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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 
| **x**      | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|------------|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                             |
| ** ** | ** ** | **For the quarterly period ended June 30, 2008.**                                                 |
| ** ** | ** ** | ** **                                                                                             |
| ** ** | ** ** | **OR**                                                                                                 |
| ** ** | ** ** | ** **                                                                                             |
| **o**      | ** ** | **Transition report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934**     |

 

**Commission file number 001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **63 0780521**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

| **4909 SE International Way,  Portland, Oregon** | ** ** | **97222-4679** |
|--------------------------------------------------|------------|----------------|
| (Address of principal executive offices)         |       | (Zip Code)     |

 

| **(503) 653-8881**                                        |
|-----------------------------------------------------------|
| (Registrant’s telephone number, including area code) |

 

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

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, 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 1, 2008 was 47,436,315 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, 2008 and 2007                             |     | 3 |
|         |                                                                                                 |                                                                                |     |   |
|         |                                                                                                 | Unaudited Consolidated  Balance Sheets                                              |     |   |
|         |                                                                                                 | June 30,  2008 and December 31, 2007                                      |     | 4 |
|         |                                                                                                 |                                                                                |     |   |
|         |                                                                                                 | Unaudited Consolidated  Statements of Cash Flows                                    |     |   |
|         |                                                                                                 | Six  months ended June 30, 2008 and 2007                                       |     | 5 |
|         |                                                                                                 |                                                                                |     |   |
|         |                                                                                                 | Unaudited Consolidated  Statement of Changes in Stockholders’ Equity (Deficit) |     |   |
|         |                                                                                                 | Six  months ended June 30, 2008                                                |     | 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                                  |                                                                                | 33       |
|         |                                                                                                 |                                                                                |     |   |
|         | Item 4. Controls and Procedures                                                                      |                                                                                | 33       |
|         |                                                                                                 |                                                                                |     |
| Part II | Other Information                                                                                    |                                                                                |     |
|         |                                                                                                 |                                                                                |     |
|         | Item 4. Submission of Matters to a Vote of Security  Holders                                         |                                                                                | 34       |
|         |                                                                                                 |                                                                                |     |   |
|         | Item 6.  Exhibits                                                                                    |                                                                                | 34       |
|         |                                                                                                 |                                                                                |     |   |
| Signatures   |                                                                                                 | 36                                                                                  |
|              |                                                                                                      |                                                                                     |          |  |  |

 

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**PART I       FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                      | ** ** | **Three Months   Ended June 30,** | ** ** | **Six Months   Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                            |       |                                                  |       |                                                |       |   |   |   |   |
| Sales                                                                           |       | $                                                     | 155,052    |                                                | $          | 135,580 |   | $ | 288,259 |   | $ | 253,896 |   |
| Cost of sales                                                                   |       | 105,730                                               |       | 89,304                                              |       | 196,459 |   | 167,565 |   |
| Gross profit                                                                    |       | 49,322                                                |       | 46,276                                              |       | 91,800 |   | 86,331 |   |
| Selling, general  and administrative expenses                                   |       | 27,702                                                |       | 23,613                                              |       | 53,511 |   | 47,473 |   |
| Operating income                                                                |       | 21,620                                                |       | 22,663                                              |       | 38,289 |   | 38,858 |   |
| Interest income                                                                 |       | 389                                                   |       | 275                                                 |       | 731 |   | 494 |   |
| Interest expense                                                                |       | (6,848                                                | )          | (8,529                                              | )          | (13,660 | ) | (16,805 | ) |
| Other  income/(expense), net                                                    |       | 684                                                   |       | (8                                                  | )          | 771 |   | 64 |   |
| Income from  continuing operations before income taxes                          |       | 15,845                                                |       | 14,401                                              |       | 26,131 |   | 22,611 |   |
| Provision for  income taxes                                                     |       | 5,628                                                 |       | 4,504                                               |       | 9,025 |   | 7,550 |   |
| Income from  continuing operations                                              |       | 10,217                                                |       | 9,897                                               |       | 17,106 |   | 15,061 |   |
| Discontinued  operations:                                                       |       |                                                  |       |                                                |       |   |   |   |   |
| Income (loss)  before taxes from discontinued operations                        |       | (195                                                  | )          | 2,086                                               |       | (280 | ) | 1,280 |   |
| Provision  (benefit) for income taxes                                           |       | (74                                                   | )          | 801                                                 |       | (106 | ) | 493 |   |
| Income (loss)  from discontinued operations                                     |       | (121                                                  | )          | 1,285                                               |       | (174 | ) | 787 |   |
| Net income                                                                      |       | $                                                     | 10,096     |                                                | $          | 11,182 |   | $ | 16,932 |   | $ | 15,848 |   |
|                                                                            |       |                                                  |       |                                                |       |   |   |   |   |
| Basic income per  share:                                                        |       |                                                  |       |                                                |       |   |   |   |   |
| Continuing operations                                                           |       | $                                                     | 0.21       |                                                | $          | 0.21 |   | $ | 0.36 |   | $ | 0.32 |   |
| Discontinued  operations                                                        |       | —                                                |       | 0.03                                                |       | — |   | 0.02 |   |
| Net income                                                                      |       | $                                                     | 0.21       |                                                | $          | 0.24 |   | $ | 0.36 |   | $ | 0.34 |   |
| ** **                                                                      | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted income  per share:                                                      |       |                                                  |       |                                                |       |   |   |   |   |
| Continuing  operations                                                          |       | $                                                     | 0.21       |                                                | $          | 0.21 |   | $ | 0.35 |   | $ | 0.31 |   |
| Discontinued  operations                                                        |       | —                                                |       | 0.02                                                |       | — |   | 0.02 |   |
| Net income                                                                      |       | $                                                     | 0.21       |                                                | $          | 0.23 |   | $ | 0.35 |   | $ | 0.33 |   |
|                                                                            |       |                                                  |       |                                                |       |   |   |   |   |
| Weighted average  shares used in per share calculations:                        |       |                                                  |       |                                                |       |   |   |   |   |
| Basic                                                                           |       | 47,392                                                |       | 47,288                                              |       | 47,348 |   | 47,280 |   |
| Diluted                                                                         |       | 48,347                                                |       | 48,124                                              |       | 48,241 |   | 48,062 |   |

 

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

 

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**UNAUDITED CONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share data)**                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
|                                                                                                                          |       |              |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                 | 42,781     |                  | $          | 57,589 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $3,013 and $2,181,  respectively                              |       | 89,624            |       | 67,818                |       |
| Inventories, net                                                                                                              |       | 84,854            |       | 70,273                |       |
| Deferred income  taxes                                                                                                        |       | 6,073             |       | 5,536                 |       |
| Current  intangible asset, net                                                                                                |       | 915               |       | —                |       |
| Other current  assets                                                                                                         |       | 14,493            |       | 16,393                |       |
| Total current  assets                                                                                                         |       | 238,740           |       | 217,609               |       |
| Property, plant  and equipment, net                                                                                           |       | 118,556           |       | 89,729                |       |
| Deferred  financing costs                                                                                                     |       | 8,688             |       | 10,698                |       |
| Deferred income  taxes                                                                                                        |       | 7,081             |       | 14,849                |       |
| Noncurrent  intangible assets, net                                                                                            |       | 13,984            |       | —                |       |
| Goodwill                                                                                                                      |       | 65,279            |       | 48,984                |       |
| Other assets                                                                                                                  |       | 29,971            |       | 30,080                |       |
| Total Assets                                                                                                                  |       | $                 | 482,299    |                  | $          | 411,949 |   |
|                                                                                                                          |       |              |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                         |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                                         |       | $                 | 1,232      |                  | $          | 1,242 |   |
| Accounts payable                                                                                                              |       | 33,468            |       | 29,799                |       |
| Accrued expenses                                                                                                              |       | 55,917            |       | 57,447                |       |
| Deferred income  taxes                                                                                                        |       | 568               |       | 533                   |       |
| Total current  liabilities                                                                                                    |       | 91,185            |       | 89,021                |       |
| Long-term debt,  excluding current maturities                                                                                 |       | 339,155           |       | 295,758               |       |
| Employee benefit  obligations                                                                                                 |       | 49,247            |       | 48,948                |       |
| Other  liabilities                                                                                                            |       | 35,998            |       | 32,368                |       |
| Total  liabilities                                                                                                            |       | 515,585           |       | 466,095               |       |
| Commitments and  contingent liabilities                                                                                       |       |              |       |                  |       |
| Stockholders’  equity (deficit):                                                                                         |       |              |       |                  |       |
| Common stock:  par value $0.01 per share, 100,000,000 shares authorized, 47,436,315 and  47,291,647 outstanding, respectively |       | 474               |       | 473                   |       |
| Capital in  excess of par value of stock                                                                                      |       | 578,988           |       | 575,595               |       |
| Accumulated  deficit                                                                                                          |       | (601,215          | )          | (618,147              | )          |
| Accumulated  other comprehensive loss                                                                                         |       | (11,533           | )          | (12,067               | )          |
| Total  stockholders’ deficit                                                                                             |       | (33,286           | )          | (54,146               | )          |
| Total  Liabilities and Stockholders’ Deficit                                                                             |       | $                 | 482,299    |                  | $          | 411,949 |   |

 

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

 

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**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                       | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                                                 |       |                                              |       |   |   |
| Income from  continuing operations                                                                         |       | $                                                 | 17,106     |   | $ | 15,061 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided in operating  activities: |       |                                              |       |   |   |
| Depreciation of  property, plant and equipment                                                             |       | 10,344                                            |       | 8,216 |   |
| Amortization,  stock compensation and other non-cash charges                                               |       | 6,304                                             |       | 4,247 |   |
| Excess tax  benefit from share-based compensation                                                          |       | (421                                              | )          | (68 | ) |
| Deferred income  taxes                                                                                     |       | (589                                              | )          | 4,795 |   |
| (Gain) loss on  disposal of assets                                                                         |       | (641                                              | )     | 18 |   |
| Changes in  assets and liabilities, net of impact of acquisition:                                          |       |                                              |       |   |   |
| (Increase)  decrease in accounts receivable                                                                |       | (8,268                                            | )          | (4,149 | ) |
| (Increase)  decrease in inventories                                                                        |       | (6,071                                            | )          | (10,449 | ) |
| (Increase)  decrease in other assets                                                                       |       | 1,527                                             |       | (3,581 | ) |
| Increase  (decrease) in accounts payable                                                                   |       | (2,717                                            | )          | 222 |   |
| Increase  (decrease) in accrued expenses                                                                   |       | (998                                              | )          | 356 |   |
| Increase  (decrease) in other liabilities                                                                  |       | 1,825                                             |       | (6,165 | ) |
| Discontinued  operations                                                                                   |       | (2,892                                            | )          | (1,281 | ) |
| Net cash  provided by operating activities                                                                 |       | 14,509                                            |       | 7,222 |   |
|                                                                                                       |       |                                              |       |   |   |
| **Cash  flows from investing activities:**                                                                 |       |                                              |       |   |   |
| Proceeds from  sale of assets                                                                              |       | 691                                               |       | 3 |   |
| Purchases of  property, plant and equipment                                                                |       | (11,800                                           | )          | (9,795 | ) |
| Acquisition of  Carlton Holdings, Inc., net of cash acquired                                          |       | (64,314                                           | )          | — |   |
| Discontinued  operations                                                                                   |       | 1,725                                             |       | (417 | ) |
| Net cash used in  investing activities                                                                     |       | (73,698                                           | )          | (10,209 | ) |
|                                                                                                       |       |                                              |       |   |   |
| **Cash  flows from financing activities:**                                                                 |       |                                              |       |   |   |
| Net borrowings  under revolving credit facility                                                            |       | 45,000                                            |       | 10,000 |   |
| Repayment of  term loan principal                                                                          |       | (1,613                                            | )          | (750 | ) |
| Excess tax  benefit from share-based compensation                                                          |       | 421                                               |       | 68 |   |
| Proceeds from  exercise of stock options                                                                   |       | 573                                               |       | 173 |   |
| Net cash  provided by financing activities                                                                 |       | 44,381                                            |       | 9,491 |   |
|                                                                                                       |       |                                              |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                                      |       | (14,808                                           | )          | 6,504 |   |
| Cash and cash  equivalents at beginning of period                                                          |       | 57,589                                            |       | 27,636 |   |
| Cash and cash  equivalents at end of period                                                                |       | $                                                 | 42,781     |   | $ | 34,140 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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

