Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**for the quarterly period ended September 30,2009.**

** **

**OR**

 
| **o** | ** ** | **Transition report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------|

 

**Commission file number 001-11549**

 

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**(503)653-8881**

(Registrant’s telephonenumber, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes  o  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer a non-accelerated filer or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  

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

 

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

 

Asof November 3, 2009 there were 47,714,461 shares outstanding of $0.01 parvalue common stock.

 

 

 

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

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

 

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**PART I       FINANCIALINFORMATION**

 

**ITEM 1.  CONSOLIDATEDFINANCIAL STATEMENTS**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**BlountInternational, Inc. and Subsidiaries**

** **
| ** **                                              | ** ** | **Three Months********Ended September 30,** | ** ** | **Nine Months********Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)**       | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                    | ** ** | ** **                                       |       |                                            |       |   |   |   |   |
| Sales                                                   |       | $                                                | 130,361    |                                            | $          | 175,006 |   | $ | 360,886 |   | $ | 463,265 |   |
| Cost of sales                                           |       | 85,513                                           |       | 118,470                                         |       | 243,609 |   | 314,929 |   |
| Gross profit                                            |       | 44,848                                           |       | 56,536                                          |       | 117,277 |   | 148,336 |   |
| Selling, general and  administrative expenses           |       | 23,581                                           |       | 26,080                                          |       | 72,767 |   | 78,518 |   |
| Gain on sale of land  and building                      |       | —                                           |       | —                                          |       | (2,701 | ) | — |   |
| Plant closure and  severance costs                      |       | 482                                              |       | 446                                             |       | 6,886 |   | 1,519 |   |
| Operating income                                        |       | 20,785                                           |       | 30,010                                          |       | 40,325 |   | 68,299 |   |
| Interest income                                         |       | 35                                               |       | 301                                             |       | 190 |   | 1,032 |   |
| Interest expense                                        |       | (6,160                                           | )          | (6,873                                          | )          | (18,516 | ) | (20,533 | ) |
| Other income, net                                       |       | 369                                              |       | 690                                             |       | 406 |   | 1,461 |   |
| Income from continuing  operations beforeincome taxes   |       | 15,029                                           |       | 24,128                                          |       | 22,405 |   | 50,259 |   |
| Provision for income  taxes                             |       | 3,687                                            |       | 9,146                                           |       | 5,874 |   | 18,171 |   |
| Income from continuing  operations                      |       | 11,342                                           |       | 14,982                                          |       | 16,531 |   | 32,088 |   |
| Discontinued  operations:                               |       |                                             |       |                                            |       |   |   |   |   |
| Loss before income  taxes                               |       | —                                           |       | (87                                             | )          | — |   | (367 | ) |
| Income tax provision                                    |       | —                                           |       | 145                                             |       | — |   | 39 |   |
| Loss from discontinued  operations                      |       | —                                           |       | (232                                            | )          | — |   | (406 | ) |
| Net income                                              |       | $                                                | 11,342     |                                            | $          | 14,750 |   | $ | 16,531 |   | $ | 31,682 |   |
|                                                    |       |                                             |       |                                            |       |   |   |   |   |
| Basic income per share:                                 |       |                                             |       |                                            |       |   |   |   |   |
| Continuing operations                                   |       | $                                                | 0.24       |                                            | $          | 0.31 |   | $ | 0.35 |   | $ | 0.68 |   |
| Discontinued operations                                 |       | —                                           |       | —                                          |       | — |   | (0.01 | ) |
| Net income                                              |       | $                                                | 0.24       |                                            | $          | 0.31 |   | $ | 0.35 |   | $ | 0.67 |   |
|                                                    |       |                                             |       |                                            |       |   |   |   |   |
| Diluted income per  share:                              |       |                                             |       |                                            |       |   |   |   |   |
| Continuing operations                                   |       | $                                                | 0.23       |                                            | $          | 0.31 |   | $ | 0.34 |   | $ | 0.67 |   |
| Discontinued operations                                 |       | —                                           |       | —                                          |       | — |   | (0.01 | ) |
| Net income                                              |       | $                                                | 0.23       |                                            | $          | 0.31 |   | $ | 0.34 |   | $ | 0.66 |   |
|                                                    |       |                                             | ** ** | ** **                                      |       |   |   |   |   |
| Weighted average shares  used in per sharecalculations: |       |                                             | ** ** | ** **                                      |       |   |   |   |   |
| Basic                                                   |       | 47,766                                           |       | 47,624                                          |       | 47,751 |   | 47,440 |   |
| Diluted                                                 |       | 48,271                                           |       | 48,248                                          |       | 48,210 |   | 48,079 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UNAUDITEDCONSOLIDATED BALANCE SHEETS**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share and per share data)**                                                                  | ** ** | **2009**               | ** ** | **2008**              | ** ** |
|                                                                                                                         |       |                   |       |                  |       |
| **Assets**                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                              |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                   |       | $                      | 58,140     |                  | $          | 58,275 |   |
| Accounts receivable,  net of allowance for doubtful accounts of$4,166 and $3,800 respectively                                |       | 72,759                 |       | 75,555                |       |
| Inventories, net                                                                                                             |       | 81,225                 |       | 90,302                |       |
| Deferred income taxes                                                                                                        |       | 5,851                  |       | 5,492                 |       |
| Other current assets                                                                                                         |       | 18,787                 |       | 14,940                |       |
| Total current assets                                                                                                         |       | 236,762                |       | 244,564               |       |
| Property, plant and  equipment, net                                                                                          |       | 115,717                |       | 119,749               |       |
| Deferred financing  costs                                                                                                    |       | 5,449                  |       | 6,679                 |       |
| Deferred income taxes                                                                                                        |       | 23,720                 |       | 21,679                |       |
| Intangible assets                                                                                                            |       | 12,744                 |       | 13,864                |       |
| Assets held for sale                                                                                                         |       | 900                    |       | 1,429                 |       |
| Goodwill                                                                                                                     |       | 66,071                 |       | 66,071                |       |
| Other assets                                                                                                                 |       | 26,486                 |       | 25,649                |       |
| Total Assets                                                                                                                 |       | $                      | 487,849    |                  | $          | 499,684 |   |
|                                                                                                                         |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                         |       |                   |       |                  |       |
| Current maturities of  long-term debt                                                                                        |       | $                      | 135,244    |                  | $          | 31,981 |   |
| Accounts payable                                                                                                             |       | 25,085                 |       | 28,864                |       |
| Accrued expenses                                                                                                             |       | 46,424                 |       | 55,235                |       |
| Deferred income taxes                                                                                                        |       | 517                    |       | 498                   |       |
| Total current  liabilities                                                                                                   |       | 207,270                |       | 116,578               |       |
| Long-term debt,  excluding current maturities                                                                                |       | 175,000                |       | 293,539               |       |
| Deferred income taxes                                                                                                        |       | 2,470                  |       | 2,223                 |       |
| Employee benefit  obligations                                                                                                |       | 86,847                 |       | 93,898                |       |
| Other liabilities                                                                                                            |       | 38,416                 |       | 36,966                |       |
| Total liabilities                                                                                                            |       | 510,003                |       | 543,204               |       |
| Commitments and  contingent liabilities                                                                                      |       |                   |       |                  |       |
| Stockholders’ equity  (deficit):                                                                                        |       |                   |       |                  |       |
| Common stock: par value  $0.01 per share, 100,000,000 shares authorized,47,714,461 and 47,614,236 outstanding,  respectively |       | 477                    |       | 476                   |       |
| Capital in excess of  par value of stock                                                                                     |       | 580,732                |       | 579,930               |       |
| Accumulated deficit                                                                                                          |       | (563,017               | )          | (579,548              | )          |
| Accumulated other  comprehensive loss                                                                                        |       | (40,346                | )          | (44,378               | )          |
| Total stockholders’  deficit                                                                                            |       | (22,154                | )          | (43,520               | )          |
| Total Liabilities and  Stockholders’ Deficit                                                                            |       | $                      | 487,849    |                  | $          | 499,684 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UNAUDITEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                                                                           | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                                           |       |                                     |       |   |   |
| Income from continuing  operations                                                                   |       | $                                        | 16,531     |   | $ | 32,088 |   |
| Adjustments to  reconcile income from continuing operations to net cashused in operating activities: |       |                                     |       |   |   |
| Depreciation of  property, plant and equipment                                                       |       | 14,983                                   |       | 15,974 |   |
| Amortization                                                                                         |       | 4,250                                    |       | 5,721 |   |
| Stock compensation and  other non-cash charges                                                       |       | 2,066                                    |       | 2,919 |   |
| Asset impairment  charges                                                                            |       | 1,960                                    |       | — |   |
| Excess tax expense  (benefit) from share-based compensation                                          |       | 68                                       |       | (459 | ) |
| Deferred income tax  (benefit) expense                                                               |       | (1,730                                   | )          | 285 |   |
| Gain on sale of assets                                                                               |       | (2,552                                   | )          | (1,287 | ) |
| Changes in assets and  liabilities:                                                                  |       |                                     |       |   |   |
| (Increase) decrease in  accounts receivable                                                          |       | 4,951                                    |       | (10,340 | ) |
| (Increase) decrease in  inventories                                                                  |       | 10,155                                   |       | (2,715 | ) |
| (Increase) decrease in  other assets                                                                 |       | 836                                      |       | 2,072 |   |
| Increase (decrease) in  accounts payable                                                             |       | (4,367                                   | )          | (2,081 | ) |
| Increase (decrease) in  accrued expenses                                                             |       | (12,358                                  | )          | (994 | ) |
| Increase (decrease) in  other liabilities                                                            |       | (5,832                                   | )          | 2,725 |   |
| Discontinued operations                                                                              |       | (106                                     | )          | (4,199 | ) |
| Net cash provided by  operating activities                                                           |       | 28,855                                   |       | 39,709 |   |
| ** **                                                                                           |       |                                     |       |   |   |
| **Cash  flows from investing activities:**                                                           |       |                                     |       |   |   |
| Purchases of property,  plant and equipment                                                          |       | (13,069                                  | )          | (17,675 | ) |
| Proceeds from sale of  assets                                                                        |       | 3,282                                    |       | 1,349 |   |
| Acquisition of Carlton  Holdings, Inc.                                                          |       | —                                   |       | (64,381 | ) |
| Discontinued operations                                                                              |       | —                                   |       | 1,725 |   |
| Net cash used in  investing activities                                                               |       | (9,787                                   | )          | (78,982 | ) |
| ** **                                                                                           |       |                                     |       |   |   |
| **Cash  flows from financing activities:**                                                           |       |                                     |       |   |   |
| Net (repayments)  borrowings under revolving credit facility                                         |       | (3,250                                   | )          | 37,000 |   |
| Repayment of term loan  principal                                                                    |       | (12,026                                  | )          | (1,921 | ) |
| Issuance costs related  to debt                                                                      |       | (1,900                                   | )          | — |   |
| Excess tax benefit  (expense) from share-based compensation                                          |       | (68                                      | )          | 459 |   |
| Proceeds from  share-based compensation activity                                                     |       | 231                                      |       | 575 |   |
| Taxes paid on  restricted stock units                                                                |       | (328                                     | )          | — |   |
| Net cash provided by  (used in) financing activities                                                 |       | (17,341                                  | )          | 36,113 |   |
|                                                                                                 |       |                                     |       |   |   |
| Effect of exchange rate  changes                                                                     |       | (1,862                                   | )          | (852 | ) |
|                                                                                                 |       |                                     |       |   |   |
| Net decrease in cash  and cash equivalents                                                           |       | (135                                     | )          | (4,012 | ) |
| Cash and cash equivalents  at beginning of period                                                    |       | 58,275                                   |       | 57,589 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                        | 58,140     |   | $ | 53,577 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UNAUDITEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT**

