8,511                             | )          | (11,800 | ) |
| Acquisition  of Carlton                     |       | —                             |       | (64,314 | ) |
| Discontinued  operations                    |       | —                             |       | 1,725 |   |
| Cash  used in investing activities          |       | $                                  | (5,255     | ) | $ | (73,698 | ) |

 

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In June 2009,we sold property in Belgium for proceeds of $3.2 million and moved our Europeanheadquarters and distribution center to new leased facilities nearby.  Purchases of property plant and equipment areprimarily for productivity improvements, expanded manufacturing capacity andreplacement of consumable tooling and equipment. Generally, about one-third ofour capital spending represents replacement of consumable tooling, dies andexisting equipment, with the remainder devoted to capacity and productivityimprovements.  During 2009, we expect toinvest $17 million to $20 million in available cash for capital expenditurescompared to $26.1 million for the full year in 2008.

 

Discontinuedoperations provided net cash from investing activities of $1.7 million in thefirst half of 2008, as we collected the final purchase price adjustment fromthe sale of our Forestry Division.

 

Cashprovided by (used in) financing activities is summarized as follows:

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| **(Amounts in thousands)**                              | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Net  increase (decrease) in debt principal outstanding  |       | $                                  | (18,746    | ) | $ | 43,387 |   |
| Issuance  costs related to debt                         |       | (1,900                             | )          | — |   |
| Proceeds  and tax effects from stock-based compensation |       | (348                               | )          | 994 |   |
| Cash  provided by (used in) financing activities        |       | $                                  | (20,994    | ) | $ | 44,381 |   |

 

Cashused in financing activities in the first half of 2009 consisted of $18.7million in net repayments of principal on our revolving credit and term debtfacilities.  We also incurred $1.9million in costs to amend and extend the maturity date of our revolving creditfacility.  Cash provided by financingactivities in the first half of 2008 consisted of net borrowing under ourrevolving credit facility, primarily to fund the acquisition of Carlton,partially offset by scheduled quarterly principal payments on our term debtfacility.  Activity under our stockcompensation plans, including the related income tax effects, used $0.3 millionof cash during the first half of 2009 and provided $1.0 million in cash duringthe first half of 2008.

 

**Critical Accounting Policies**

 

There have been nomaterial changes to our critical accounting policies and estimates from theinformation provided in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, included in our Form 10-Kfor the fiscal year ended December 31, 2008.

 

**RecentAccounting Pronouncements**

 

In September 2006,the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS No. 157”).  FAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the U. S., and expands disclosures about fairvalue measurements.  We adopted FAS No. 157 for financial assets andliabilities on January 1, 2008, with no immediate effect on theconsolidated financial statements.  Aspermitted by FASB Staff Position No. FAS 157-2, “Effective Date of FASBStatement No. 157”, we elected to defer the adoption of SFAS No. 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.

 

In December 2007,the FASB issued FAS No. 141(R).  FASNo. 141(R) replaces FAS No. 141. The provisions of FAS No. 141(R) wereeffective for us on January 1, 2009. The impact of adopting FAS No. 141(R) will depend on thenature, terms and size of any business combinations completed after theeffective date.  In addition, certaintransaction-related expenses that would have been capitalized as part of atransaction under FAS No. 141 are expensed as incurred under FAS No. 141(R) beginningJanuary 1, 2009.

 

In December 2007,the FASB issued FAS No. 160.  FAS No. 160amends Accounting Research Bulletin No. 51, Consolidated FinancialStatements. The provisions of FAS No. 160 were effective for us on January 1,2009.    The adoption of FAS No. 160did not have a material impact on our financial position and results ofoperations.

 

In March 2008, the FASB issued FAS No. 161. FAS No. 161 requires enhanced disclosures about an entity’s derivative andhedging activities.  The provisions ofFAS No. 161 were effective for us on January 1, 2009, and haveresulted in expanded disclosures about our derivative instruments and hedgingactivities.

 

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In April 2008, theFASB issued FSP No. 142-3.  FSP No. 142-3amends the factors that should be considered in developing assumptions used todetermine useful lives of recognized intangible assets under FAS No. 142, “Goodwilland Other Intangible Assets”. The provisions of FSP No. 142-3 wereeffective for us on January 1, 2009. The impact of adopting FSP No. 142-3 will depend on the nature,terms and size of any business combinations completed after the effective date.

 

In June 2008, theFASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted inShare-Based Payment Transactions Are Participating Securities”.  This FSPaddresses whether instruments granted in share-based payment transactions areparticipating securities prior to vesting and, therefore, need to be includedin the earnings allocation in computing earnings per share under the two-classmethod described in paragraphs 60 and 61 of FASB Statement No. 128, “Earningsper Share”.  The provisions of this FSP were effective for us on January 1,2009.  There was no impact on the calculation of earnings per share as aresult of the adoption of this FSP.

 

In December 2008 theFASB issued FSP No. 132(R)-1.  FSP No. 132(R)-1amends FASB Statement No. 132, “Employers’ Disclosures about Pensions andOther Postretirement Benefits”, to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  The provisions ofFSP No. 132(R)-1 will be effective for us in our 2009 Form 10-K, andwill result in expanded disclosures in our financial statements.