**BlountInternational, Inc. and Subsidiaries**

** **
| **(Amounts in thousands)**                           | ** ** | **Shares** | ** ** | **Common   Stock** | ** ** | **Capital in   Excess   of Par** | ** ** | **Accumulated   Deficit** | ** ** | **Accumulated   Other   Comprehensive   Income   (Loss)** | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------------|------------|------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                                           | ** ** | ** **                     | ** ** | ** **                                                                    | ** ** | ** ** | ** ** |
| Balance  December 31, 2007                                |       | 47,292     |       | $                       | 473        |                                                 | $          | 575,595                        |       | $                                                                             | (618,147   | )          | $          | (12,067 | ) | $ | (54,146 | ) |
|                                                           |       |       |       |                    |       |                                                 |       |                           |       |                                                                          |       |       |       |
| Net income                                                     |       |       |       |                    |       |                                                 |       | 16,932                         |       |                                                                          |       | 16,932     |       |
| Other  comprehensive income (loss):                            |       |       |       |                    |       |                                                 |       |                           |       |                                                                          |       |       |       |
| Foreign currency  translation Adjustment                       |       |       |       |                    |       |                                                 |       |                           |       | 1,155                                                                         |       | 1,155      |       |
| Unrealized  losses                                             |       |       |       |                    |       |                                                 |       |                           |       | (621                                                                          | )          | (621       | )          |
| Comprehensive  income, net                                     |       |       |       |                    |       |                                                 |       |                           |       |                                                                          |       | 17,466     |       |
| Stock options,  stock appreciation rights and restricted stock |       | 144        |       | 1                       |       | 993                                                  |       |                           |       |                                                                          |       | 994        |       |
| Stock  compensation expense                                    |       |       |       |                    |       | 2,400                                                |       |                           |       |                                                                          |       | 2,400      |       |
| Balance  June 30, 2008                                    |       | 47,436     |       | $                       | 474        |                                                 | $          | 578,988                        |       | $                                                                             | (601,215   | )          | $          | (11,533 | ) | $ | (33,286 | ) |

 

Other comprehensive income (loss) for the three and sixmonths ended June 30, 2008 was $(1.0) million and $0.5 million,respectively.  Other comprehensive lossfor the three and six months ended June 30, 2007 was $2.8 million.

 

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

 

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE1:  BASIS OF PRESENTATION**

 

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

 

Theaccompanying financial data as of June 30, 2008 and for the three and sixmonths ended June 30, 2008  and 2007has been prepared by the Company, without audit, pursuant to the rules andregulations of the United States Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations. The December 31,2007 consolidated balance sheet was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America. These consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2007.

 

***Use of Estimates.******* The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires that management make certain estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities as of the dates of the financial statements,as well as the reported amounts of revenues and expenses during the reportingperiods.  The Company bases its estimateson various assumptions that are believed to be reasonable under thecircumstances.  Management is continuallyevaluating and updating these estimates and it is reasonably possible that theseestimates will 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.

 

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

 

On May 2, 2008, theCompany acquired all of the outstanding stock of Carlton Holdings, Inc. (“Carlton”),a manufacturer of cutting chain for chainsaws located near Portland,Oregon.  The Company paid a total of$66.1 million in cash for Carlton, including related acquisition costs of $1.4million, and assumed liabilities totaling $21.6 million.  Carlton had $1.8 million in cash on the dateof acquisition, resulting in a net cash outflow of $64.3 million for theacquisition.  The acquisition wasfinanced with a combination of cash on hand and $58.5 million borrowed underthe Company’s revolving credit facility. As of June 30, 2008, Carlton is a wholly-owned subsidiary of Blount, Inc.and the operating results of Carlton are included in the Company’s consolidatedfinancial statements from May 2, 2008 forward.

 

TheCompany accounted for the acquisition in accordance with Financial AccountingStandard (“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 Company estimated the fair value ofassets using various methods and considering, among other factors, projecteddiscounted cash flows, replacement cost less an allowance for depreciation,recent comparable transactions, and historical book values.  The Company estimated the fair value ofliabilities assumed considering the historical book values, experiencesubsequent to the purchase date and projected future cash flows.  The Company is in the process of completingand refining its estimates of fair value for 

 

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certainassets and liabilities; therefore, the allocation of the purchase price issubject to further refinement and adjustment. A summary of the acquisition date balance sheet of Carlton, reflectingthe preliminary purchase price allocation, is as follows:

 
| **(Amounts in thousands)**                                   | ** ** | **May 2, 2008** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------|------------|
| Cash                                                                   |       | $                         | 1,801      |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,000 |       | 15,397                    |       |
| Inventories                                                            |       | 9,958                     |       |
| Current  intangible asset subject to amortization                      |       | 1,220                     |       |
| Other current  assets                                                  |       | 193                       |       |
| Total current  assets                                                  |       | 28,569                    |       |
| Property, plant  and equipment, net                                    |       | 27,432                    |       |
| Noncurrent  intangible assets subject to amortization                  |       | 8,590                     |       |
| Goodwill and  other intangible assets not subject to amortization      |       | 21,795                    |       |
| Deferred income  tax asset                                             |       | 1,283                     |       |
| Total assets                                                           |       | 87,669                    |       |
|                                                                   |       |                      |       |
| Current  liabilities                                                   |       | 7,615                     |       |
| Non-current  liabilities                                               |       | 3,430                     |       |
| Deferred income  tax liability                                         |       | 10,509                    |       |
| Total  liabilities assumed                                             |       | 21,554                    |       |
| Cash paid for  acquisition, excluding cash acquired                    |       | $                         | 66,115     |   |

 

Reflectedin the consolidated results of operations for the three and six months ended June 30,2008 are non-cash charges totaling $1.9 million for amortization of intangibleassets, depreciation of the step-up to fair value for property, plant andequipment and expensing of the step-up to fair value related toinventories.  In addition, a charge of$0.1 million was recognized for severance costs related to eliminatedpositions.

 

Thefollowing table summarizes the Company’s intangible assets:

 
| ** **                           | ** ** | ** **        | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Life**          | ** ** | **Gross  Carrying**         | ** ** | **Accumulated**                 | ** ** | **Gross   Carrying** | ** ** | **Accumulated** | ** ** |
| **(Amounts in thousands)** | ** ** | **In Years** | ** ** | **Amount**                  | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Goodwill,  Carlton acquisition       |       | Indefinite        |       | $                           | 16,295     |                            | $          | — |   | $ | — |   | $ | — |   |
| Goodwill, other                      |       | Indefinite        |       | 48,984                      |       | —                          |       | 48,984 |   | — |   |
| Total goodwill                       |       |              |       | 65,279                      |       | —                          |       | 48,984 |   |   |   |
|                                 |       |              |       |                        |       |                            |       |   |   |   |   |
| Trademarks and  trade names          |       | Indefinite        |       | 5,500                       |       | —                          |       | — |   | — |   |
| Backlog                              |       | 0.7               |       | 1,220                       |       | (305                            | )          | — |   | — |   |
| Covenant not to  compete             |       | 3                 |       | 590                         |       | (33                             | )          | — |   | — |   |
| Customer  relationships              |       | 10                |       | 8,000                       |       | (73                             | )          | — |   | — |   |
| Total intangible  assets             |       |              |       | $                           | 80,589     |                            | $          | (411 | ) | $ | 48,984 |   | $ | — |   |

 

Amortizationexpense was $0.4 million for the three and six months ended June 30, 2008and no amortization expense was incurred for the three and six months ended June 30,2007.  Amortization expense for theseintangible assets is expected to total $1.6 million in 2008; $1.5 million in2009 and 2010; $1.3 million in 2011; $1.1 million in 2012 and $0.9 million in2013.

 

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The following pro formaresults present the estimated effect as if the acquisition had occurred on thefirst day of each period presented.  Thepro forma results include the historical results of Carlton, pro forma purchaseaccounting effects for the three and six month periods, the pro forma interestexpense effects of additional borrowings to fund the transaction and therelated pro forma income tax effects.  Inaddition to the pro forma amortization of tangible and intangible assetadjustments to fair value, the pro forma results for all periods presentedinclude a charge of $1.7 million to expense the adjustment of inventory toestimated fair value.

 
| ** **                           | ** ** | **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 earnings  per share            |       | 0.21                                                            |       | 0.20                                                          |       | 0.36 |   | 0.36 |   |
| Diluted earnings  per share          |       | 0.21                                                            |       | 0.20                                                          |       | 0.35 |   | 0.35 |   |
|                                      |            |                                                                 |            |                                                               |            |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Three Months   Ended June 30, 2007** | ** ** | **Six Months  Ended June 30, 2007** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **As  Reported**                                                | ** ** | **Pro-  Forma**                                         | ** ** | **As  Reported** | ** ** | **Pro-  Forma** | ** ** |
|                                 |       |                                                            |       |                                                    |       |   |   |   |   |
| Sales                                |       | $                                                               | 135,580    |                                                    | $          | 148,595 |   | $ | 253,896 |   | $ | 280,278 |   |
| Net income                           |       | 11,182                                                          |       | 9,657                                                   |       | 15,848 |   | 13,962 |   |
| Basic earnings  per share            |       | 0.24                                                            |       | 0.21                                                    |       | 0.34 |   | 0.30 |   |
| Diluted earnings  per share          |       | 0.23                                                            |       | 0.20                                                    |       | 0.33 |   | 0.29 |   |
|                                      |            |                                                                 |            |                                                         |            |  |  |  |  |  |  |  |  |

 

**NOTE3:  DISCONTINUED OPERATIONS**

 

***DiscontinuedForestry Division.*** On November 5, 2007, the Company sold its Forestry Division, whichconstituted the majority of our Industrial and Power Equipment segment, toCaterpillar Forest Products Inc., a subsidiary of Caterpillar Inc., for grossproceeds of $79.1 million.  Under theterms of the related purchase agreement, $8.8 million of the gross proceeds areinitially held in escrow for up to three years from the transaction date.  The Company recognized a pretax gain of $26.0million net of related transaction expenses on the sale in 2007.  Prior to its treatment as discontinuedoperations, this division accounted for 20% of our consolidated sales for thefirst six months of 2007.  The ForestryDivision is reported as discontinued operations for all periods presented.  This division was headquartered in Zebulon,North Carolina, and manufactured and marketed timber harvesting and handlingequipment and industrial tractors and loaders. The division had manufacturing facilities in Owatonna, Minnesota;Prentice, Wisconsin; and Söderhamn, Sweden.  The sale included the disposition of theForestry Division’s recorded goodwill in the amount of $22.9 million.  The Company retained certain liabilitiesrelated to the business, as well as an idle manufacturing facility located inMenominee, Michigan.  In December 2007,the land and building in Menominee, Michigan were sold for net cash proceeds of$0.5 million.