**BlountInternational, Inc. and Subsidiaries**

 
| **(Amounts in thousands)**                                     | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess********of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other********Comprehensive********Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------------------|------------|--------------------------|------------|---------------------------------------------------------|------------|-----------|------------|
|                                                           |       |       |       |              |       |                                 |       |                     |       |                                                    |       |      |       |
| Balance  December 31, 2008                                |       | 47,614     |       | $                 | 476        |                                 | $          | 579,930                  |       | $                                                       | (579,548   | )         | $          | (44,378 | ) | $ | (43,520 | ) |
|                                                           |       |       |       |              |       |                                 |       |                     |       |                                                    |       |      |       |
| Net income                                                     |       |       |       |              |       |                                 |       | 16,531                   |       |                                                    |       | 16,531    |       |
| Other comprehensive  income:                                   |       |       |       |              |       |                                 |       |                     |       |                                                    |       |      |       |
| Foreign currency  translation adjustment                       |       |       |       |              |       |                                 |       |                     |       | 923                                                     |       | 923       |       |
| Unrealized gains                                               |       |       |       |              |       |                                 |       |                     |       | 3,109                                                   |       | 3,109     |       |
| Comprehensive income,  net                                     |       |       |       |              |       |                                 |       |                     |       |                                                    |       | 20,563    |       |
| Stock options, stock  appreciation rights and restricted stock |       | 100        |       | 1                 |       | (166                                 | )          |                     |       |                                                    |       | (165      | )          |
| Stock compensation  expense                                    |       |       |       |              |       | 968                                  |       |                     |       |                                                    |       | 968       |       |
|                                                           |       |       |       |              |       |                                 |       |                     |       |                                                    |       |      |       |
| Balance  September 30, 2009                               |       | 47,714     |       | $                 | 477        |                                 | $          | 580,732                  |       | $                                                       | (563,017   | )         | $          | (40,346 | ) | $ | (22,154 | ) |

 

Other comprehensive income forthe three and nine months ended September 30, 2009 was $2.4 million and$4.0 million, respectively.  Othercomprehensive loss for the three and nine months ended September 30, 2008was $2.0 million and $1.5 million, respectively.

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

**UNAUDITEDNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

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

 

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

 

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

 

***Reclassifications.***  Certain amounts in the prior period financialstatements have been reclassified to conform to the current periodpresentation.  Such reclassificationshave no effect on previously reported net income or net stockholders’ deficit.

 

***Subsequent Events Review.***  We have performed an evaluation of subsequentevents through November 6, 2009, which is the date the financialstatements were issued.

 

***Accounting Standards Codification.***  The Financial Accounting Standards Board (“FASB”)issued its Accounting Standards Codification (the “ASC”) in June 2009effective for reporting periods ending after September 15, 2009.  The ASC is now the single source for allauthoritative accounting standards generally accepted in the U.S.  The ASC has been applied to this report on Form 10-Qand any references to authoritative accounting standards have been modifiedaccordingly.  Implementation of the ASChad no effect on our results of operations or financial condition.

 

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

 

On May 2, 2008, we acquired all of theoutstanding stock of Carlton Holdings, Inc. and its subsidiaries(collectively, “Carlton”), a manufacturer of cutting chain for chainsawslocated near Portland, Oregon.  TheCompany paid a total of $66.2 million in cash for Carlton, including relatedacquisition costs of $1.5 million, and also assumed liabilities totaling $21.3million.  Carlton had $1.8 million incash on the date of acquisition, resulting in a net cash outflow of $64.4million for the acquisition.  Theacquisition was financed with a combination of cash on hand and $58.5 millionborrowed under our revolving credit facility. The operating results of Carlton are included in the consolidatedfinancial statements from May 2, 2008 forward.  We accounted for the acquisition inaccordance with ASC 805.  Accordingly,Carlton’s assets and liabilities were recorded at their estimated fair valueson the date of acquisition.

 

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The following unaudited proforma results present the estimated effect as if the acquisition had occurredon the first day of each period presented.  The unaudited pro forma results include the historical results ofCarlton, pro forma purchase accounting effects, the pro forma interest expenseeffects of additional borrowings to fund the transaction and the related proforma income tax effects.  In addition tothe pro forma amortization of tangible and intangible asset adjustments to fairvalue, the unaudited pro forma results for each period presented include acharge of $1.7 million to expense the adjustment of inventory to estimated fairvalue.

 
| ** **                  | ** ** | **Three Months********Ended September 30,  2008** | ** ** | **Nine Months********Ended September 30,  2008** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(Amounts in thousands)**  | ** ** | **As  Reported**                                       | ** ** | **Pro  Forma**                                        | ** ** | **As  Reported** | ** ** | **Pro  Forma** | ** ** |
|                        |       |                                                   |       |                                                  |       |   |   |   |   |
| Sales                       |       | $                                                      | 175,006    |                                                  | $          | 175,006 |   | $ | 463,265 |   | $ | 483,408 |   |
| Net income                  |       | 14,750                                                 |       | 13,777                                                |       | 31,682 |   | 31,546 |   |
| Basic earnings per  share   |       | 0.31                                                   |       | 0.29                                                  |       | 0.67 |   | 0.66 |   |
| Diluted earnings per  share |       | 0.31                                                   |       | 0.29                                                  |       | 0.66 |   | 0.65 |   |
|                             |            |                                                        |            |                                                       |            |  |  |  |  |  |  |  |  |

 

**NOTE 3:  DISCONTINUED OPERATIONS**

 

On November 5, 2007, wesold our Forestry Division, which constituted the majority of our Industrialand Power Equipment segment, to Caterpillar Forest Products Inc., a subsidiaryof Caterpillar Inc., for gross proceeds of $79.1 million.  Under the terms of the related asset purchaseagreement, $8.8 million of the gross proceeds was initially held in escrow forup to three years from the transaction date. As of September 30, 2009, $6.1 million of these proceeds remain inescrow.  We recognized a pretax gain of$26.0 million, net of related transaction expenses, on the sale in 2007.  The Forestry Division is reported asdiscontinued operations for all periods presented.  The 2008 results consist of wind-down andexit activities related to this business.

 

Discontinued operations aresummarized as follows:

 
| ** **                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
|                                                      |       |                                     |       |   |   |
| Sales                                                     |       | $                                        | —     |   | $ | — |   |
| Operating loss before  taxes from discontinued operations |       | —                                   |       | (367 | ) |
| Income tax provision                                      |       | —                                   |       | 39 |   |
| Loss from discontinued  operations                        |       | $                                        | —     |   | $ | (406 | ) |

 

**NOTE 4:  RESTRUCTURING ACTIVITIES**

 

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

 

***Plant Closure Costs.***  In January 2009, we announced our intentto close our manufacturing facility in Milan, Tennessee during the secondquarter of 2009.  Products previouslymanufactured in that facility are now produced in our other manufacturing facilities.  For the nine months ended September 30,2009, we have recognized a total of $3.8 million in charges related to thisplant closure, consisting of $2.0 million in asset impairment charges, $1.0million in employee severance and benefit costs and $0.8 million in otherexpenses.  Of these charges, $0.3 millionis recognized in cost of goods sold on the Consolidated Statements of Incomefor the nine months ended September 30, 2009.  The land and building are currently beingmarketed for sale and are included in assets held for sale on the ConsolidatedBalance Sheets.

 

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***Severance Costs.***  We have taken actions during 2008 and 2009 toreduce the number of employees at certain of our other locations.  During the three and nine months ended September 30,2009, we recognized a total of $0.5 million and $3.4 million, respectively, inseverance charges related to this reduction in force.  Since December 31, 2008, we have reducedour number of employees by more than 600 positions, or 17% of our totalworkforce.  We recognized severancecharges of $0.4 million and $1.5 million, respectively, during the three andnine months ended September 30, 2008 for similar actions.