 

In April 2009, theFASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures aboutFair Value of Financial Instruments”.  This FSP amends FASB Statement No. 107,“Disclosures about Fair Value of Financial Instruments”, to require disclosuresabout fair value of financial instruments for interim periods.  This FSPalso amends APB Opinion No. 28, “Interim Financial Reporting”, to requirethose disclosures in summarized financial information at interim reportingperiods.  This FSP is effective for interim reporting periods ending afterJune 15, 2009, with early adoption permitted.  We have elected toadopt this FSP effective for the quarter ended March 31, 2009.  Withthis early adoption, we have also elected to adopt FSP FAS 157-4, “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That are Not Orderly”and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation ofOther-Than-Temporary Impairments”.  The impact of adopting these variousFSPs resulted in expanded disclosures in the notes to our consolidatedfinancial statements.

 

In May 2009, theFASB issued FAS No. 165.  FAS No. 165sets out general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor available to be issued.  FAS No. 165requires disclosure of the date through which subsequent events have beenevaluated, the nature of any event and an estimate of its financial effect ordisclosure that such estimate cannot be made. The provisions of FAS No. 165 were adopted by us in the quarterended June 30, 2009 and have resulted in additional disclosure regardingsubsequent events.

 

**Forward Looking Statements**

 

“Forward looking statements,” as defined by the PrivateSecurities Litigation Reform Act of 1995, used in this report, includingwithout limitation our “outlook,” “guidance,” “expectations,”  “beliefs,” “plans,” “indications,” “estimates,”“anticipations,” and their variants, are based upon available information andupon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning 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 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risks from changes in interestrates, foreign currency exchange rates and commodity prices, including rawmaterials such as steel. We manage our exposure to these market risks throughour regular operating and financing activities, and, when deemed appropriate,through the use of derivatives. When utilized, derivatives are used as riskmanagement tools and not for trading or speculative purposes.

 

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We manage our ratio of fixedto variable rate debt with the objective of achieving a mix that managementbelieves is appropriate. Our 8 7/8% senior subordinated notes carry a fixedinterest rate.  The interest rates arevariable on our term and revolver loans and we are subject to market risk frommovement in benchmark rates.  When weamended the revolving credit facility in April 2009, the interest rate onour revolving credit facility was increased significantly.  Given the current global economic environmentand global credit markets, we will continue to be subject to market risk andwill likely incur higher interest expense and borrowing costs on anyreplacement financing we obtain.

 

See also, the Market Risk section of Management’s Discussionand Analysis of Financial Condition and Results of Operations in our mostrecent Form 10-K, filed with the SEC on March 10, 2009, for furtherdiscussion of market risk.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s Securities Exchange Act of 1934reports is recorded, processed, summarized and reported within the time periodsspecified 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 provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

The Company, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.Based on this evaluation, the Company’s Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective at the reasonable assurance level.

 

There have been nochanges in the Company’s internal control over financial reporting during theCompany’s last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**PART II  OTHER INFORMATION**

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The following actions were taken at our annual meeting ofstockholders, which was held on May 28, 2009:

 

1.  The stockholderselected the eight nominees for director to our Board of Directors.  The eight directors elected, along with thevoting results, are as follows:

 
| ** **          | ** ** | **No. of Shares** | ** ** | **No. of Shares**   | ** ** |
|---------------------|------------|-------------------|------------|---------------------|------------|
| **Name**            | ** ** | **Voting For**    | ** ** | **Withheld Voting** | ** ** |
|                |       |              |       |                |       |
| R. Eugene Cartledge |       | 25,420,517        |       | 19,474,254          |       |
| Joshua L. Collins   |       | 43,946,159        |       | 948,612             |       |
| Eliot M. Fried      |       | 25,418,775        |       | 19,475,997          |       |
| Thomas J. Fruechtel |       | 44,309,996        |       | 584,776             |       |
| E. Daniel James     |       | 25,378,196        |       | 19,516,575          |       |
| Robert D. Kennedy   |       | 25,417,341        |       | 19,477,430          |       |
| Harold E. Layman    |       | 23,425,387        |       | 21,469,385          |       |
| James  S. Osterman  |       | 43,997,405        |       | 897,367             |       |

 

2.  The stockholdersratified the appointment by our Audit Committee of PricewaterhouseCoopers LLPas the Corporation’s independent auditors. The vote was as follows:

 
| For     |   | 44,526,115 |   |
|---------|--------|------------|--------|
| Against |   | 354,903    |   |
| Abstain |   | 13,753     |   |

 

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

**10.01 Sixth Amendment to Amended and Restated CreditAgreement dated April 30, 2009.

 

**10.02 Sixth Amendment Fee Letter dated April 30, 2009.

 

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

 

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

 

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

 

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

 

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

 

Blount International, Inc.

P.O. Box 22127

Portland, Oregon 97269-2127

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Actof 1934, the registrant has duly caused this report to be signed on its behalfby the duly authorized undersigned.

 

BLOUNT INTERNATIONAL, INC.

Registrant

 

 
| /s/ Calvin E. Jenness      |                                    | /s/ Mark V. Allred |
|----------------------------|-----------------------------------------|--------------------|
| Calvin E. Jenness          | Mark V. Allred                          |
| Senior Vice President and  | Vice President and Corporate Controller |
| Chief Financial Officer    | (Principal Accounting Officer)          |
|                       |                                    |
| Dated: August 7, 2009 |                                    |

 

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