 

Discontinuedoperations are summarized as follows:

 
| ** **                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                               | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Sales                                                              |       | $                                                 | —     |   | $ | 61,910 |   |
| Operating income  (loss) before taxes from discontinued operations |       | (280                                              | )          | 1,280 |   |
| Income tax  provision (benefit)                                    |       | (106                                              | )          | 493 |   |
| Income (loss)  from discontinued operations                        |       | $                                                 | (174       | ) | $ | 787 |   |

 

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**NOTE4:  INVENTORIES, NET**

 

Inventoriesconsisted of the following:

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Raw materials  and supplies          |       | $                 | 13,218     |                  | $          | 9,297 |   |
| Work in progress                     |       | 14,368            |       | 14,701                |       |
| Finished goods                       |       | 57,268            |       | 46,275                |       |
| Total  inventories                   |       | $                 | 84,854     |                  | $          | 70,273 |   |

 

**NOTE5:  PROPERTY, PLANT AND EQUIPMENT**

 

Property,plant and equipment consisted of the following:

 
| ** **                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Land                                      |       | $                 | 7,937      |                  | $          | 4,882 |   |
| Buildings and  improvements               |       | 60,826            |       | 51,251                |       |
| Machinery and  equipment                  |       | 203,217           |       | 186,076               |       |
| Furniture,  fixtures and office equipment |       | 29,736            |       | 28,419                |       |
| Transportation  equipment                 |       | 777               |       | 662                   |       |
| Construction in  progress                 |       | 11,645            |       | 5,491                 |       |
| Accumulated  depreciation                 |       | (195,582          | )          | (187,052              | )          |
| Total property,  plant and equipment, net |       | $                 | 118,556    |                  | $          | 89,729 |   |

 

**NOTE6:  LONG TERM DEBT**

 

Long-termdebt consisted of the following:

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Revolving credit  facility           |       | $                 | 45,000     |                  | $          | — |   |
| Term loans                           |       | 120,387           |       | 122,000               |       |
| 8 7/8% senior  subordinated notes    |       | 175,000           |       | 175,000               |       |
| Total debt                           |       | 340,387           |       | 297,000               |       |
| Less current  maturities             |       | (1,232            | )          | (1,242                | )          |
| Long-term debt                       |       | $                 | 339,155    |                  | $          | 295,758 |   |

 

Theweighted average interest rate on outstanding debt as of June 30, 2008 was 6.62%.

 

**87/8% Senior Subordinated Notes.**  The Company has oneregistered debt security, the 8 7/8% senior subordinated notes.  The interest rate on these notes is fixeduntil their maturity on August 1, 2012. These notes are subject to redemption at any time after August 1,2008 at the option of the Company, in whole or in part, at redemption prices of104.438% through July 31, 2009; 102.219% from August 1, 2009 through July 31,2010; and at 100.000% on August 1, 2010 and thereafter.  These notes are issued by the Company’s wholly-ownedsubsidiary, Blount, Inc., and are fully and unconditionally, jointly andseverally, guaranteed by the Company and all of its domestic subsidiaries (“guarantorsubsidiaries”) other than Blount, Inc. All guarantor subsidiaries of these 8 7/8% senior subordinated notes are100% owned, directly or indirectly, by the Company.  While the Company and all of 

 

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itsdomestic subsidiaries guarantee these 8 7/8% senior subordinated notes, none ofBlount’s existing foreign subsidiaries (“non-guarantor subsidiaries”) guaranteethese notes.  See also Note 14.

 

**SeniorCredit Facilities.** The Company, throughits wholly-owned subsidiary, Blount, Inc., first entered into a creditagreement with General Electric Capital Corporation 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.

 

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of June 30, 2008, the Company had theability to borrow an additional $100.2 million under the terms of the revolvingcredit agreement. The revolving credit facility bears interest at the LIBORrate plus 1.75%, or at the prime rate, depending on the type of loan, andmatures on August 9, 2009.  Interestis payable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. Any outstanding principal is due in its entirety on the maturity date.

 

Theterm loan facility bears interest at the LIBOR rate plus 1.75%, or at the primerate, depending on the type of loan, and matures on August 9, 2010.  The term loan facility requires quarterlypayments of $0.3 million, with a final payment of $117.6 million due on thematurity date.  Once repaid, principalunder the term loan facility may not be re-borrowed by the Company.

 

Theamended and restated senior credit facilities contain financial covenantcalculations relating to maximum capital expenditures, minimum fixed chargecoverage ratio, maximum leverage ratio and maximum first lien credit facilitiesleverage ratio.  In addition, there arecovenants relating, among other categories, to investments, loans and advances,indebtedness, and the sale of stock or assets. The Company was in compliance with all debt covenants as of June 30,2008.

 

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.

 

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

 

**NOTE7:  PENSION AND OTHER POST-EMPLOYMENTBENEFIT 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 components of net periodic benefit costfor these plans, including amounts recognized both in continuing anddiscontinued operations are as follows:

 

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| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**                           | ** ** | **Other Post-Employment   Benefits** | ** ** |
| **(Amounts in thousands)**  | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                                   | 987        |   | $ | 907 |   | $ | 63 |   | $ | 95 |   |
| Interest cost                         |       | 2,765                                               |       | 2,572 |   | 538 |   | 526 |   |
| Expected return  on plan assets       |       | (3,565                                              | )          | (3,223 | ) | — |   | — |   |
| Amortization of  prior service cost   |       | (2                                                  | )          | (2 | ) | 2 |   | 2 |   |
| Amortization of  net actuarial losses |       | 288                                                 |       | 371 |   | 208 |   | 243 |   |
| Total net  periodic benefit cost      |       | $                                                   | 473        |   | $ | 625 |   | $ | 811 |   | $ | 866 |   |

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**                         | ** ** | **Other Post-Employment   Benefits** | ** ** |
| **(Amounts in thousands)**  | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                                 | 1,974      |   | $ | 1,814 |   | $ | 126 |   | $ | 189 |   |
| Interest cost                         |       | 5,530                                             |       | 5,144 |   | 1,076 |   | 1,051 |   |
| Expected return  on plan assets       |       | (7,130                                            | )          | (6,446 | ) | — |   | — |   |
| Amortization of  prior service cost   |       | (4                                                | )          | (5 | ) | 4 |   | 4 |   |
| Amortization of  net actuarial losses |       | 576                                               |       | 743 |   | 416 |   | 487 |   |
| Total net  periodic benefit cost      |       | $                                                 | 946        |   | $ | 1,250 |   | $ | 1,622 |   | $ | 1,731 |   |

 

Asof December 31, 2006, the Company implemented a redesign of its domesticretirement plans, including a freeze of its defined benefit pension planand the associated nonqualified plan. Effective January 1, 2007, employees who were an active participantin the plans ceased accruing benefits and new employees are not eligible toparticipate.  All retirement benefitsaccrued up to the time of the freeze were preserved.  The Company expects to contribute a total ofapproximately $3 million to $4 million to its funded pension plans during 2008.

 

The Company also sponsors adefined contribution 401(k) plan covering most employees in the U.S.  In conjunction with the redesign of itsdomestic retirement plans, the defined contribution 401 (k) plan wasamended to provide for an additional annual Company contribution of 3%, 4% or5% of base compensation, depending upon the participant’s years ofservice.  The new contribution is madewhether or not the employee contributes to the plan.  In addition, the Company intends to continueto match employee contributions to 401(k) accounts up to 4.5% of basecompensation.

 

**NOTE8:  COMMITMENTS AND CONTINGENTLIABILITIES**

 

Guaranteesand other commercial commitments are summarized in the following table:

 
| **(Amounts in thousands)**               | ** ** | **June 30, 2008** | ** **  |
|----------------------------------------------------|------------|-----------------------------|-------------|
| Warranty reserve                                   |       | $                           | 147         |   |
| Letters of  credit outstanding                     |       | 4,800                       |        |
| Third party  financing agreements (1)              |       | 1,364                       |        |
| Total guarantees  and other commercial commitments |       | $                           |  6,311 |   |

 

----

(1)  Represents contingent guarantees under variousthird party financing agreements. 

 

Inaddition to these amounts, the Company also guarantees certain debt of itssubsidiaries (see Notes 6 and 14).

 

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TheCompany is a defendant in a number of product liability lawsuits involving bothcontinuing operations and certain discontinued operations, some of which seeksignificant or unspecified damages, involving serious personal injuries forwhich there are retentions or deductible amounts under the Company’s insurancepolicies. In addition, the Company is a party to a number of other suitsarising out of the normal course of its business, including suits concerningcommercial contracts, employee matters and intellectual property rights.  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.

 

On September 12,2003, the Company received a General Notice Letter as a Potentially ResponsibleDe Minimis Party from Region IX of the EPA regarding the Operating Industries, Inc.Superfund Site (“OII Site”) in Monterey Park, California. The notice statedthat the EPA would submit an offer to settle and an explanation as to why itbelieves the Company or a predecessor unit is a de minimis participant at thesite.  The Company was subsequentlyinformed by the EPA that its report would be delayed, and on September 17,2004, was notified that there would be further delays.  On July 21, 2008, the Company received arequest from the OII Site Steering Committee to extend the Company’s tolling agreementwith the companies participating in the clean-up on the understanding that theEPA’s offer to settle would be forthcoming in late 2008.  The Company agreed to maintain the parties’status quo for an additional period.

 

The EPAhas indicated that its de minimis settlement offer will be based on volume ofwaste at a uniform per gallon price among all de minimis parties.  The site was operated as a landfill from 1948to 1984, and received wastes from over 4,000 generators. At the present time,the Company has no knowledge as to which of its units, if any, was involved atthe site, or the amounts, if any, that were sent there. However, based upon itscurrent knowledge of the site, and its alleged status as a PotentiallyResponsible De Minimis Party, the Company does not believe that any settlementor participation in any remediation will have a materially adverse effect onits consolidated financial position, operating results or cash flows.

 

With respect to certainproceedings involving Carlton, which the Company acquired on May 2, 2008,the Company has determined that in 1989, contamination of soil and groundwaterby trichloroethylene (“TCE”) and other volatile organic compounds (“VOCs”) wasdiscovered at Carlton’s facility located in Milwaukie, Oregon (the “CarltonSite”) in connection with the removal of two underground storage tanks. On November, 19, 1990, Carlton entered into a Consent Order with the OregonDepartment of Environmental Quality (“DEQ”), which was amended in 1996, 1997and 2000, pursuant to which the Company continues to investigate, remediate andmonitor the contamination under the supervision of the DEQ.  The Companyhas accrued an amount based upon the current estimated potential remediationcosts of the clean-up at the Carlton Site through the year 2028.  Althoughthere can be no assurance that the currently estimated cost and scope ofremediation will not change in the future due to the imposition of additionalremediation obligations by the DEQ, the detection of additional contaminationin the future or other later discovered facts, the Company does not believethat any remediation will have a materially adverse effect on its consolidatedfinancial position, operating results or cash flows.