 

**NOTE 5:  INVENTORIES, NET**

 

Inventories consisted of thefollowing:

 
| ** **                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**  | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw materials and  supplies |       | $                      | 10,373     |                  | $          | 14,260 |   |
| Work in progress            |       | 13,737                 |       | 14,169                |       |
| Finished goods              |       | 57,115                 |       | 61,873                |       |
| Total inventories, net      |       | $                      | 81,225     |                  | $          | 90,302 |   |

 

**NOTE 6:  LONG-TERM DEBT**

 

Long-term debt consisted ofthe following:

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Revolving credit  facility        |       | $                      | 27,500     |                  | $          | 30,750 |   |
| Term loans                        |       | 107,744                |       | 119,770               |       |
| 8 7/8% senior  subordinated notes |       | 175,000                |       | 175,000               |       |
| Total debt                        |       | 310,244                |       | 325,520               |       |
|                              |       |                   |       |                  |       |
| Less current maturities           |       | (135,244               | )          | (31,981               | )          |
| Long-term debt                    |       | $                      | 175,000    |                  | $          | 293,539 |   |

 

The weighted average interestrate on outstanding debt as of September 30, 2009 was 6.37%.

 

***8 7/8% Senior Subordinated Notes.***  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at the option of the Company, in whole or in part, at redemptionprices of 102.219% from August 1, 2009 through July 31, 2010; and at100% on 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% seniorsubordinated notes, none of Blount’s existing foreign subsidiaries (“non-guarantorsubsidiaries”) guarantee these notes. See also Note 16.

 

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

 

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

 

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

 

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

 

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

 

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

 

We paid fees and expenses of $1.9 million to amend therevolving credit facility in April 2009. The revolving credit facilityprincipal balance outstanding was classified as current on the December 31,2008 Consolidated Balance Sheet because, before the maturity date was extendedby the amendment, the maturity date was less than 12 months from the balancesheet date at the time.  There were nochanges to financial covenants, nor did this amendment affect the term loanfacility.

 

As of September 30, 2009, the revolving creditfacility provided for total borrowing capacity up to $90.0 million, reduced byoutstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of September 30, 2009, the Company hadthe ability to borrow an additional $45.9 million under the terms of therevolving credit agreement. Interest is payable monthly in arrears on any primerate borrowing and at the individual maturity dates for any LIBOR-basedborrowing.  Any outstanding principal isdue in its entirety on the maturity date of August 9, 2010.

 

The term loan facility bearsinterest at the LIBOR rate plus 1.75%, or at the prime rate, depending on thetype of loan, and also matures on August 9, 2010.  The term loan facility requires quarterlypayments of $0.3 million, with a final payment of $106.6 million due on thematurity date.  Once repaid, principalunder the term loan facility may not be re-borrowed by the Company.

 

The amended and restatedsenior credit facilities contain financial covenant calculations relating tomaximum capital expenditures, minimum fixed charge coverage ratio, maximumleverage ratio and maximum first lien credit facilities leverage ratio.  In addition, there are covenants relating,among other categories, to investments, acquisitions, loans and advances,indebtedness and the sale of stock or assets. The Company was in compliance with all debt covenants through September 30,2009.

 

The amended and restated senior credit facilities maybe prepaid at any time.  There can alsobe additional mandatory repayment requirements related to the sale of Companyassets, the issuance of stock under certain circumstances or upon the Company’sannual generation of excess cash flow, as determined under the creditagreement.

 

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

 

The revolving credit facilityand the term loan facility mature on August 9, 2010 and are thereforeclassified as current liabilities on the balance sheet as of September 30,2009.  Before these facilities mature, weplan to obtain replacement financing.  Weare currently in negotiations with GECC to amend and extend these senior creditfacilities.  If successful, we expect tocomplete the amendment and extension by the end of 2009.  The proposed terms include an extension ofthe maturity date, an increase in the interest rate applicable to the termloans and a reduction in the borrowing capacity of the revolving creditfacility.  However, given the conditionsin global credit markets, we may not be successful in consummating the proposedagreements.

 

**NOTE 7:  PENSION AND OTHER POST-EMPLOYMENT BENEFITPLANS**

 

The Company sponsors definedbenefit pension plans covering employees in the U.S., Canada and Belgium.  The Company also sponsors various otherpost-employment medical and benefit plans covering many of its current andformer employees.  The U.S. defined benefit pension plan andthe associated nonqualified plan have been frozen since December 31,2006.  Employees who currently participate in these U.S. plans no longeraccrue benefits and new employees hired since December 31, 2006 are noteligible to participate.  All retirement benefits accrued up to the timeof the freeze were preserved.

 

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The components of net periodicbenefit cost for these plans are as follows:

 
| ** **                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**                       | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)**            | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                          |       | $                                          | 548        |   | $ | 987 |   | $ | 66 |   | $ | 63 |   |
| Interest cost                         |       | 2,656                                      |       | 2,765 |   | 505 |   | 538 |   |
| Expected return on plan  assets       |       | (2,504                                     | )          | (3,565 | ) | — |   | — |   |
| Amortization of prior  service cost   |       | (2                                         | )          | (2 | ) | — |   | 2 |   |
| Amortization of net  actuarial losses |       | 1,261                                      |       | 288 |   | 192 |   | 208 |   |
| Total net periodic  benefit cost      |       | $                                          | 1,959      |   | $ | 473 |   | $ | 763 |   | $ | 811 |   |

 
| ** **                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **Pension Benefits**                      | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)**            | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Service cost                          |       | $                                         | 1,644      |   | $ | 2,961 |   | $ | 198 |   | $ | 189 |   |
| Interest cost                         |       | 7,968                                     |       | 8,295 |   | 1,515 |   | 1,614 |   |
| Expected return on plan  assets       |       | (7,512                                    | )          | (10,695 | ) | — |   | — |   |
| Amortization of prior  service cost   |       | (6                                        | )          | (6 | ) | — |   | 6 |   |
| Amortization of net  actuarial losses |       | 3,783                                     |       | 864 |   | 576 |   | 624 |   |
| Total net periodic  benefit cost      |       | $                                         | 5,877      |   | $ | 1,419 |   | $ | 2,289 |   | $ | 2,433 |   |

 

In September 2009, we made a contribution of $10million to the U.S. defined benefit pension plan.  We expect to contribute a total ofapproximately $14 million to $15 million to our funded pension plans during2009.

 

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

 

**NOTE 8:  COMMITMENTS**

 

Significant financialguarantees and commitments are summarized in the following table:

 
| ** **                                  | ** ** | **September 30,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2009**               | ** ** |
| Letters of credit  outstanding              |       | $                      | 4,168      |   |
| Other financial  guarantees                 |       | 1,163                  |       |
| Total financial  guarantees and commitments |       | $                      | 5,331      |   |

 

**NOTE 9:  CONTINGENT LIABILITIES**

 

The Company is a defendant ina number of product liability lawsuits, some of which seek significant orunspecified damages, involving serious personal injuries for which there areretentions or deductible amounts under the Company’s insurance policies. Someof these lawsuits arise out of the Company’s duty to indemnify certainpurchasers of the Company’s discontinued operations for lawsuits involvingproducts manufactured prior to the sale of these businesses.  In addition, the Company is a party to anumber of other suits arising out of the normal course of its business,including suits concerning commercial contracts, employee matters, intellectualproperty rights and other matters.  Insome instances the Company is the plaintiff, and is seeking recovery ofdamages. In others, the Company is a defendant against whom damages are beingsought.  While there can be no assuranceas to their ultimate outcome, management does not believe these lawsuits willhave a material adverse effect on the Company’s consolidated financialposition, operating results or cash flows.

 

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The Company accrues, by acharge to income, an amount representing management’s best estimate of theundiscounted probable loss related to any matter deemed by management and itscounsel as a reasonably probable loss contingency in light of all of the thenknown circumstances.

 

**NOTE 10:  EARNINGS PER SHARE DATA**

 

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

 
| ** **                                                                                                                              | ** ** | **Three Months********Ended September 30,** | ** ** | **Nine Months********Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Shares in thousands)**                                                                                                               | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Shares for basic per  share computation – weighted average common shares outstanding                                               |       | 47,766                                           |       | 47,624                                          |       | 47,751 |   | 47,440 |   |
| Dilutive effect of  common stock equivalents                                                                                            |       | 505                                              |       | 624                                             |       | 459 |   | 639 |   |
| Shares for diluted per  share computation                                                                                               |       | 48,271                                           |       | 48,248                                          |       | 48,210 |   | 48,079 |   |
| Options and stock  appreciation rights (“SARs”) excluded from computation as anti-dilutive  because they are out-of-the-money |       | 1,547                                            |       | 2,299                                           |       | 1,607 |   | 1,677 |   |

 

The amount of unvestedrestricted stock and restricted stock units (“RSUs”) considered participatingsecurities at September 30, 2008 and September 30, 2009 was 305,000and 176,000, respectively.  Theallocation of undistributed earnings (net income) to the participatingsecurities under the two class method had no effect on the calculation ofearnings per share.

 

**NOTE 11:  STOCK-BASED COMPENSATION**

 

The Company did not make any stock-based compensationawards during the nine months ended September 30, 2009, but did make thefollowing awards during the nine months ended September 30, 2008:

 
| **(Amounts in thousands)**                                                          | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|
| SARs granted                                                                        |       | 305      |       |
| Shares of restricted  stock granted                                                 |       | 54       |       |
| RSUs granted                                                                        |       | 125      |       |
|                                                                                |       |     |       |
| Aggregate fair value of  SARs granted                                               |       | $        | 1,259      |   |
| Aggregate fair value of  restricted stock and RSUs granted                          |       | $        | 2,148      |   |
| Effect of accelerated  expense recognition due to granteeretirement-eligible status |       | $        | 491        |   |

 

On October 19, 2009, the Company granted 750,000stock options to its President, Chief Operating Officer and CEO Designate.  These options vest ratably over a three-yearperiod, and have a total fair value of $3.2 million, which will be recognizedas compensation expense over the vesting period beginning in the fourth quarterof 2009.

 

Under terms of the Company’s stock compensation plans,employee grantees who are retirement eligible generally receive continuedvesting after retirement.  In suchcircumstances, stock-based compensation expense is recognized on an acceleratedbasis.  The effect of such acceleratedexpense recognition for 2009 was to reduce by $1.0 million the expense thatotherwise would have been recognized in 2009 on stock compensation grants madeand expensed in earlier years.