 

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

 

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**NOTE9:  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)**                                                                                  | ** ** | **2008**                                              | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Shares for basic  per share computation – weighted average common shares outstanding                            |       | 47,392                                                |       | 47,288                                        |       | 47,348 |   | 47,280 |   |
| Dilutive effect  of common stock equivalents                                                                         |       | 955                                                   |       | 836                                           |       | 893 |   | 782 |   |
| Shares for  diluted per share computation                                                                            |       | 48,347                                                |       | 48,124                                        |       | 48,241 |   | 48,062 |   |
|                                                                                                                 |       |                                                  |       |                                          |       |   |   |   |   |
| Options and  stock appreciation rights excluded from computation as anti-dilutive because  they are out-of-the-money |       | 1,675                                                 |       | 1,765                                         |       | 1,677 |   | 1,765 |   |

 

**NOTE10:  STOCK-BASED COMPENSATION**

 

The Company made thefollowing stock-based compensation awards during the periods indicated:

 
| ** **                                                                           | ** ** | ** ** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)**                                                 | ** ** | ** ** | ** ** | ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock  appreciation rights (“SARs”) granted                                |       |       |       |                                          |       | 305 |   | 380 |   |
| Restricted stock  shares granted                                                     |       |       |       |                                          |       | 54 |   | 45 |   |
| Restricted stock  units (“RSUs”) granted                                   |       |       |       |                                          |       | 125 |   | 136 |   |
|                                                                                 |       |       |       |                                          |       |   |   |   |   |
| Aggregate fair  value of SARs granted                                                |       |       |       |                                          |       |   | $ | 1,259 |   | $ | 1,617 |   |
| Aggregate fair  value of restricted stock and RSUs granted                           |       |       |       |                                          |       |   | $ | 2,148 |   | $ | 2,138 |   |
| Effect of  accelerated expense recognition due to grantee retirement-eligible status |       |       |       |                                          |       |   |   | $ | 897 |   | $ | 1,001 |   |

 

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

 
| ** **                              | ** ** | ** ** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|-----------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** **                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Estimated  average life                 |       |       |       |                                           |       | 6 years |   | 6 years |   |
| Risk-free  interest rate                |       |       |       |                                           |       | 2.7 | % | 4.5 | % |
| Expected  volatility                    |       |       |       |                                           |       | 32.4 | % | 29.1-29.5 | % |
| Weighted average  volatility            |       |       |       |                                           |       | 32.4 | % | 29.3 | % |
| Dividend yield                          |       |       |       |                                           |       | 0.0 | % | 0.0 | % |
| Weighted average  grant date fair value |       |       |       |                                           |       |   | $ | 4.37 |   | $ | 4.50 |   |
|                                         |            |            |            |                                                |            |  |  |  |  |  |  |  |

 

As of June 30,2008, the total unrecognized stock-based compensation expense related topreviously granted awards was $2.8 million. The weighted-average period overwhich this expense is expected to be recognized is 1.3 years.  The Company’s policy upon the exercise ofoptions, restricted stock awards, RSUs or SARs has been to issue new sharesinto the market place.

 

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**NOTE 11: SEGMENT INFORMATION**

 

The Company identifies operating segments primarily based onmanagement responsibility. The Company has one operating and reportablesegment: Outdoor Products.  The corporateand other category includes centralized administrative functions and a gearcomponents manufacturing business.  Seealso Note 3 regarding the disposition of the primary operating unit making upthe Company’s former Industrial and Power Equipment segment. Outdoor Productsmanufactures and markets cutting chain, bars, sprockets and accessories forchainsaw use, concrete-cutting equipment, lawnmower blades and accessories foryard care equipment.

 

The accounting policies of the segment are the same as thosedescribed in the summary of significant accounting policies.

 

Certain financial information by segment is presented in thetable below:

 
| **(Amounts in thousands)** | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets:**                          |       |                    |       |                        |       |
| Outdoor Products                     |       | $                       | 413,277    |                        | $          | 316,834 |   |
| Other and  corporate                 |       | 60,073                  |       | 84,163                      |       |
|                                      |            |                         |            |                             |            |  |  |

 
| ** **                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Sales:**                           |       |                                            |       |                                          |       |   |   |   |   |
| Outdoor Products                     |       | $                                               | 146,356    |                                          | $          | 128,106 |   | $ | 272,583 |   | $ | 238,973 |   |
| Other                                |       | 8,696                                           |       | 7,474                                         |       | 15,676 |   | 14,923 |   |
| Total sales                          |       | $                                               | 155,052    |                                          | $          | 135,580 |   | $ | 288,259 |   | $ | 253,896 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| **Operating  income:**               |       |                                            |       |                                          |       |   |   |   |   |
| Outdoor Products                     |       | $                                               | 24,612     |                                          | $          | 26,664 |   | $ | 46,351 |   | $ | 47,734 |   |
| Other and  corporate expenses        |       | (2,992                                          | )          | (4,001                                        | )          | (8,062 | ) | (8,876 | ) |
| Operating income                     |       | $                                               | 21,620     |                                          | $          | 22,663 |   | $ | 38,289 |   | $ | 38,858 |   |

 

**NOTE 12: SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Interest paid                        |       | $                                                 | 11,508     |   | $ | 14,586 |   |
| Income taxes  paid                   |       | 8,214                                             |       | 8,938 |   |
|                                      |            |                                                   |            |  |  |  |  |

 

**NOTE 13: 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 United States of America, and expands disclosures about fairvalue measurements.  The Company adopted FAS No. 157 for financialassets and liabilities 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,” the Company 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 February 2008,FASB issued Staff Position No. FAS 157-1, “Application of FASB Statement No. 157to FASB Statement No. 13 and Other Accounting Pronouncements That 

 

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Address Fair ValueMeasurements for Purposes of Lease Classification or Measurement underStatement 13” (“FSP No. 157-1”). The Company also adopted FSP No. 157-1 on January 1, 2008,with no immediate effect on the consolidated financial statements.

 

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

 

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

 

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

 

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

 

In April 2008, theFASB issued FASB Staff Position No. FAS 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP No. 142-3”).  This FASB Staff Position amends the factorsthat should be considered in developing assumptions used to determine usefullives of recognized intangible assets under FAS 142, “Goodwill and OtherIntangible Assets”. The provisions of FSP No. 142-3 are effective for theCompany on January 1, 2009 and early adoption is prohibited.  The adoption of FSP No. 142-3 is not anticipatedto have a material impact on the financial position and results of operationsof the Company.

 

**NOTE 14: 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.

 

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**Condensed Consolidating Statement of OperationsInformation**

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Three  Months Ended 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           |       |
| Selling, general  and administrative expenses                 |       | —                           |       | 14,856            |       | 2,864                       |       | 9,982                             |       | —           |       | 27,702           |       |
| Operating income                                              |       | —                           |       | 15,706            |       | 388                         |       | 5,994                             |       | (468             | )          | 21,620           |       |
| Other, net                                                    |       | (4,250                           | )          | (2,380            | )          | 153                         |       | 702                               |       | —           |       | (5,775           | )          |
| Income (loss)  from continuing operations before 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           |       |
| Selling, general  and administrative expenses                 |       | —                           |       | 30,832            |       | 3,877                       |       | 18,802                            |       | —           |       | 53,511           |       |
| Operating income                                              |       | —                           |       | 25,923            |       | 939                         |       | 12,728                            |       | (1,301           | )          | 38,289           |       |
| Other, net                                                    |       | (8,800                           | )          | (4,168            | )          | 289                         |       | 521                               |       | —           |       | (12,158          | )          |
| Income (loss)  from continuing operations before 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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| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Three  Months Ended June 30, 2007**                    |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |              | $          | 98,769                      |       | $                                 | 11,847     |             | $          | 79,613           |       | $ | (54,649 | ) | $ | 135,580 |   |
| Cost of sales                                                 |       | —                           |       | 69,520            |       | 9,811                       |       | 63,614                            |       | (53,641          | )          | 89,304           |       |
| Gross profit                                                  |       | —                           |       | 29,249            |       | 2,036                       |       | 15,999                            |       | (1,008           | )          | 46,276           |       |
| Selling, general  and administrative expenses                 |       | —                           |       | 14,711            |       | 1,062                       |       | 7,850                             |       | (10              | )          | 23,613           |       |
| Operating income                                              |       | —                           |       | 14,538            |       | 974                         |       | 8,149                             |       | (998             | )          | 22,663           |       |
| Other, net                                                    |       | (5,925                           | )          | (1,154            | )          | 132                         |       | (1,315                            | )          | —           |       | (8,262           | )          |
| Income (loss)  from continuing operations before income taxes |       | (5,925                           | )          | 13,384            |       | 1,106                       |       | 6,834                             |       | (998             | )          | 14,401           |       |
| Provision  (benefit) for income taxes                         |       | (1,800                           | )          | 5,959             |       | 416                         |       | (71                               | )          | —           |       | 4,504            |       |
| Income (loss)  from continuing operations                     |       | (4,125                           | )          | 7,425             |       | 690                         |       | 6,905                             |       | (998             | )          | 9,897            |       |
| Income (loss)  from discontinued operations                   |       | —                           |       | 1,572             |       | (19                         | )          | (268                              | )          | —           |       | 1,285            |       |
| Equity in  earnings of affiliated companies                   |       | 15,307                           |       | 6,310             |       | 172                         |       | —                            |       | (21,789          | )          | —           |       |
| Net income                                                    |       | $                                | 11,182     |              | $          | 15,307                      |       | $                                 | 843        |             | $          | 6,637            |       | $ | (22,787 | ) | $ | 11,182 |   |

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Six  Months Ended June 30, 2007**                      |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |              | $          | 183,361                     |       | $                                 | 23,621     |             | $          | 154,412          |       | $ | (107,498 | ) | $ | 253,896 |   |
| Cost of sales                                                 |       | —                           |       | 130,841           |       | 19,539                      |       | 122,824                           |       | (105,639         | )          | 167,565          |       |
| Gross profit                                                  |       | —                           |       | 52,520            |       | 4,082                       |       | 31,588                            |       | (1,859           | )          | 86,331           |       |
| Selling, general  and administrative expenses                 |       | —                           |       | 29,870            |       | 2,191                       |       | 15,422                            |       | (10              | )          | 47,473           |       |
| Operating income                                              |       | —                           |       | 22,650            |       | 1,891                       |       | 16,166                            |       | (1,849           | )          | 38,858           |       |
| Other, net                                                    |       | (11,784                          | )          | (3,663            | )          | 276                         |       | (1,076                            | )          | —           |       | (16,247          | )          |
| Income (loss)  from continuing operations before income taxes |       | (11,784                          | )          | 18,987            |       | 2,167                       |       | 15,090                            |       | (1,849           | )          | 22,611           |       |
| Provision  (benefit) for income taxes                         |       | (3,968                           | )          | 8,700             |       | 815                         |       | 2,003                             |       | —           |       | 7,550            |       |
| Income (loss)  from continuing operations                     |       | (7,816                           | )          | 10,287            |       | 1,352                       |       | 13,087                            |       | (1,849           | )          | 15,061           |       |
| Income (loss)  from discontinued operations                   |       | —                           |       | 873               |       | (53                         | )          | (33                               | )          | —           |       | 787              |       |
| Equity in  earnings of affiliated companies                   |       | 23,664                           |       | 12,504            |       | 240                         |       | —                            |       | (36,408          | )          | —           |       |
| Net income                                                    |       | $                                | 15,848     |              | $          | 23,664                      |       | $                                 | 1,539      |             | $          | 13,054           |       | $ | (38,257 | ) | $ | 15,848 |   |