 

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The following assumptions wereused to estimate the fair value of SARs in the nine months ended September 30,2008:

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

 

As of September 30, 2009,the total unrecognized stock-based compensation expense related to previouslygranted awards was $1.0 million. The weighted average period over which thisexpense is expected to be recognized is 10 months.  The Company’s policy upon the exercise ofoptions, restricted stock awards, RSUs or SARs has been to issue new sharesinto the market place.

 

**NOTE 12:  SEGMENT INFORMATION**

 

The Company identifiesoperating segments primarily based on organizational structure and theevaluation of the Chief Operating Decision Maker (Chief Executive Officer). TheCompany has one reportable segment: Outdoor Products.  The other category includes centralizedadministrative functions, a gear component manufacturing business, gain on saleof land and buildings and plant closure and other severance costs.  See also Note 3 regarding the disposition ofthe primary operating unit making up the Company’s former Industrial and PowerEquipment segment. Outdoor Products manufactures and markets cutting chain,bars, sprockets and accessories for chainsaw use, concrete-cutting equipmentand lawnmower blades and accessories for yard care equipment.  The accounting policies of the segment arethe same as those described in the summary of significant accounting policies.

 

Certain financial informationby segment is presented in the table below:

 
| ** **                 | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Sales:**                 |       |                                             |       |                                            |       |   |   |   |   |
| Outdoor Products           |       | $                                                | 126,923    |                                            | $          | 166,217 |   | $ | 348,473 |   | $ | 438,800 |   |
| Other                      |       | 3,438                                            |       | 8,789                                           |       | 12,413 |   | 24,465 |   |
| Total sales                |       | $                                                | 130,361    |                                            | $          | 175,006 |   | $ | 360,886 |   | $ | 463,265 |   |
|                       |       |                                             |       |                                            |       |   |   |   |   |
| **Operating  income:**     |       |                                             |       |                                            |       |   |   |   |   |
| Outdoor Products           |       | $                                                | 25,506     |                                            | $          | 34,552 |   | $ | 56,020 |   | $ | 81,244 |   |
| Other                      |       | (4,721                                           | )          | (4,542                                          | )          | (15,695 | ) | (12,945 | ) |
| Operating income           |       | $                                                | 20,785     |                                            | $          | 30,010 |   | $ | 40,325 |   | $ | 68,299 |   |

 

**NOTE 13:  SUPPLEMENTAL CASH FLOWS INFORMATION**

 
| ** **                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| Interest paid              |       | $                                         | 19,674     |   | $ | 21,654 |   |
| Income taxes paid, net     |       | 9,932                                     |       | 11,846 |   |
|                            |            |                                           |            |  |  |  |  |

 

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**NOTE 14:  FAIR VALUE OF FINANCIAL INSTRUMENTS ANDCREDIT RISK CONCENTRATION**

 

The Company has manufacturingor distribution operations in Brazil, Canada, China, Europe, Japan, Russia andthe U.S. The Company sells to customers in these locations and other countriesthroughout the world. At September 30, 2009, approximately 74% of accountsreceivable were from customers outside the U.S. If the U.S. Dollar strengthensagainst foreign currencies, as it did during the latter half of 2008, itbecomes more costly for these foreign customers to pay their U.S. Dollarbalances owed.  They may have difficultyin repaying these amounts, and in turn, the Company’s bad debt expense mayincrease.  Accounts receivable areprincipally from distributors, dealers, mass merchants, chainsaw manufacturersand other original equipment manufacturers (“OEMs”) and are normally notcollateralized.

 

The carrying amount of cashand cash equivalents approximates fair value because of the short term maturityof those instruments. The carrying amount of accounts receivable approximatesfair value because the maturity period is short and the Company has reduced thecarrying amount to the estimated net realizable value with an allowance fordoubtful accounts.  The carrying amountof the revolving credit facility approximates fair value because the applicableinterest rates are variable and the maturity period is relatively short.  The fair value of the term loans isdetermined by reference to prices of recent transactions whereby buyers andsellers exchange their interests in portions of these loans.  The fair value of the fixed rate 8 7/8%senior subordinated notes is determined by reference to quoted marketprices.  The carrying amount of otherfinancial instruments approximates fair value because of the short termmaturity periods and variable interest rates associated with the instruments.

 

The estimated fair values ofthe term loans and 8 7/8% senior subordinated notes at September 30, 2009and December 31, 2008 are presented below. See also Note 6.

 
| ** **                        | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **(Amounts in thousands)**        | ** ** | **Carrying  Amount**        | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Term loans                        |       | $                           | 107,744    |                       | $          | 103,434 |   | $ | 119,770 |   | $ | 107,194 |   |
| 8 7/8% senior  subordinated notes |       | 175,000                     |       | 179,375                    |       | 175,000 |   | 159,478 |   |
|                                   |            |                             |            |                            |            |  |  |  |  |  |  |  |  |

 

***Derivative Financial Instruments and Foreign Currency Hedging.***  The Company makes regular payments to itswholly-owned subsidiary in Canada, Blount Canada Ltd. (“Blount Canada”), forcontract manufacturing services performed by Blount Canada for conversion ofraw materials into finished goods. We are exposed to changes in Canadian Dollarto U.S. Dollar exchange rates from these transactions since most conversioncosts are incurred in Canadian Dollars. Changes in the Canadian Dollar to U.S. Dollar exchange rates mayadversely affect our results of operations and financial position.

 

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

 

During the three and nine months ended September 30,2009, a gain of $0.4 million and a loss of $0.6 million, respectively, wererecognized in cost of goods sold on the Consolidated Statements of Income atthe maturity of the related Canadian Dollar derivative financialinstruments.  Gains and losses on theseCanadian Dollar derivative financial instruments are offset in cost of goodssold by the effects of currency exchange rate changes on the underlyingtransactions.  During 2008, none of thesecontracts matured and no amounts were recognized in the Consolidated Statementsof Income.  Through September 30,2009, the Company has not recognized any amount from these contracts inearnings due to ineffectiveness.  The aggregatenotional amount of these Canadian Dollar contracts outstanding was $35.3million at September 30, 2009 and $51.4 million at December 31, 2008.

 

We hedge the interest rate and foreign currencyexposure on a portion of our cash and cash equivalents invested in Brazil withinterest rate swap agreements.  Thechange in fair value of these instruments is recognized in interest income onthe Consolidated Statements of Income.  Anychange in fair value on these derivative contracts is fully 

 

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offset by the change in fair value of the underlyinginvestments.  The Consolidated Statementsof Income include income of $0.7 million and expense of $1.0 million,respectively, for the three and nine months ended September 30, 2009, andincome of $2.2 million and $1.6 million, respectively, for the three and ninemonths ended September 30, 2008 from the change in fair value of theseinterest rate swap contracts. The aggregate notional amount of these interestrate swap agreements outstanding was $12.0 million at September 30, 2009and $10.3 million at December 31, 2008.

 

As of December 31, 2008, the fair values ofderivatives held by the Company were:

 
| **(Amounts in thousands)**                                                                                                                                     | ** ** | **Carrying  Value of  Assets  (Liabilities) on  Balance Sheet** | ** ** | **Assets  (Liabilities)  Measured at  Fair Value** | ** ** | **Quoted Prices  in Active  Markets  Inputs********Level 1** | ** ** | **Significant  Other  Observable  Inputs********Level 2** | ** ** | **Significant  Unobservable Inputs********Level 3** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Interest rate swaps  included incash and cash equivalents on the Consolidated  Balance Sheets                                                                  |       | $                                                               | 446        |                                               | $          | 446                                                          |       | $                                                         | —     |                                                | $          | 446 |   | $ | — |   |
| Foreign currency  zero-cost collarforward contracts included incurrent liabilities and accumulated  other comprehensive loss on theConsolidated Balance Sheets |       | (1,837                                                          | )          | (1,837                                             | )          | —                                                       |       | (1,837                                                    | )          | —                                              |       |
|                                                                                                                                                                |            |                                                                 |            |                                                    |            |                                                              |            |                                                           |            |                                                     |            |  |  |  |  |  |

 

As of September 30, 2009, the fair values ofderivatives held by the Company were:

 
| **(Amounts in thousands)**                                                                                                                                 | ** ** | **Carrying  Value of  Assets  (Liabilities) on  Balance Sheet** | ** ** | **Assets  (Liabilities)********Measured at  Fair Value** | ** ** | **Quoted Prices  in Active  Markets  Inputs********Level 1** | ** ** | **Significant  Other  Observable  Inputs********Level 2** | ** ** | **Significant  Unobservable Inputs********Level 3** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Interest rate swaps  included incash and cash equivalents on the Consolidated  Balance Sheets                                                              |       | $                                                               | (856       | )                                                        | $          | (856                                                         | )          | $                                                         | —     |                                                | $          | (856 | ) | $ | — |   |
| Foreign currency  zero-cost collarforward contracts included incurrent assets and accumulated other  comprehensive loss on the Consolidated Balance Sheets |       | 3,103                                                           |       | 3,103                                                    |       | —                                                       |       | 3,103                                                     |       | —                                              |       |
|                                                                                                                                                            |            |                                                                 |            |                                                          |            |                                                              |            |                                                           |            |                                                     |            |  |  |  |  |  |

 

The amounts included in accumulated othercomprehensive loss on the Consolidated Balance Sheets are expected to bereclassified to the Consolidated Income Statement within the next twelvemonths.

 

As specified in ASC 820.10, the framework formeasuring fair value is based on independent observable inputs of market dataand is based on the following hierarchy:

 

Level 1 – Quoted prices in active markets foridentical assets and liabilities.

 

Level 2 – Significant observable inputs based onquoted prices for similar instruments in active markets, quoted prices foridentical or similar instruments in markets that are not active and model-basedvaluations for which all significant assumptions are observable.