 

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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,  2008**                                    | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
| Cash and cash  equivalents                                 |       | $                                | —     |              | $          | —                      |       | $                               | 565        |             | $          | 42,216           |       | $ | — |   | $ | 42,781 |   |
| Accounts  receivable, net                                  |       | —                           |       | 36,223            |       | 22,224                      |       | 31,150                          |       | 27               |       | 89,624           |       |
| Intercompany  receivables                                  |       | —                           |       | 167,139           |       | 83,562                      |       | 17,763                          |       | (268,464         | )          | —           |       |
| Inventories                                                |       | —                           |       | 48,335            |       | 14,924                      |       | 23,244                          |       | (1,649           | )          | 84,854           |       |
| Other current  assets                                      |       | —                           |       | 11,836            |       | 1,105                       |       | 8,540                           |       | —           |       | 21,481           |       |
| Total current  assets                                      |       | —                           |       | 263,533           |       | 122,380                     |       | 122,913                         |       | (270,086         | )          | 238,740          |       |
| Investments in  affiliated companies                       |       | 236,299                          |       | 319,399           |       | (131,298                    | )          | —                          |       | (424,400         | )          | —           |       |
| Property, plant  and equipment, net                        |       | —                           |       | 33,333            |       | 38,370                      |       | 46,853                          |       | —           |       | 118,556          |       |
| Goodwill and  other assets                                 |       | —                           |       | 70,311            |       | 43,335                      |       | 13,302                          |       | (1,945           | )          | 125,003          |       |
| Total Assets                                               |       | $                                | 236,299    |              | $          | 686,576                     |       | $                               | 72,787     |             | $          | 183,068          |       | $ | (696,431 | ) | $ | 482,299 |   |
|                                                       |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**   |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |              |       |                        |       |                            |       |             |       |             |       |
| Current  maturities of long-term debt                      |       | $                                | —     |              | $          | 1,232                       |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 1,232 |   |
| Accounts payable                                           |       | —                           |       | 13,735            |       | 8,778                       |       | 10,955                          |       | —           |       | 33,468           |       |
| Intercompany  payables                                     |       | 268,437                          |       | —            |       | —                      |       | —                          |       | (268,437         | )          | —           |       |
| Other current  liabilities                                 |       | —                           |       | 34,941            |       | 4,498                       |       | 17,046                          |       | —           |       | 56,485           |       |
| Total current  liabilities                                 |       | 268,437                          |       | 49,908            |       | 13,276                      |       | 28,001                          |       | (268,437         | )          | 91,185           |       |
| Long-term debt,  excluding current maturities              |       | —                           |       | 339,155           |       | —                      |       | —                          |       | —           |       | 339,155          |       |
| Other  liabilities                                         |       | 1,148                            |       | 61,214            |       | 13,820                      |       | 11,008                          |       | (1,945           | )          | 85,245           |       |
| Total  liabilities                                         |       | 269,585                          |       | 450,277           |       | 27,096                      |       | 39,009                          |       | (270,382         | )          | 515,585          |       |
| Stockholders’  equity (deficit)                       |       | (33,286                          | )          | 236,299           |       | 45,691                      |       | 144,059                         |       | (426,049         | )          | (33,286          | )          |
| Total  Liabilities and Stockholders’ Equity (Deficit) |       | $                                | 236,299    |              | $          | 686,576                     |       | $                               | 72,787     |             | $          | 183,068          |       | $ | (696,431 | ) | $ | 482,299 |   |

 

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

 

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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, 2008**              |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                                | 3,876      |              | $          | 9,069                       |       | $                                 | 3,000      |             | $          | (1,436           | )          | $ | — |   | $ | 14,509 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Proceeds from  sale of assets                         |       | —                           |       | 682               |       | 9                           |       | —                            |       | —           |       | 691              |       |
| Purchase of  property, plant and equipment            |       | —                           |       | (6,196            | )          | (1,786                      | )          | (3,818                            | )          | —           |       | (11,800          | )          |
| Acquisition of  Carlton Holdings, Inc.           |       | —                           |       | (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           |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       | —                           |       | (10,512           | )          | 444                         |       | (4,740                            | )          | —           |       | (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        |             | $          | 42,216           |       | $ | — |   | $ | 42,781 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| **Six  Months Ended June 30, 2007**              |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net cash  provided by (used in) operating activities  |       | $                                | 3,922      |              | $          | (6,180                      | )          | $                                 | 519        |             | $          | 7,186            |       | $ | 1,775 |   | $ | 7,222 |   |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Purchase of  property, plant and equipment            |       | —                           |       | (6,198            | )          | (798                        | )          | (2,799                            | )          | —           |       | (9,795           | )          |
| Other                                                 |       | —                           |       | (377              | )          | —                      |       | (37                               | )          | —           |       | (414             | )          |
| Net cash used in  investing activities                |       | —                           |       | (6,575            | )          | (798                        | )          | (2,836                            | )          | —           |       | (10,209          | )          |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       | —                           |       | 10,000            |       | —                      |       | —                            |       | —           |       | 10,000           |       |
| Repayment of  term loan principal                     |       | —                           |       | (750              | )          | —                      |       | —                            |       | —           |       | (750             | )          |
| Advances from  (to) affiliates                        |       | (4,163                           | )          | 3,974             |       | 189                         |       | —                            |       | —           |       | —           |       |
| Other                                                 |       | 241                              |       | —            |       | —                      |       | —                            |       | —           |       | 241              |       |
| Net cash provided  by (used in) financing activities  |       | (3,922                           | )          | 13,224            |       | 189                         |       | —                            |       | —           |       | 9,491            |       |
|                                                  |       |                             |       |              |       |                        |       |                              |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       | —                           |       | 469               |       | (90                         | )          | 4,350                             |       | 1,775            |       | 6,504            |       |
| Cash and cash  equivalents at beginning of period     |       | —                           |       | —            |       | 90                          |       | 29,398                            |       | (1,852           | )          | 27,636           |       |
| Cash and cash  equivalents at end of period           |       | $                                | —     |              | $          | 469                         |       | $                                 | —     |             | $          | 33,748           |       | $ | (77 | ) | $ | 34,140 |   |

 

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

 

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

 

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 $66.1 million in cash forCarlton, including related acquisition costs, and assumed liabilities totaling$21.6 million.  Carlton had $1.8 millionin cash on the date of acquisition, resulting in a net cash outflow of $64.3million for the acquisition.  Theacquisition was financed with a combination of cash on hand and $58.5 millionborrowed under our revolving credit facility. As of June 30, 2008, Carlton is a wholly-owned subsidiary of Blount, Inc.and the operating results of Carlton are included in our consolidated financialstatements from May 2, 2008 forward.

 

We accounted for the acquisition in accordance with FAS No. 141,“Business Combinations” (“FAS No. 141”). Accordingly, Carlton’s assets and liabilities were recorded at theirestimated fair values on the date of acquisition.  We estimated the fair value of assets usingvarious methods and considering, among other factors, projected discounted cashflows, replacement cost less an allowance for depreciation, recent comparabletransactions, and historical book values. We estimated the fair value of liabilities assumed considering thehistorical book values, experience subsequent to the purchase date andprojected future cash flows.  We are inthe process of completing and refining our estimates of fair value for certainassets and liabilities; therefore, the allocation of the purchase price issubject to further refinement and adjustment.

 

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**Operating Results**

 

**Three months ended June 30, 2008 (unaudited)compared to three months ended June 30, 2007 (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)**                                  | ** ** | **2008**                                         | ** ** | **2007**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
|                                                                 | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |
| Sales                                                                |       | $                                                | 155.1      |       | $          | 135.6      |       | $          | 19.5       |   |   |   |   |   |
|                                                                 |       |                                             |       |       |       |       |       | $          | 2.8        |   | Sales volume |   |
|                                                                 |       |                                             |       |       |       |       |       | 3.4        |       | Selling price and mix |   |
|                                                                 |       |                                             |       |       |       |       |       | 3.0        |       | Foreign currency translation |   |
|                                                                 |       |                                             |       |       |       |       |       | 10.3       |       | Carlton operations |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Gross profit                                                         |       | 49.3                                             |       | 46.3       |       | 3.0        |       |       |       |   |   |
| *Gross  margin*                                                      | * *   | *31.8*                                           | *%*        | *34.1*     | %          |       |       | 1.1        |       | Sales volume |   |
|                                                                 |       |                                             |       |       |       |       |       | 3.4        |       | Selling price and mix |   |
|                                                                 |       |                                             |       |       |       |       |       | (1.7       | )          | Product cost and mix |   |
|                                                                 |       |                                             |       |       |       |       |       | (0.7       | )          | Foreign currency translation |   |
|                                                                 |       |                                             |       |       |       |       |       | 0.9        |       | Carlton operations |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Selling, general  and administrative expenses (“SG&A”) |       | 27.7                                             |       | 23.6       |       | 4.1        |       |       |       |   |   |
|                                                                 |       |                                             |       |       |       |       |       | 0.9        |       | Compensation expense |   |
|                                                                 |       |                                             |       |       |       |       |       | 1.3        |       | Foreign currency translation |   |
|                                                                 |       |                                             |       |       |       |       |       | 1.8        |       | Carlton operations |   |
|                                                                 |       |                                             |       |       |       |       |       | 0.1        |       | Other |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Operating income                                                     |       | 21.6                                             |       | 22.7       |       | (1.1       | )          |       |       |   |   |
| *Operating  margin*                                                  | * *   | *13.9*                                           | *%*        | *16.7*     | %          |       |       | 3.0        |       | Increase in gross profit |   |
|                                                                 |       |                                             |       |       |       |       |       | (4.1       | )          | Increase in SG&A |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Income from  continuing operations                                   |       | 10.2                                             |       | 9.9        |       | 0.3        |       |       |       |   |   |
|                                                                 |       |                                             |       |       |       |       |       | (1.1       | )          | Decrease in operating income |   |
|                                                                 |       |                                             |       |       |       |       |       | 1.8        |       | Decrease in net interest expense |   |
|                                                                 |       |                                             |       |       |       |       |       | (1.1       | )          | Increase in income tax provision |   |
|                                                                 |       |                                             |       |       |       |       |       | 0.7        |       | Increase in other income |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Income (loss)  from discontinued operations                          |       | (0.1                                             | )          | 1.3        |       | (1.4       | )          |       |       |   |   |
|                                                                 |       |                                             |       |       |       |       |       | (2.3       | )          | Decrease in operating results |   |
|                                                                 |       |                                             |       |       |       |       |       | 0.9        |       | Change in income tax provision |   |
|                                                                 |       |                                             |       |       |       |       |       |       |       |   |   |
| Net income                                                           |       | $                                                | 10.1       |       | $          | 11.2       |       | $          | (1.1       | ) |   |   |   |   |
|                                                                      |            |                                                  |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

Sales in the three months ended June 30, 2008 increasedby $19.5 million (14%) from the same period in 2007.  This sales increase was primarily due to$10.3 million of sales from Carlton, which was acquired on May 2,2008.  Additional factors includeincreased sales volume, price increases and the favorable effect of translationof foreign currency denominated sales transactions, given the weaker U.S.Dollar, in comparison to 2007.  TheOutdoor Products segment experienced an $18.3 million (14%) increase in salesduring the three months ended June 30, 2008 compared to the same period in2007, while sales of gear components increased $1.2 million (16%) during thesame period.  International salesincreased $22.1 million (27%) and domestic sales decreased $2.7 million(5%).  The increase in internationalsales is attributed to new sales from the Carlton acquisition and continuedstrength in international markets, as well as the $3.0 million favorable impactfrom movement in foreign currency exchange rates compared to 2007.  The decrease in U.S. sales is a result ofhigher domestic sales of gear-related products 

 

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offset by lower sales volume for chainsaw components andoutdoor care products and lower domestic sales of concrete cutting products.