 

Level 3 – Significant unobservable inputs that aresupported by little or no market activity that are significant to the fairvalue of the assets or liabilities.

 

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**NOTE 15:  RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, the FASB revised theauthoritative guidance for business combinations.  The revised guidance was effective for us on January 1,2009.  The impact of this revisedguidance will depend on the nature, terms and size of any business combinationscompleted after the effective date.  Inaddition, certain transaction-related expenses that would have been capitalizedas part of a transaction under previous authoritative guidance are expensed asincurred under the revised guidance beginning January 1, 2009.

 

In December 2007, the FASB issued authoritativeguidance on non-controlling interests in consolidated financialstatements.  The new authoritativeguidance was effective for us on January 1, 2009 and did not have amaterial impact on our financial position or results of operations.

 

In April 2008, the FASB revised authoritativeguidance regarding the determination of the useful life of intangibleassets.  This revised authoritativeguidance amends the factors that should be considered in developing assumptionsused to determine useful lives of recognized intangible assets. The revisedauthoritative guidance was effective for us on January 1, 2009.  The impact of adopting this revisedauthoritative guidance depends on the nature, terms and size of any businesscombinations completed after the effective date.

 

In June 2008, the FASB issued new authoritativeguidance for determining whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the earnings allocation in computing earnings per share underthe two-class method described in paragraph 45-60B of ASC 260.10.45.  Thisauthoritative guidance was effective for us on January 1, 2009 and had noimpact on the calculation of earnings per share.

 

In December 2008, the FASB revised authoritativeguidance regarding employers’ disclosures about postretirement benefit planassets to require expanded disclosures about plan assets of a defined benefitpension or other postretirement plan.  InSeptember 2009, the FASB further revised the authoritative guidance forfair value measurements and disclosures to permit a reporting entity to measurethe fair value of an investment on the basis of the net asset value per shareof the investment.  This revised authoritative guidance will be effectivefor us in our 2009 Form 10-K, and will result in expanded disclosures inthe notes to our consolidated financial statements.

 

In April 2009, the FASB revised authoritativeguidance regarding interim disclosures about fair value of financialinstruments.  This revised authoritative guidance requires expandeddisclosures about fair value of financial instruments for interim periods andalso requires those disclosures in summarized financial information at interimreporting periods.  We adopted this revised authoritative guidance in thefirst quarter of 2009. With this adoption, we also adopted new authoritativeguidance regarding determining fair value when the volume and level of activityfor the asset or liability have significantly decreased and identifyingtransactions that are not orderly and recognition and presentation ofother-than-temporary impairments.  The impact of adopting thisauthoritative guidance resulted in expanded disclosures in the notes to ourconsolidated financial statements.

 

In May 2009, the FASB issued new authoritativeguidance on subsequent events that sets out general standards of accounting forand disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.  This authoritative guidance requiresdisclosure of the date through which subsequent events have been evaluated, thenature of any event and an estimate of its financial effect or disclosure thatsuch estimate cannot be made.  We adoptedthis authoritative guidance in the quarter ended June 30, 2009 and suchadoption resulted in additional disclosure regarding subsequent events.

 

In August 2009, the FASB revised theauthoritative guidance on fair value measurements and disclosures forliabilities.  This revised authoritativeguidance was effective for us in the quarter ended September 30, 2009 anddid not have a material impact on our financial position, results of operationsor fair value disclosures.

 

**NOTE 16:  CONSOLIDATING FINANCIAL INFORMATION**

 

See Note 6 for a discussion ofthe Company’s guarantor subsidiaries. The following consolidating financial information sets forth condensedconsolidating statements of operations, balance sheets and statements of cashflows of Blount International, Inc., Blount, Inc., the guarantorsubsidiaries and the non-guarantor subsidiaries:

 

16

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Table of Contents

 

**CondensedConsolidating Statement of Income Information**

 
| **(Amounts in thousands)**                                    | ** ** | **Blount International,  Inc.**  | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended September 30, 2009**                |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |                    | $          | 101,484                     |       | $                                 | 3,436      |             | $          | 75,187           |       | $ | (49,746 | ) | $ | 130,361 |   |
| Cost  of sales                                                |       | —                           |       | 68,934                  |       | 2,645                       |       | 62,782                            |       | (48,848          | )          | 85,513           |       |
| Gross  profit                                                 |       | —                           |       | 32,550                  |       | 791                         |       | 12,405                            |       | (898             | )          | 44,848           |       |
| Operating  expenses, net                                      |       | —                           |       | 16,193                  |       | 526                         |       | 7,344                             |       | —           |       | 24,063           |       |
| Operating  income                                             |       | —                           |       | 16,357                  |       | 265                         |       | 5,061                             |       | (898             | )          | 20,785           |       |
| Other  income (expense), net                                  |       | (2,931                           | )          | (2,562                  | )          | 145                         |       | (408                              | )          | —           |       | (5,756           | )          |
| Income  (loss) from continuing operationsbefore income  taxes |       | (2,931                           | )          | 13,795                  |       | 410                         |       | 4,653                             |       | (898             | )          | 15,029           |       |
| Provision  (benefit) for income taxes                         |       | (1,702                           | )          | 5,304                   |       | (37                         | )          | 122                               |       | —           |       | 3,687            |       |
| Income (loss) from continuing operations                      |       | (1,229                           | )          | 8,491                   |       | 447                         |       | 4,531                             |       | (898             | )          | 11,342           |       |
| Equity in earnings of affiliated companies                    |       | 12,571                           |       | 4,080                   |       | —                      |       | —                            |       | (16,651          | )          | —           |       |
| Net income                                                    |       | $                                | 11,342     |                    | $          | 12,571                      |       | $                                 | 447        |             | $          | 4,531            |       | $ | (17,549 | ) | $ | 11,342 |   |
|                                                          |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,  Inc.**       | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Nine Months Ended September 30, 2009**                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |                    | $          | 267,467                     |       | $                                 | 17,310     |             | $          | 202,677          |       | $ | (126,568 | ) | $ | 360,886 |   |
| Cost  of sales                                                |       | —                           |       | 187,811                 |       | 14,891                      |       | 167,060                           |       | (126,153         | )          | 243,609          |       |
| Gross  profit                                                 |       | —                           |       | 79,656                  |       | 2,419                       |       | 35,617                            |       | (415             | )          | 117,277          |       |
| Operating  expenses                                           |       | —                           |       | 51,085                  |       | 5,848                       |       | 20,019                            |       | —           |       | 76,952           |       |
| Operating  income (loss)                                      |       | —                           |       | 28,571                  |       | (3,429                      | )          | 15,598                            |       | (415             | )          | 40,325           |       |
| Other  income (expense), net                                  |       | (8,697                           | )          | (8,796                  | )          | 387                         |       | (814                              | )          | —           |       | (17,920          | )          |
| Income  (loss) from continuing operationsbefore income  taxes |       | (8,697                           | )          | 19,775                  |       | (3,042                      | )          | 14,784                            |       | (415             | )          | 22,405           |       |
| Provision  (benefit) for income taxes                         |       | (4,052                           | )          | 9,214                   |       | (1,418                      | )          | 2,130                             |       | —           |       | 5,874            |       |
| Income (loss) from continuing operations                      |       | (4,645                           | )          | 10,561                  |       | (1,624                      | )          | 12,654                            |       | (415             | )          | 16,531           |       |
| Equity in earnings of affiliated companies                    |       | 21,176                           |       | 10,615                  |       | —                      |       | —                            |       | (31,791          | )          | —           |       |
| Net income                                                    |       | $                                | 16,531     |                    | $          | 21,176                      |       | $                                 | (1,624     | )                | $          | 12,654           |       | $ | (32,206 | ) | $ | 16,531 |   |

 

17

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**CondensedConsolidating Statement of Income Information**

 
| **(Amounts in thousands)**                                    | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Three Months Ended September 30, 2008**                |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |                    | $          | 125,855                     |       | $                                 | 12,979     |             | $          | 96,446           |       | $ | (60,274 | ) | $ | 175,006 |   |
| Cost  of sales                                                |       | —                           |       | 91,113                  |       | 10,561                      |       | 79,273                            |       | (62,477          | )          | 118,470          |       |
| Gross  profit                                                 |       | —                           |       | 34,742                  |       | 2,418                       |       | 17,173                            |       | 2,203            |       | 56,536           |       |
| Operating  expenses                                           |       | —                           |       | 16,560                  |       | 1,039                       |       | 8,927                             |       | —           |       | 26,526           |       |
| Operating  income                                             |       | —                           |       | 18,182                  |       | 1,379                       |       | 8,246                             |       | 2,203            |       | 30,010           |       |
| Other  income (expense), net                                  |       | (4,093                           | )          | (1,578                  | )          | 141                         |       | (352                              | )          | —           |       | (5,882           | )          |
| Income  (loss) from continuing operationsbefore income  taxes |       | (4,093                           | )          | 16,604                  |       | 1,520                       |       | 7,894                             |       | 2,203            |       | 24,128           |       |
| Provision  (benefit) for income taxes                         |       | (1,431                           | )          | 7,066                   |       | 637                         |       | 2,874                             |       | —           |       | 9,146            |       |
| Income (loss) from continuing operations                      |       | (2,662                           | )          | 9,538                   |       | 883                         |       | 5,020                             |       | 2,203            |       | 14,982           |       |
| Loss from discontinued operations                             |       | —                           |       | (196                    | )          | (36                         | )          | —                            |       | —           |       | (232             | )          |
| Equity in earnings of affiliated companies                    |       | 17,412                           |       | 8,070                   |       | 50                          |       | —                            |       | (25,532          | )          | —           |       |
| Net income                                                    |       | $                                | 14,750     |                    | $          | 17,412                      |       | $                                 | 897        |             | $          | 5,020            |       | $ | (23,329 | ) | $ | 14,750 |   |
|                                                          |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **(Amounts in thousands)**                          | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                    |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Nine Months Ended September 30, 2008**                 |       |                             |       |                    |       |                        |       |                              |       |             |       |             |       |
| Sales                                                         |       | $                                | —     |                    | $          | 330,653                     |       | $                                 | 36,505     |             | $          | 275,271          |       | $ | (179,164 | ) | $ | 463,265 |   |
| Cost  of sales                                                |       | —                           |       | 238,244                 |       | 30,183                      |       | 226,568                           |       | (180,066         | )          | 314,929          |       |
| Gross  profit                                                 |       | —                           |       | 92,409                  |       | 6,322                       |       | 48,703                            |       | 902              |       | 148,336          |       |
| Operating  expenses                                           |       | —                           |       | 49,166                  |       | 3,142                       |       | 27,729                            |       | —           |       | 80,037           |       |
| Operating  income                                             |       | —                           |       | 43,243                  |       | 3,180                       |       | 20,974                            |       | 902              |       | 68,299           |       |
| Other  income (expense), net                                  |       | (12,893                          | )          | (5,747                  | )          | 431                         |       | 169                               |       | —           |       | (18,040          | )          |
| Income  (loss) from continuing operationsbefore income  taxes |       | (12,893                          | )          | 37,496                  |       | 3,611                       |       | 21,143                            |       | 902              |       | 50,259           |       |
| Provision  (benefit) for income taxes                         |       | (5,347                           | )          | 16,016                  |       | 1,568                       |       | 5,934                             |       | —           |       | 18,171           |       |
| Income (loss) from continuing operations                      |       | (7,546                           | )          | 21,480                  |       | 2,043                       |       | 15,209                            |       | 902              |       | 32,088           |       |
| Loss from discontinued operations                             |       | —                           |       | (370                    | )          | (36                         | )          | —                            |       | —           |       | (406             | )          |
| Equity in earnings of affiliated companies                    |       | 39,228                           |       | 18,118                  |       | 128                         |       | —                            |       | (57,474          | )          | —           |       |
| Net income                                                    |       | $                                | 31,682     |                    | $          | 39,228                      |       | $                                 | 2,135      |             | $          | 15,209           |       | $ | (56,572 | ) | $ | 31,682 |   |