 

Consolidated order backlog at June 30, 2008 was $131.1million compared to $69.3 million at December 31, 2007 and $78.1 millionat June 30, 2007.  Backlog in theOutdoor Products segment increased $58.3 million from December 31, 2007,of which $24.6 million relates to Carlton. The backlog for gear components increased by $3.5 million during the sixmonths ended June 30, 2008.

 

Gross profit increased $3.0 million (7%) from the secondquarter of 2007 to the second quarter of 2008. Gross margin for the three months ended June 30, 2008 was 31.8% ofsales compared to 34.1% for the same period in 2007.  Higher sales volume and improved pricing werepartially offset by increases in product costs and the unfavorable net effectsof movement in foreign currency exchange rates. The higher product costs were attributable to higher steel costs,estimated at $1.0 million, as well as increased shipping and freight costs.  Gross profit was also adversely affected bycharges totaling $1.9 million related to purchase accounting for the Carltonacquisition.

 

Fluctuations in currency exchange rates decreased our grossprofit in the second quarter of 2008 compared to 2007 by $0.7 million on aconsolidated basis.  The translation ofstronger foreign currencies into a weaker U.S. Dollar resulted in highermanufacturing costs in Brazil and Canada, where local currencies strengthenedcompared to the U.S. Dollar.  Thesehigher manufacturing costs were only partially offset by higher translatedsales in Europe.

 

SG&A was $27.7 million for the three month period ending June 30,2008, compared to $23.6 million for the same period in 2007, representing anincrease of $4.1 million (17%).  As apercentage of sales, SG&A increased from 17.4% in 2007 to 17.9% in2008.  The SG&A increase included$1.8 million from the addition of Carlton operations and $1.3 million from theeffect of currency exchange rates on international based expenses.  In addition, compensation expense increasedby $0.9 million year-over-year, reflecting annual merit increases for ouremployees as well as slightly higher stock compensation and incentivecompensation expenses.

 

Operating income decreased by $1.1 million from the secondquarter of 2007 to the second quarter of 2008, resulting in an operating marginfor 2008 of 13.9% of sales compared to 16.7% for 2007. The decrease inoperating income was due to higher sales and the related gross profit offset bythe adverse effects of changes in foreign currency exchange rates and purchaseaccounting effects related to the acquisition of Carlton.

 

Interestexpense was $6.8 million for the three month period ending June 30, 2008compared to $8.5 million for the same period in 2007.  The decrease was due to lower averageoutstanding debt balances and lower average interest rates.

 

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

 
| ** **                                             | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                   |       |                                                |       |   |   |
| Income from  continuing operations before income taxes |       | $                                                   | 15,845     |   | $ | 14,401 |   |
| Provision for  income taxes                            |       | 5,628                                               |       | 4,504 |   |
| Income from  continuing operations                     |       | $                                                   | 10,217     |   | $ | 9,897 |   |
| Effective tax  rate                                    |       | 35.5                                                | %          | 31.3 | % |

 

The increase in our effective tax rate from the secondquarter of 2007 to the second quarter of 2008 is largely due to shifts in therelative proportion of pre-tax income earned in foreign versus domesticlocations, and the various tax rates that apply to our foreign locations, whichcan differ significantly from our domestic rate.

 

Incomefrom continuing operations in the three months ended June 30, 2008 was$10.2 million, or $0.21 per diluted share, compared to $9.9 million, or $0.21per diluted share, for the same period in 2007.

 

The loss from discontinued operations in the three monthsended June 30, 2008 was $0.1 million compared to income from discontinuedoperations of $1.3 million, or $0.02 per diluted share, for the same period in2007.  The 

 

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2008 results consisted solely of wind-down and exitactivities related to our discontinued Forestry Division, which was sold on November 5,2007.  Results for the second quarter of2007 reflect the activities of the Forestry Division prior to the sale, as wellas wind-down and exit activities related to our discontinued Lawnmower segment,which was sold in 2006.

 

Discontinued operations are summarized as follows:

 
| ** **                                                         | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**                               | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Sales                                                              |       | $                                                   | —     |   | $ | 35,658 |   |
| Operating income  (loss) before taxes from discontinued operations |       | (195                                                | )          | 2,086 |   |
| Income tax  provision (benefit)                                    |       | (74                                                 | )          | 801 |   |
| Income (loss)  from discontinued operations                        |       | $                                                   | (121       | ) | $ | 1,285 |   |

 

The Forestry Division reported $35.7 million of sales andincome before taxes of $2.1 million in the second quarter of 2007.  The operating results in the 2007 periodreflect reduced sales volume amid a deepening of the cyclical downturn in theNorth American timber harvesting equipment market in 2007.

 

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

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** | **2008 as a   % of 2007** | ** ** |
| Sales:                               |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                   | 146,356    |   | $ | 128,106 |   | 114 | % |
| Other                                |       | 8,696                                               |       | 7,474 |   | 116 | % |
| Total sales                          |       | $                                                   | 155,052    |   | $ | 135,580 |   | 114 | % |
| Operating  income:                   |       |                                                |       |   |   |   |   |
| Outdoor Products                     |       | $                                                   | 24,612     |   | $ | 26,664 |   | 92 | % |
| Other and  corporate expenses        |       | (2,992                                              | )          | (4,001 | ) | 75 | % |
| Operating income                     |       | $                                                   | 21,620     |   | $ | 22,663 |   | 95 | % |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment increased $18.3million (14%) in the three months ended June 30, 2008 compared to the sameperiod in 2007.  Of this increase,Carlton sales contributed $10.3 million, and $2.5 million was due to additionalsales volume, primarily from an increase in sales of wood-cutting saw chain andoutdoor equipment parts that was offset by lower sales of concrete-cuttingproducts than for the comparable period in 2007.  Improved price and product mix alsocontributed $2.4 million to the year-over-year sales increase.  Fluctuations in foreign currency exchangerates added another $3.0 million to segment sales in the second quarter of 2008compared to 2007.  Exclusive of theeffects of the Carlton sales, international sales grew 15% for the three monthcomparable periods, while domestic sales decreased 10%, sales to OEM customersdecreased 10% and replacement sales increased 13%.  Order backlog increased by $58.3 million fromDecember 31, 2007 to $121.6 million at June 30, 2008, of which $24.6million relates to Carlton.

 

Segment contribution to operating income decreased $2.1million (8%) in the second quarter of 2008 compared to the second quarter of2007.  The favorable effects of increasedsales volume, ($1.9 million, including Carlton sales), and improved price andmix ($2.4 million) were partially offset by higher product cost and mix ($1.2million), higher SG&A expenses ($3.3 million, including Carlton), and thenet unfavorable effect of fluctuations in foreign currency translation rates($1.9 million).  Included in segmentcontribution to operating income for the second quarter of 2008 are purchaseaccounting charges totaling $2.0 million. The higher product cost and mix, excluding the foreign currency exchangeeffect, includes inflationary pressures of higher wages and other conversioncosts, higher freight and shipping costs, increased energy costs and $0.6million in higher steel costs.  Theoperating margin of 16.8% in 2008 compares to 20.8% in 2007.

 

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***Other and Corporate Expenses.***  The other and corporate expense categoryincludes the activity of our gear components business, as well as the costs ofcertain centralized management and administrative functions.  Sales of gear-related products increased 16%from the second quarter of 2007 to the second quarter of 2008.  This increase was a result of higher volumeof $0.3 million and a $1.0 million favorable effect of price increases. Thecontribution to operating income from our gear components business increased$0.5 million (148%) year-over-year due to the higher revenue, partially offsetby higher product cost and mix. Corporate expenses were down $0.5 million (11%).

 

**Six months ended June 30, 2008 (unaudited)compared to six months ended June 30, 2007 (unaudited).**

** **
| ** **                                                           | ** ** | **Six months ended   June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Amounts in millions)**                                  | ** ** | **2008**                                       | ** ** | **2007**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
|                                                                 | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |
| Sales                                                                |       | $                                              | 288.3      |       | $          | 253.9      |       | $          | 34.4       |   |   |   |   |   |
|                                                                 |       |                                           |       |       |       |       |       | $          | 13.0       |   | Sales volume |   |
|                                                                 |       |                                           |       |       |       |       |       | 5.1        |       | Selling price and mix |   |
|                                                                 |       |                                           |       |       |       |       |       | 6.0        |       | Foreign currency translation |   |
|                                                                 |       |                                           |       |       |       |       |       | 10.3       |       | Carlton operations |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Gross profit                                                         |       | 91.8                                           |       | 86.3       |       | 5.5        |       |       |       |   |   |
| *Gross  margin*                                                      | * *   | *31.8*                                         | *%*        | *34.0*     | %          |       |       | 6.1        |       | Sales volume |   |
|                                                                 |       |                                           |       |       |       |       |       | 5.1        |       | Selling price and mix |   |
|                                                                 |       |                                           |       |       |       |       |       | (4.4       | )          | Product cost and mix |   |
|                                                                 |       |                                           |       |       |       |       |       | (2.2       | )          | Foreign currency translation |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.9        |       | Carlton operations |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Selling, general  and administrative expenses (“SG&A”) |       | 53.5                                           |       | 47.5       |       | 6.0        |       |       |       |   |   |
|                                                                 |       |                                           |       |       |       |       |       | 1.2        |       | Compensation expense |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.9        |       | Severance costs |   |
|                                                                 |       |                                           |       |       |       |       |       | (1.1       | )          | Professional services |   |
|                                                                 |       |                                           |       |       |       |       |       | 1.8        |       | Carlton operations |   |
|                                                                 |       |                                           |       |       |       |       |       | 2.4        |       | Foreign currency translation |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.4        |       | Pension expense |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.4        |       | Other |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Operating income                                                     |       | 38.3                                           |       | 38.9       |       | (0.6       | )          |       |       |   |   |
| *Operating  margin*                                                  | * *   | *13.3*                                         | *%*        | *15.3*     | %          |       |       | 5.5        |       | Increase in gross profit |   |
|                                                                 |       |                                           |       |       |       |       |       | (6.0       | )          | Increase in SG&A |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Income from  continuing operations                                   |       | 17.1                                           |       | 15.1       |       | 2.0        |       |       |       |   |   |
|                                                                 |       |                                           |       |       |       |       |       | (0.5       | )          | Decrease in operating income |   |
|                                                                 |       |                                           |       |       |       |       |       | 3.3        |       | Decrease in net interest expense |   |
|                                                                 |       |                                           |       |       |       |       |       | (1.5       | )          | Increase in income tax provision |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.7        |       | Increase in other income |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Income (loss)  from discontinued operations                          |       | (0.2                                           | )          | 0.8        |       | (1.0       | )          |       |       |   |   |
|                                                                 |       |                                           |       |       |       |       |       | (1.6       | )          | Decrease in operating results |   |
|                                                                 |       |                                           |       |       |       |       |       | 0.6        |       | Increase in income tax benefit |   |
|                                                                 |       |                                           |       |       |       |       |       |       |       |   |   |
| Net income                                                           |       | $                                              | 16.9       |       | $          | 15.9       |       | $          | 1.0        |   |   |   |   |   |
|                                                                      |            |                                                |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

Sales in the six months ended June 30, 2008 increased by$34.4 million (14%) from the same period in 2007.  Increased sales volume ($13.0 million),higher average selling prices ($5.1 million) and the favorable effect of 

 

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translation of foreign currency denominated salestransactions ($6.0 million), given the weaker U.S. Dollar in comparison to2007, contributed to the increase.  Inaddition, the acquisition of Carlton on May 2, 2008 contributed $10.3million of the sales increase.  TheOutdoor Products segment experienced a $33.6 million (14%) increase in salesduring the six months ended June 30, 2008 compared to the same period in2007, while sales of gear components increased $0.8 million (5%) during thesame period.  International salesincreased $34.9 million (22%), while domestic sales decreased $0.6 million(1%).  The increase in internationalsales reflected Carlton international sales of $9.4 million, along withcontinued strength in international markets, as well as the $6.0 millionfavorable impact from movement in foreign currency exchange rates compared to2007.  The decrease in U.S. sales isattributed to lower sales volume for chainsaw components and outdoor careproducts and lower domestic sales of concrete cutting products, partiallyoffset by higher domestic sales of gear-related products.