 

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**CondensedConsolidating Balance Sheet Information**

 
| **(Amounts in thousands)**                                 | ** ** | **Blount  International,  Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **September 30, 2009**                                | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Assets**                                                 |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Cash  and cash equivalents                                 |       | $                                | —     |                    | $          | 1,911                       |       | $                               | —     |             | $          | 56,334           |       | $ | (105 | ) | $ | 58,140 |   |
| Accounts  receivable, net                                  |       | —                           |       | 38,367                  |       | 1,575                       |       | 32,817                          |       | —           |       | 72,759           |       |
| Intercompany  receivables                                  |       | —                           |       | 222,862                 |       | 89,990                      |       | 30,789                          |       | (343,641         | )          | —           |       |
| Inventories,  net                                          |       | —                           |       | 54,600                  |       | 2,462                       |       | 24,574                          |       | (411             | )          | 81,225           |       |
| Other  current assets                                      |       | —                           |       | 16,452                  |       | 1,455                       |       | 8,149                           |       | (1,418           | )          | 24,638           |       |
| Total  current assets                                      |       | —                           |       | 334,192                 |       | 95,482                      |       | 152,663                         |       | (345,575         | )          | 236,762          |       |
| Investments  in affiliated companies                       |       | 254,596                          |       | 273,954                 |       | —                      |       | —                          |       | (528,550         | )          | —           |       |
| Property,  plant and equipment, net                        |       | —                           |       | 57,346                  |       | 6,686                       |       | 51,685                          |       | —           |       | 115,717          |       |
| Goodwill  and other assets                                 |       | —                           |       | 110,761                 |       | 12,784                      |       | 11,825                          |       | —           |       | 135,370          |       |
| Total  Assets                                              |       | $                                | 254,596    |                    | $          | 776,253                     |       | $                               | 114,952    |             | $          | 216,173          |       | $ | (874,125 | ) | $ | 487,849 |   |
|                                                       |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| **Liabilities and Stockholders’ Equity (Deficit)**    |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
|                                                       |       |                             |       |                    |       |                        |       |                            |       |             |       |             |       |
| Current  maturities of long-term debt                      |       | $                                | —     |                    | $          | 135,244                     |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 135,244 |   |
| Accounts  payable                                          |       | —                           |       | 16,588                  |       | 825                         |       | 9,195                           |       | (1,523           | )          | 25,085           |       |
| Intercompany  payables                                     |       | 275,836                          |       | 42,032                  |       | 23                          |       | 25,750                          |       | (343,641         | )          | —           |       |
| Other  current liabilities                                 |       | —                           |       | 30,264                  |       | 2,590                       |       | 14,087                          |       | —           |       | 46,941           |       |
| Total  current liabilities                                 |       | 275,836                          |       | 224,128                 |       | 3,438                       |       | 49,032                          |       | (345,164         | )          | 207,270          |       |
| Long-term  debt, excluding current maturities              |       | —                           |       | 175,000                 |       | —                      |       | —                          |       | —           |       | 175,000          |       |
| Other  liabilities                                         |       | 914                              |       | 122,529                 |       | —                      |       | 4,290                           |       | —           |       | 127,733          |       |
| Total  liabilities                                         |       | 276,750                          |       | 521,657                 |       | 3,438                       |       | 53,322                          |       | (345,164         | )          | $                | 510,003    |   |
| Stockholders’  equity (deficit)                       |       | (22,154                          | )          | 254,596                 |       | 111,514                     |       | 162,851                         |       | (528,961         | )          | (22,154          | )          |
| Total  Liabilities and Stockholders’Equity  (Deficit) |       | $                                | 254,596    |                    | $          | 776,253                     |       | $                               | 114,952    |             | $          | 216,173          |       | $ | (874,125 | ) | $ | 487,849 |   |

 

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**CondensedConsolidating Balance Sheet Information**

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

 

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**CondensedConsolidating Cash Flows Information**

** **
| **(Amounts in thousands)**                                              | ** ** | **Blount International, **

**Inc.** | ** ** | **Blount,********Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------|------------|------------------------------|------------|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                              |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| **Nine Months Ended September 30, 2009**                           |       |                                      |       |                    |       |                         |       |                               |       |             |       |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Net  cash provided by operating activities                              |       | $                                         | 4,018      |                    | $          | (1,215                       | )          | $                                  | 12,774     |             | $          | 12,315           |       | $ | 963 |   | $ | 28,855 |   |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Purchases  of property, plant & equipment                      |       | —                                    |       | (5,764                  | )          | (412                         | )          | (6,893                             | )          | —           |       | (13,069          | )          |
| Proceeds  from sale of assets                                           |       | —                                    |       | —                  |       | 42                           |       | 3,240                              |       | —           |       | 3,282            |       |
| Net  cash used in investing activities                                  |       | —                                    |       | (5,764                  | )          | (370                         | )          | (3,653                             | )          | —           |       | (9,787           | )          |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Net  repayments under revolving credit facility                         |       | —                                    |       | (3,250                  | )          | —                       |       | —                             |       | —           |       | (3,250           | )          |
| Repayment  of term loan principal                                       |       | —                                    |       | (12,026                 | )          | —                       |       | —                             |       | —           |       | (12,026          | )          |
| Issuance  costs related to debt                                         |       | —                                    |       | (1,900                  | )          | —                       |       | —                             |       | —           |       | (1,900           | )          |
| Advances  from (to) affiliates                                          |       | (3,853                                    | )          | 25,881                  |       | (12,404                      | )          | (9,624                             | )          | —           |       | —           |       |
| Other                                                                   |       | (165                                      | )          | —                  |       | —                       |       | —                             |       | —           |       | (165             | )          |
| Net  cash provided by (used in) financing activities                    |       | (4,018                                    | )          | 8,705                   |       | (12,404                      | )          | (9,624                             | )          | —           |       | (17,341          | )          |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Effect  of exchange rate changes                                        |       | —                                    |       | —                  |       | —                       |       | (1,862                             | )          | —           |       | (1,862           | )          |
| Net  increase (decrease) in cash and cash equivalents                   |       | —                                    |       | 1,726                   |       | —                       |       | (2,824                             | )          | 963              |       | (135             | )          |
| Cash  and cash equivalents at beginning of period                       |       | —                                    |       | 185                     |       | —                       |       | 59,158                             |       | (1,068           | )          | 58,275           |       |
| Cash  and cash equivalents at end of period                             |       | $                                         | —     |                    | $          | 1,911                        |       | $                                  | —     |             | $          | 56,334           |       | $ | (105 | ) | $ | 58,140 |   |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| **Nine Months Ended September 30, 2008**                           |       |                                      |       |                    |       |                         |       |                               |       |             |       |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Net  cash provided by (used in) operating activities                    |       | $                                         | 5,304      |                    | $          | 20,605                       |       | $                                  | (3,084     | )                | $          | 16,884           |       | $ | — |   | $ | 39,709 |   |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Purchases  of property, plant and equipment,net of  proceeds from sales |       | —                                    |       | (8,444                  | )          | (2,094                       | )          | (5,788                             | )          | —           |       | (16,326          | )          |
| Acquisition  of Carlton                                                 |       | —                                    |       | (64,381                 | )          | —                       |       | —                             |       | —           |       | (64,381          | )          |
| Discontinued  operations                                                |       | —                                    |       | 1,725                   |       | —                       |       | —                             |       | —           |       | 1,725            |       |
| Net  cash used in investing activities                                  |       | —                                    |       | (71,100                 | )          | (2,094                       | )          | (5,788                             | )          | —           |       | (78,982          | )          |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Net  borrowings under revolving credit facility                         |       | —                                    |       | 37,000                  |       | —                       |       | —                             |       | —           |       | 37,000           |       |
| Repayment  of term loan principal                                       |       | —                                    |       | (1,921                  | )          | —                       |       | —                             |       | —           |       | (1,921           | )          |
| Advances  from (to) affiliates                                          |       | (6,338                                    | )          | 8,081                   |       | 5,057                        |       | (6,800                             | )          | —           |       | —           |       |
| Other                                                                   |       | 1,034                                     |       | —                  |       | —                       |       | —                             |       | —           |       | 1,034            |       |
| Net  cash provided by (used in) financing activities                    |       | (5,304                                    | )          | 43,160                  |       | 5,057                        |       | (6,800                             | )          | —           |       | 36,113           |       |
|                                                                    |       |                                      |       |                    |       |                         |       |                               |       |             |       |             |       |
| Effect  of exchange rate changes                                        |       | —                                    |       | —                  |       | —                       |       | (852                               | )          | —           |       | (852             | )          |
| Net  increase (decrease) in cash and cash equivalents                   |       | —                                    |       | (7,335                  | )          | (121                         | )          | 3,444                              |       | —           |       | (4,012           | )          |
| Cash  and cash equivalents at beginning of period                       |       | —                                    |       | 10,512                  |       | 121                          |       | 46,956                             |       | —           |       | 57,589           |       |
| Cash  and cash equivalents at end of period                             |       | $                                         | —     |                    | $          | 3,177                        |       | $                                  | —     |             | $          | 50,400           |       | $ | — |   | $ | 53,577 |   |

 

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

 

The following discussion andanalysis should be read in conjunction with our unaudited consolidatedfinancial statements included elsewhere in this report.

 

**OperatingResults**

 

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

 

The table below provides asummary of results and the primary contributing factors to the year-over-yearchange.

 
| ** **                                                        | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                                         | ** ** | **2009**                                   | ** ** | **2008**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not foot due to rounding)**                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Sales                                                             |       | $                                          | 130.4      |       | $          | 175.0      |       | $ | (44.6 | ) |   |   |   |   |
|                                                              |       |                                       |       |       |       |       |       | (46.5 | ) | Sales volume |   |
|                                                              |       |                                       |       |       |       |       |       | 4.3 |   | Selling price and mix |   |
|                                                              |       |                                       |       |       |       |       |       | (2.5 | ) | Foreign currency translation |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Gross  profit                                                     |       | 44.8                                       |       | 56.5       |       | (11.7      | )          |   |   |   |   |
| *Gross margin*                                                    | * *   | *34.4*                                     | *%*        | *32.3*     | *%*        |       |       | (15.0 | ) | Sales volume |   |
|                                                              |       |                                       |       |       |       |       |       | 4.3 |   | Selling price and mix |   |
|                                                              |       |                                       |       |       |       |       |       | (2.6 | ) | Product cost and mix |   |
|                                                              |       |                                       |       |       |       |       |       | 1.6 |   | Foreign currency translation |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Selling,  General & Administration(“SG&A”) |       | 23.6                                       |       | 26.1       |       | (2.5       | )          |   |   |   |   |
|                                                              |       |                                       |       |       |       |       |       | (2.0 | ) | Compensation expense |   |
|                                                              |       |                                       |       |       |       |       |       | 1.6 |   | Employee benefit plans |   |
|                                                              |       |                                       |       |       |       |       |       | (0.5 | ) | Professional services |   |
|                                                              |       |                                       |       |       |       |       |       | (0.3 | ) | Depreciation |   |
|                                                              |       |                                       |       |       |       |       |       | (0.4 | ) | Advertising |   |
|                                                              |       |                                       |       |       |       |       |       | (0.7 | ) | Foreign currency translation |   |
|                                                              |       |                                       |       |       |       |       |       | (0.2 | ) | Other |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Plant  closure and severance costs                                |       | 0.5                                        |       | 0.4        |       | 0.1        |       |   |   |   |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Operating  income                                                 |       | 20.8                                       |       | 30.0       |       | (9.2       | )          |   |   |   |   |
| *Operating margin*                                                | * *   | *15.9*                                     | *%*        | *17.1*     | *%*        |       |       | (11.7 | ) | Decrease in gross profit |   |
|                                                              |       |                                       |       |       |       |       |       | 2.5 |   | Decrease in SG&A |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Income  from continuing operations                                |       | 11.3                                       |       | 15.0       |       | (3.6       | )          |   |   |   |   |
|                                                              |       |                                       |       |       |       |       |       | (9.2 | ) | Decrease in operating income |   |
|                                                              |       |                                       |       |       |       |       |       | 0.4 |   | Decrease in net interest  expense |   |
|                                                              |       |                                       |       |       |       |       |       | (0.3 | ) | Decrease in other income |   |
|                                                              |       |                                       |       |       |       |       |       | 5.5 |   | Decrease in income tax  provision |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Loss  from discontinued operations                                |       | —                                     |       | (0.2       | )          | 0.2        |       |   |   |   |   |
|                                                              |       |                                       |       |       |       |       |       | 0.1 |   | Decrease in operating loss |   |
|                                                              |       |                                       |       |       |       |       |       | 0.1 |   | Decrease in tax provision |   |
|                                                              |       |                                       |       |       |       |       |       |   |   |   |   |
| Net  income                                                       |       | $                                          | 11.3       |       | $          | 14.8       |       | $ | (3.4 | ) |   |   |   |   |

 

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Sales in the three monthsended September 30, 2009 decreased by $44.6 million (25.5%) from the sameperiod in 2008.  This sales decrease wasprimarily due to decreased unit volume of $46.5 million.  Selling price and mix improvements of $4.3million partially offset the volume-related decrease in sales.  The translation of foreigncurrency-denominated sales transactions, given the stronger U.S. Dollar incomparison to the third quarter of 2008, reduced consolidated sales by $2.5million in the comparative period. International sales decreased by $24.7 million (21.3%) and domesticsales decreased by $20.0 million (33.8%). The decrease in international sales reflected worldwide weakness indemand and poor market conditions related to the global recession, as well asthe unfavorable effects from movement in foreign currency exchange ratescompared to 2008.  We have continued tobe cautious about extending credit to certain higher risk geographical areasduring the current global recession, which we believe has contributed to a slowdownin sales and orders from portions of our international customer base.  The decrease in U.S. sales is attributed topoor economic conditions and weakness in demand for our products in the thirdquarter of 2009, compared to the strong domestic market conditions thatprevailed during the third quarter of 2008, attributed in part to increasedsevere storm activity in the prior year. While orders and sales in the third quarter of 2009 are up compared tothe first two quarters of 2009, we believe that many of our customers havereduced or delayed orders for our products, and reduced their inventories ofour products, over their concerns about the state of the economy and lowerorder rates from their customers.

 

Consolidated order backlog at September 30,2009 was $81.7 million compared to $80.5 million at June 30, 2009.  Backlog in the Outdoor Products segmentincreased $1.8 million, while the backlog for gear components decreased by $0.6million during the third quarter of 2009.

 

Gross profit decreased $11.7million (20.7%) from the third quarter of 2008 to the third quarter of2009.  Much lower sales volume andmoderate increases in product costs were partially offset by improved pricingand mix and the net favorable effects of movement in foreign currency exchangerates.  Year-over-year steel costs areestimated to be $0.3 million lower for the comparable third quarter periods,reversing the steel cost increases we have experienced in the first twoquarters of 2009 compared to 2008.  Ourmanufacturing costs were adversely affected during the third quarter of 2009 bylower production volumes, including a higher number of idle manufacturing days,which caused lower absorption rates and higher period expenses for fixed andsemi-variable manufacturing costs when compared to the third quarter of 2008.  Our production and shipment volumes were atrecord levels in the year-ago third quarter. Gross margin in the third quarter of 2009 was 34.4% of sales compared to32.3% in the third quarter of 2008.

 

Fluctuations in currencyexchange rates increased our gross profit in the third quarter of 2009 comparedto 2008 by $1.6 million on a consolidated basis.  The translation of weaker foreign currenciesinto a stronger U.S. Dollar resulted in lower reported sales revenue from oursales outside the U.S. (primarily in Europe). However, lower reportedmanufacturing costs in Brazil and Canada, as a result of weaker currencies inthose countries, more than offset the unfavorable impact that translation ofweaker foreign currencies had on sales.

 

SG&A was $23.6 million inthe third quarter of 2009, compared to $26.1 million in the third quarter of2008, representing a decrease of $2.5 million (9.6%).  As a percentage of sales, SG&A increasedfrom 14.9% in the third quarter of 2008 to 18.1% in the third quarter of 2009primarily due to the sharp decrease in sales revenue, which outpaced thereduction in SG&A spending. Compensation expense for the quarter decreased by $2.0 million on ayear-over-year basis, reflecting reductions in staffing levels implementedduring 2009 and the deferral of annual merit increases for many of ouremployees.  Employee benefit expensesincreased by $1.6 million, primarily due to higher costs for our U.S. andCanadian defined benefit pension plans. Expense for these plans is higher in 2009 than it was in 2008 due toincreased amortization of actuarial losses and reduced return on plan assetsfollowing the significant market-related decrease in the value of the relatedpension assets experienced during 2008. Professional services expenses were $0.5 million lower in the thirdquarter of 2009 than in the third quarter of 2008.  Depreciation expense was $0.3 million lowerin the third quarter of 2009 than in the comparable quarter of 2008, primarilybecause our enterprise resource planning software system became fullydepreciated during the third quarter of 2008. Advertising expense decreased by $0.4 million as we have reduced ordeferred expenditures based on the slowdown in our business.  International operating expenses decreased$0.7 million from the prior year due to the stronger U.S. Dollar and its effecton the translation of foreign expenses.

 

We have taken actions during2009 to reduce the number of employees at certain of our locations.  During the three months ended September 30,2009, we recognized a total of $0.5 million in severance charges related tothis reduction in force.  We recognizedseverance charges of $0.4 million during the three months ended September 30,2008 for similar actions involving a fewer number of employees.

 

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Operating income decreased by$9.2 million from the third quarter of 2008 to the third quarter of 2009, resultingin an operating margin for 2009 of 15.9% of sales compared to 17.1% for thethird quarter of 2008. The decrease was due to lower sales and gross profit,partially offset by reduced SG&A expenses.