 

Gross profit increased $5.5 million (6%) from the first sixmonths of 2007 to the same period in 2008. Gross margin for the six months ended June 30, 2008 was 31.8% ofsales compared to 34.0% for the same period in 2007.    Higher sales volume and improved pricingwere partially offset by increases in product costs and the unfavorable neteffect of movement in foreign currency exchange rates.  The higher product costs were attributable tohigher steel costs, estimated at $1.7 million, as well as increased shippingand freight costs related to higher energy prices.  In addition, in the first six months of 2007we incurred $1.0 million of costs to consolidate our North Americandistribution centers.  The six monthsended June 30, 2008 also include charges to cost of sales totaling $1.9million related to purchase accounting for the Carlton acquisition.

 

Fluctuations in currency exchange rates decreased our grossprofit in the six months ended June 30, 2008 compared to 2007 by $2.2million on a consolidated basis.  Thetranslation of stronger foreign currencies into a weaker U.S. Dollar resultedin higher manufacturing costs in Brazil and Canada, where local currenciesstrengthened compared to the U.S. Dollar, and were only partially offset byhigher translated sales in Europe.

 

SG&A was $53.5 million for the six month period ending June 30,2008, compared to $47.5 million for the same period in 2007, representing anincrease of $6.0 million (13%).  As apercentage of sales, SG&A remained relatively flat, decreasing from 18.7%in 2007 to 18.6% in 2008.  Internationaloperating expenses increased $2.4 million from the prior year primarily due tothe weaker U.S. Dollar and its effect on the translation of foreign expenses.The effect of the Carlton acquisition increased SG&A by $1.8 million.  Compensation expense increased by $1.2million year-over-year, reflecting annual merit increases for our employees anda slight increase in stock compensation expense.  Severance costs and benefits related to areorganization at our Portland headquarters, as well as similar actions takenin Europe, accounted for $0.9 million of the increase.  Professional services expense decreased $1.1million due to lower legal and audit costs.

 

Operating income decreased by $0.6 million from the sixmonths ended June 30, 2007 to the same period in 2008, resulting in anoperating margin for 2008 of 13.3% of sales compared to 15.3% for 2007. Thedecrease was due to increased SG&A expenses and a total of $2.0 million inpurchase accounting charges related to the acquisition of Carlton, partiallyoffset by higher gross profit.

 

Interestexpense was $13.7 million for the six month period ending June 30, 2008compared to $16.8 million for the same period in 2007.  The decrease was due to lower averageoutstanding debt balances and lower average interest rates.

 

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

 
| ** **                                             | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                   |       |                                              |       |   |   |
| Income from  continuing operations before income taxes |       | $                                                 | 26,131     |   | $ | 22,611 |   |
| Provision for  income taxes                            |       | 9,025                                             |       | 7,550 |   |
| Income from  continuing operations                     |       | $                                                 | 17,106     |   | $ | 15,061 |   |
| Effective tax  rate                                    |       | 34.5                                              | %          | 33.4 | % |

 

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The increase in our effective tax rate from 2007 to 2008 islargely due to to shifts in the relative proportion of pre-tax income earned inforeign versus domestic locations, and the various tax rates that apply to ourforeign locations, which can differ significantly from our domestic rate.

 

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

 

Incomefrom continuing operations in the six months ended June 30, 2008 was $17.1million, or $0.35 per diluted share, compared to $15.1 million, or $0.31 perdiluted share, for the same period in 2007.

 

The loss from discontinued operations in the six months endedJune 30, 2008 was $0.2 million compared to income from discontinuedoperations of $0.8 million, or $0.02 per diluted share, for the same period in2007.  The 2008 results consisted solelyof wind-down and exit activities related to our discontinued Forestry Division,which was sold on November 5, 2007. Results for the six month period ending June 30, 2007 reflect theactivities of the Forestry Division prior to the sale, as well as wind-down andexit activities related to our discontinued Lawnmower segment which was sold in2006.

 

Discontinued operations are summarized as follows:

 
| ** **                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                               | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Sales                                                              |       | $                                                 | —     |   | $ | 61,910 |   |
| Operating income  (loss) before taxes from discontinued operations |       | (280                                              | )          | 1,280 |   |
| Income tax  provision (benefit)                                    |       | (106                                              | )          | 493 |   |
| Income (loss)  from discontinued operations                        |       | $                                                 | (174       | ) | $ | 787 |   |

 

The Forestry Division reported sales of $61.9 million andincome before taxes of $1.3 million in the six months ended June 30,2007.  The operating results in the 2007period reflected reduced sales volume amid a deepening of the cyclical downturnin the North American timber harvesting equipment market in 2007.

 

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

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2008 as a   % of 2007** | ** ** |
| Sales:                               |       |                                              |       |   |   |   |   |
| Outdoor Products                     |       | $                                                 | 272,583    |   | $ | 238,973 |   | 114 | % |
| Other                                |       | 15,676                                            |       | 14,923 |   | 105 | % |
| Total sales                          |       | $                                                 | 288,259    |   | $ | 253,896 |   | 114 | % |
| Operating  income:                   |       |                                              |       |   |   |   |   |
| Outdoor Products                     |       | $                                                 | 46,351     |   | $ | 47,734 |   | 97 | % |
| Other and  corporate expenses        |       | (8,062                                            | )          | (8,876 | ) | 91 | % |
| Operating income                     |       | $                                                 | 38,289     |   | $ | 38,858 |   | 99 | % |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segment increased $33.6million (14%) in the six months ended June 30, 2008 compared to the sameperiod in 2007.  Of this increase,Carlton sales contributed $10.3 

 

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million, and $13.5 million was due to additional salesvolume, primarily from an increase in sales of wood-cutting saw chain andoutdoor equipment parts, which was offset by lower sales of concrete-cuttingproducts than for the comparable period in 2007.  Higher average selling prices and improvedproduct mix also contributed $3.8 million to the year-over-year salesincrease.  Fluctuations in foreigncurrency exchange rates added another $6.0 million to segment sales in the sixmonths ended June 30, 2008 compared to 2007.  Including $9.4 million for Carlton,international sales grew by $34.7 million, or 22% for the six month comparableperiods, while domestic sales decreased 1%. Sales to OEM customers decreased by 8% in our base operations, whilereplacement sales increased 17%.

 

Segment contribution to operating income decreased $1.4million (3%) in the six months ended June 30, 2008 compared to thecomparable period in 2007.  Higherproduct cost and mix ($3.5 million), higher SG&A expenses, excludingCarlton ($2.3 million), the net unfavorable effect of fluctuations in foreigncurrency translation rates ($4.6 million) and the unfavorable effects ofCarlton ($0.9 million) were partially offset by increased sales volume ($6.1million) and improved price and mix ($3.8 million).  Carlton’s results were negatively impacted bycharges of $2.0 million related to purchase accounting.  The higher product cost and mix, excludingthe foreign currency exchange effect, includes inflationary pressures of higherwages and other conversion costs, higher freight and shipping costs, increasedenergy costs and $1.1 million in higher steel costs.  The operating margin of 17.0% in 2008compares to 20.0% in 2007.

 

***Other and Corporate Expenses.***  The other and corporate expense categoryincludes the activity of our gear components business, as well as the costs ofcertain centralized management and administrative functions.  Sales of gear-related products increased 5%from the six months ended June 30, 2007 to the same period in 2008.  This increase was a result of a $1.3 million favorableeffect of price increases, offset by lower volume of $0.5 million.  The contribution to operating income from ourgear components business increased $0.4 million (46%) year-over-year due to thehigher sales price and mix, partially offset by higher product cost andmix.  Corporate expenses were down $0.4million (4%), with severance costs partially offset by lower legal and auditexpenses.

 

**Financial Condition, Liquidity and CapitalResources**

 

Totaldebt at June 30, 2008 was $340.4 million, compared to $297.0 million at December 31,2007.  The increase in debt during thefirst half of 2008 is attributable to borrowings under the revolving creditfacility to fund the acquisition of Carlton on May 2, 2008.  As of June 30, 2008, our debt consistedof the following:

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Revolving credit  facility           |       | $                 | 45,000     |                  | $          | — |   |
| Term loans                           |       | 120,387           |       | 122,000               |       |
| 8 7/8% senior  subordinated notes    |       | 175,000           |       | 175,000               |       |
| Total debt                           |       | 340,387           |       | 297,000               |       |
| Less current  maturities             |       | (1,232            | )          | (1,242                | )          |
| Long-term debt                       |       | $                 | 339,155    |                  | $          | 295,758 |   |

 

**8 7/8% Senior Subordinated Notes.**  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at any time after August 1, 2008 at the option of the Company,in whole or in part, at redemption prices of 104.438% through July 31,2009; 102.219% from August 1, 2009 through July 31, 2010; and at100.000% August 1, 2010 and thereafter. These notes are issued by the Company’s wholly-owned subsidiary, Blount, Inc.,and are fully and unconditionally, jointly and severally, guaranteed by theCompany and all of its domestic subsidiaries (“guarantor subsidiaries”) otherthan Blount, Inc.  All guarantorsubsidiaries of these 8 7/8% senior subordinated notes are 100% owned, directlyor indirectly, by the Company.  While theCompany and all of its domestic subsidiaries guarantee these 8 7/8% senior subordinatednotes, none of Blount’s existing foreign subsidiaries (“non-guarantorsubsidiaries”) guarantee these notes. See also Note 14.

 

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

 

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of June 30, 2008, the Company had theability to borrow an additional $100.2 million under the terms of the revolvingcredit agreement. The revolving credit facility bears interest at the LIBORrate plus 1.75%, or at the prime rate, depending on the type of loan, andmatures on August 9, 2009.  Interestis payable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. Any outstanding principal is due in its entirety on the maturity date.

 

The term loan facility bears interest at the LIBOR rate plus1.75%, or at the prime rate, depending on the type of loan, and matures on August 9,2010.  The term loan facility requiresquarterly payments of $0.3 million, with a final payment of $117.6 million dueon the maturity date.  Once repaid,principal under the term loan facility may not be re-borrowed by the Company.

 

The amended and restated senior credit facilities containfinancial covenant calculations relating to maximum capital expenditures,minimum fixed charge coverage ratio, maximum leverage ratio and maximum firstlien credit facilities leverage ratio. In addition, there are covenants relating, among other categories, toinvestments, loans and advances, indebtedness, and the sale of stock orassets.  The Company was in compliancewith all debt covenants as of June 30, 2008.

 

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.

 

Interestexpense was $13.7 million in the six months ended June 30, 2008; adecrease of $3.1 million compared to the six months ended June 30,2007.  The decrease reflects thefavorable effects of lower average debt outstanding, as well as reducedinterest rates on our variable rate debt. Our interest expense may vary in the future because the revolving creditfacility and term loan interest rates are variable. The interest rate is fixedon the senior subordinated notes.  Ourweighted average interest rate on all debt was 6.62% as of June 30, 2008,compared to 8.11% as of December 31, 2007. Cash paid for interest in the first six months of 2008 was $11.5million, compared to $14.6 million in the same period of 2007.

 

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

 

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

 

Cashand cash equivalents at June 30, 2008 were $42.8 million compared to $57.6million at December 31, 2007.  At June 30,2008, $42.2 million of the cash balance 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)**    | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Income from  continuing operations      |       | $                                                 | 17,106     |   | $ | 15,061 |   |
| Non-cash items                          |       | 14,997                                            |       | 17,208 |   |
| Subtotal                                |       | 32,103                                            |       | 32,269 |   |
| Changes in  assets and liabilities, net |       | (14,702                                           | )          | (23,766 | ) |
| Discontinued  operations, net           |       | (2,892                                            | )          | (1,281 | ) |
| Cash provided by  operating activities  |       | $                                                 | 14,509     |   | $ | 7,222 |   |

 

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

 

Duringthe six months ended June 30, 2008, operating activities provided $14.5million of cash.  Income from continuingoperations plus non-cash items totaled $32.1 million in the first six months of2008, reflecting improved operating results offset by a lower amount ofnon-cash items.  The reduction innon-cash items reflects higher depreciation and amortization expenses offset byfluctuations in the deferred income tax provision when compared with the sixmonths of 2007.  In addition, purchaseaccounting for the Carlton acquisition resulted in non-cash charges of $1.9million recognized in the first six months of 2008.  We expect non-cash charges related to theCarlton acquisition purchase accounting to total $3.5 million for 2008, andapproximately $1.8 million in each of 2009 and 2010.  The positive operating cash flow from theseitems was partially offset by the net increase in working capital and otherassets and liabilities during the period, including an increase in accountsreceivable of $8.3 million, an increase in inventories of $6.1 million and areduction in accounts payable and accrued expenses of $3.7 million.  Discontinued operations used $2.9 million incash during the first six months of 2008 as certain obligations and liabilitiesrelated to the sale of our Forestry Division were paid in 2008.  Cash payments during the first six months of2008 also included $11.5 million for interest and $8.2 million for incometaxes.

 

Duringthe first six months of 2007, operating activities provided $7.2 million ofcash.  Income from continuing operationsplus non-cash items totaled $32.3 million. The positive operating cash flow from these items exceeded the netincrease in working capital and other assets and liabilities during theperiod.  An increase in accountsreceivable of $4.1 million, inventories of $10.4 million, other assets of $3.6million and other liabilities of $6.2 million used a combined total of $24.3million in the first six months of 2007. These cash uses were partially offset by reductions in accounts payableand accrued expenses of $0.6 million.  Inaddition, discontinued operations used $1.3 million in cash during the firstsix months of 2007, reflecting increases in working capital components.  Cash payments during the first half of 2007also included $14.6 million for interest, $8.9 million for income taxes and$7.3 million for defined benefit pension plans.

 

Cashused in investing activities is summarized as follows:

 
| ** **                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Proceeds from  sale of assets               |       | $                                                 | 691        |   | $ | 3 |   |
| Purchases of  property, plant and equipment |       | (11,800                                           | )          | (9,795 | ) |
| Acquisition of  Carlton Holdings, Inc. |       | (64,314                                           | )          | — |   |
| Discontinued  operations                    |       | 1,725                                             |       | (417 | ) |
| Cash used in  investing activities          |       | $                                                 | (73,698    | ) | $ | (10,209 | ) |

 

During2008, we expect to invest $25 million to $27 million in available cash forcapital expenditures, primarily for ongoing productivity and cost improvements inour manufacturing processes, routine replacement of machinery and equipment,replacement of tooling that is consumed in the production process andincremental capacity expansion. 

 

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For thesix months ended June 30, 2007, we also spent $1.0 million related toconsolidation of North American logistics in our Outdoor Products segment.

 

In thefirst six months of 2007, discontinued operations used $0.4 million ininvesting activities for the purchase of machinery and equipment.

 

Cashprovided by financing activities is summarized as follows:

 
| ** **                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Amounts in thousands)**                          | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Net increase in  debt principal outstanding                   |       | $                                                 | 43,387     |   | $ | 9,250 |   |
| Proceeds and tax  benefits from the exercise of stock options |       | 994                                               |       | 241 |   |
| Cash provided by  financing activities                        |       | $                                                 | 44,381     |   | $ | 9,491 |   |

 

Cashprovided by financing activities in the first six months of 2008 consisted ofnet borrowings of $45.0 million under our revolving credit facility for theacquisition of Carlton Holdings, Inc. and net proceeds and tax benefitsfrom the exercise of stock options of $1.0 million, partially offset by thescheduled quarterly principal payment on our term debt facility of $1.6 million.  Cash provided by financing activities in thefirst six months of 2007 was $9.5 million, consisting of net borrowings of$10.0 million under our revolving credit facility and the net proceeds and taxbenefits from the exercise of stock options, partially offset by the scheduledquarterly principal payment of $0.8 million on our term debt facility.

 

**CriticalAccounting 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, 2007.

 

**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 United States of America, and expandsdisclosures about fair value measurements.  We adopted FAS No. 157for financial assets and liabilities on January 1, 2008, with no immediateeffect on the consolidated financial statements.  As permitted by FASB Staff Position No. FAS157-2, “Effective Date of FASB Statement No. 157”, we elected to defer theadoption of SFAS No. 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. In February 2008, FASB issued Staff Position No. FAS 157-1, “Applicationof FASB Statement No. 157 to FASB Statement No. 13 and OtherAccounting Pronouncements That Address Fair Value Measurements for Purposes ofLease Classification or Measurement under Statement 13” (“FSP No. 157-1”).  We also adopted FSP No. 157-1 on January 1,2008, with no immediate effect on the consolidated financial statements.

 

In February 2007,the FASB issued FAS No. 159, “Fair Value Option for Financial Assets andFinancial Liabilities-Including an amendment of FASB Statement No. 115” (“FASNo. 159”).  FAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value.  Wechose not to elect the fair value option for its financial assets andliabilities existing at January 1, 2008 and did not elect the fair valueoption on financial assets and liabilities transacted in the three months endedMarch 31, 2008.  Therefore, theadoption of  FAS No. 159 on January 1,2008, had no immediate effect on our consolidated financial statements.

 

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

 

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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, ConsolidatedFinancial Statements, and improves the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements for those entities that have anoutstanding non-controlling interest in one or more subsidiaries or thatdeconsolidate a subsidiary.  Theprovisions of FAS No. 160 are effective for the Company on January 1,2009.    Earlier adoption is prohibited.  The adoption of FAS No. 160 is notanticipated to have a material impact on the financial position and results ofoperations of the Company.

 

In March 2008,the FASB issued FAS No. 161, “Disclosures about Derivative Instruments andHedging Activities, an amendment of FASB Statement No. 133” (“FAS No. 161”). FAS No. 161 requires enhanced disclosures about an entity’s derivative andhedging activities and thereby improves the transparency of financialreporting.  The provisions of FAS No. 161 are effective for theCompany on January 1, 2009.

 

In April 2008, theFASB issued FSP No. FAS 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP No. 142-3”). This FASB Staff Position amends the factors that should be considered indeveloping assumptions used to determine useful lives of recognized intangibleassets under FAS 142, “Goodwill and Other Intangible Assets”. The provisions ofFSP No. 142-3 are effective for the Company on January 1, 2009.  Early adoption is prohibited.  The adoption of FSP No. 142-3 is notanticipated to have a material impact on the financial position and results ofoperations of the Company.

 

**ForwardLooking Statements**

 

“Forwardlooking statements,” as defined by the Private Securities Litigation Reform Actof 1995, used in this report, including without limitation our “outlook,” “guidance,”“expectations,”  “beliefs,” “plans,” “indications,”“estimates,” “anticipations,” and their variants, are based upon availableinformation and upon assumptions that the Company believes are reasonable;however, these forward looking statements involve certain risks and should notbe considered indicative of actual results that the Company may achieve in thefuture. Specifically, issues concerning foreign currency exchange rates, thecost to the Company of commodities in general, and of steel in particular, theanticipated level of applicable interest rates and the anticipated effects ofdiscontinued operations involve certain estimates and assumptions. To theextent that these, or any other such assumptions, are not realized goingforward, or other unforeseen factors arise, actual results for the periodssubsequent to the date of this report may differ materially.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**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 

 

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operation of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. Based on this evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures 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.

 

**PART II OTHERINFORMATION**

 

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

 

Thefollowing actions were taken at our annual meeting of stockholders, which washeld on May 20, 2008:

 

1.  The stockholders elected the eight nomineesfor director to our Board of Directors. The eight directors elected, along with the voting results, are asfollows:

 
| ** **           | ** ** | **No. of Shares** | ** ** | **No. of Shares** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Name**             | ** ** | **Voting For**         | ** ** | **Withheld Voting**    | ** ** |
| R. Eugene  Cartledge |       | 25,941,153                  |       | 5,852,377                   |       |
| Joshua L.  Collins   |       | 31,491,808                  |       | 301,722                     |       |
| Eliot M. Fried       |       | 25,941,671                  |       | 5,851,859                   |       |
| Thomas J.  Fruechtel |       | 31,496,569                  |       | 296,961                     |       |
| E. Daniel James      |       | 25,939,084                  |       | 5,854,446                   |       |
| Robert D.  Kennedy   |       | 25,942,448                  |       | 5,851,082                   |       |
| Harold E. Layman     |       | 24,791,736                  |       | 7,001,794                   |       |
| James S.  Osterman   |       | 31,347,737                  |       | 445,793                     |       |

 

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

 
| For     |   | 31,268,896 |   |
|---------|--------|------------|--------|
| Against |   | 521,935    |   |
| Abstain |   | 2,699      |   |

 

**ITEM 6. EXHIBITS**

 

**(a) Exhibits:**

 

**10.1  Amended andRestated Employment Agreement with Richard H. Irving, III as Senior VicePresident, General Counsel and Secretary of Blount dated July 14, 2008.

 

**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.

 

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**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**

 

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

 
| BLOUNT INTERNATIONAL, INC.  |   |                                   |
|-----------------------------|--------|----------------------------------------|
| Registrant                  |   |                                   |
|                        |   |                                   |
|                        |   |                                   |
| /s/  Calvin E. Jenness      |   | /s/  Mark V. Allred                    |
| Calvin  E. Jenness          |   | Mark  V. Allred                        |
| Senior  Vice President and  |   | Vice  President - Corporate Controller |
| Chief  Financial Officer    |   | (Principal  Accounting Officer)        |
|                        |   |                                   |
| Dated:  August 8, 2008 |   |                                   |

 

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