 

Interest expense was $6.2million in the third quarter of 2009 compared to $6.9 million in the thirdquarter of 2008.  The decrease was due tolower average outstanding debt balances in the comparable periods, partiallyoffset by higher average interest rates on our variable rate debt.  The variable interest rate on our revolverbalance increased significantly when we extended the maturity date to August 9,2010 with an amendment signed on April 30, 2009.  The variable rate on our term loans wasunaffected by the amendment.

 

The following table summarizesour income tax provision for continuing operations in 2009 and 2008:

 
| ** **                                             | ** ** | **Three Months Ended   September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Amounts in thousands)**                             | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Income from continuing  operations before income taxes |       | $                                           | 15,029     |   | $ | 24,128 |   |
| Provision for income  taxes                            |       | 3,687                                       |       | 9,146 |   |
| Effective tax rate                                     |       | 24.5                                        | %          | 37.9 | % |
|                                                        |            |                                             |            |  |  |  |  |

 

The effective tax rate for thethird quarter of 2009 was reduced from the federal statutory rate by the impactof lower taxes on our foreign operations and the positive effect fromfinalization of our advanced pricing agreement (“APA”) with Canada and theU.S.  Finalization of the APA resulted inthe recognition of interest on refunds from prior years.  Additionally, our effective tax rate in 2009was reduced by federal and state tax credits. Taxes on our foreign operationsare lower than in the U.S. because of lower statutory tax rates and increaseddeductions for tax purposes in foreign jurisdictions that are not recognized asexpenses for book purposes.  Partiallyoffsetting these tax rate reductions were additional tax expenses recognized oninterest and dividends repatriated from certain of our foreign locations.

 

Income from continuingoperations in the third quarter of 2009 was $11.3 million, or $0.23 per dilutedshare, compared to $15.0 million, or $0.31 per diluted share, in the thirdquarter of 2008.

 

Discontinued operations,consisting of wind-down and exit activities related to our discontinuedForestry Division, which was sold on November 5, 2007, are summarized asfollows:

 
| ** **                                                | ** ** | **Three Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| Sales                                                     |       | $                                           | —     |   | $ | — |   |
| Operating loss before  taxes from discontinued operations |       | —                                      |       | (87 | ) |
| Income tax provision                                      |       | —                                      |       | 145 |   |
| Loss from discontinued  operations                        |       | $                                           | —     |   | $ | (232 | ) |

 

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***Segment Results. ***The followingtable reflects segment sales and operating results for 2009 and 2008:

 
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                                  | ** ** | **2008** | ** ** | **Percent   Change** | ** ** |
| Sales:                     |       |                                      |       |   |   |   |   |
| Outdoor Products           |       | $                                         | 126,923    |   | $ | 166,217 |   | (23.6 | )% |
| Other                      |       | 3,438                                     |       | 8,789 |   | (60.9 | ) |
| Total sales                |       | $                                         | 130,361    |   | $ | 175,006 |   | (25.5 | )% |
| Operating income:          |       |                                      |       |   |   |   |   |
| Outdoor Products           |       | $                                         | 25,506     |   | $ | 34,552 |   | (26.2 | )% |
| Other                      |       | (4,721                                    | )          | (4,542 | ) | (3.9 | ) |
| Operating income           |       | $                                         | 20,785     |   | $ | 30,010 |   | (30.7 | )% |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Productssegment decreased $39.3 million (23.6%) in the third quarter of 2009 comparedto the third quarter of 2008.  Sales unitvolume decreased by $41.7 million, reflecting weak market conditions and lowershipments for all geographic regions and sales channels and most product lines,compared to the same period in 2008. Improved price and product mix of $4.9 million partially offset thevolume decline.  Fluctuations in foreigncurrency exchange rates further reduced reported segment sales revenue by $2.5million compared to the third quarter of 2008. Sales of wood-cutting chainsaw components were down 26.5% and sales ofoutdoor care products were up by 1.5%. Sales of our outdoor care products were affected by weather conditionsin the Midwest and East Coast areas of the U.S., which stimulated demand forsuch products, and by the positive market reception of promotional activitiesthat we implemented.  Sales ofconcrete-cutting products were down 29.6% due to continued weak marketconditions in the construction equipment industry.  Sales to OEM customers decreased by 35.5%,while replacement market sales declined by 19.6%.  International sales decreased 21.1% for thethree month comparable periods, while domestic sales declined by 29.4%.

 

Segment contribution tooperating income decreased $9.0 million (26.2%) in the third quarter of 2009compared to the third quarter of 2008. The favorable effects of improved price and mix ($4.9 million),fluctuations in foreign currency translation rates ($2.3 million) and lowerSG&A expenses ($1.2 million) were offset by the net effects of lower salesvolume ($13.2 million) and higher product cost and mix ($4.3 million).  Our product costs were adversely affectedduring the third quarter of 2009 compared to the third quarter of 2008 by lowerproduction volumes, including a higher number of idle manufacturing days, whichcaused lower absorption rates and higher period expenses for fixed andsemi-variable manufacturing costs.  Steelcosts on a year-over-year basis were essentially flat for the segment. Thedecrease in SG&A expense is largely attributable to the effects ofcost-cutting measures we implemented in the first nine months of 2009 to reducehead count and operating expenses.  TheseSG&A cost reductions were partially offset by higher expenses for ourdefined benefit pension plans and an increase in the provision for bad debts.

 

***Other.***  The othercategory includes centralized administrative functions, the results of our gearcomponents manufacturing business, a gain on the sale of land and building andplant closure and severance costs.  Salesof gear-related products decreased 60.9% from the third quarter of 2008 to thethird quarter of 2009.  The salesdecrease included lower volume of $4.8 million and a $0.5 million unfavorableeffect of mix changes.  During the currentquarter, a greater proportion of smaller-sized and lower-priced gear componentswere sold compared with the third quarter of 2008.  The contribution to operating income from ourgear components business decreased $0.4 million (43.7%) year-over-year due tothe lower sales volume, partially offset by reduced expenses from cost-cuttingactions taken during 2009.  Centraladministrative expenses were down $0.2 million for the comparable period,largely due to lower compensation expense partially offset by higher costs forour employee benefit plans.  Severancecosts were $0.5 million in the third quarter of 2009 as we continued with ourrestructuring and cost-cutting activities. Similar actions were taken in the third quarter of 2008 resulting in therecognition of $0.4 million in severance costs.

 

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**Nine monthsended September 30, 2009 (unaudited) compared to nine months ended September 30,2008 (unaudited).**

 

The table below provides asummary of results and the primary contributing factors to the year-over-yearchange:

 
| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** |       |
|--------------------------------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                  | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** |   |
| **(Amounts may not foot due to rounding)** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Sales                                      |       | $                                         | 360.9      |       | $          | 463.3      |       | $ | (102.4 | ) |   |   |   |   |
|                                       |       |                                      |       |       |       |       |       | (112.5 | ) | Sales volume |   |
|                                       |       |                                      |       |       |       |       |       | 18.9 |   | Selling price and mix |   |
|                                       |       |                                      |       |       |       |       |       | (8.8 | ) | Foreign currency translation |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Gross  profit                              |       | 117.3                                     |       | 148.3      |       | (31.1      | )          |   |   |   |   |
| *Gross margin*                             | * *   | *32.5*                                    | *%*        | *32.0*     | *%*        |       |       | (41.5 | ) | Sales volume |   |
|                                       |       |                                      |       |       |       |       |       | 18.9 |   | Selling price and mix |   |
|                                       |       |                                      |       |       |       |       |       | (11.0 | ) | Product cost and mix |   |
|                                       |       |                                      |       |       |       |       |       | 2.6 |   | Foreign currency translation |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Operating  expenses                        |       | 77.0                                      |       | 80.0       |       | (3.1       | )          |   |   |   |   |
|                                       |       |                                      |       |       |       |       |       | (2.7 | ) | Gain on sale of land and  building |   |
|                                       |       |                                      |       |       |       |       |       | 3.5 |   | Plant closure costs |   |
|                                       |       |                                      |       |       |       |       |       | 1.9 |   | Increase in other severance  costs |   |
|                                       |       |                                      |       |       |       |       |       | (5.3 | ) | Compensation expense |   |
|                                       |       |                                      |       |       |       |       |       | 3.8 |   | Employee benefit plans |   |
|                                       |       |                                      |       |       |       |       |       | 1.0 |   | Provision for bad debts |   |
|                                       |       |                                      |       |       |       |       |       | (1.6 | ) | Depreciation |   |
|                                       |       |                                      |       |       |       |       |       | (3.2 | ) | Foreign currency translation |   |
|                                       |       |                                      |       |       |       |       |       | (0.5 | ) | Other |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Operating  income                          |       | 40.3                                      |       | 68.3       |       | (28.0      | )          |   |   |   |   |
| *Operating margin*                         | * *   | *11.1*                                    | *%*        | *14.7*     | *%*        |       |       | (31.1 | ) | Decrease in gross profit |   |
|                                       |       |                                      |       |       |       |       |       | 2.7 |   | Gain on sale of land and  building |   |
|                                       |       |                                      |       |       |       |       |       | (5.4 | ) | Plant closure and severance  costs |   |
|                                       |       |                                      |       |       |       |       |       | 5.8 |   | Decrease in SG&A |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Income  from continuing operations         |       | 16.5                                      |       | 32.1       |       | (15.6      | )          |   |   |   |   |
|                                       |       |                                      |       |       |       |       |       | (28.0 | ) | Decrease in operating income |   |
|                                       |       |                                      |       |       |       |       |       | 1.2 |   | Decrease in net interest  expense |   |
|                                       |       |                                      |       |       |       |       |       | (1.1 | ) | Decrease in other income |   |
|                                       |       |                                      |       |       |       |       |       | 12.3 |   | Decrease in income tax  provision |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Loss  from discontinued operations         |       | —                                    |       | (0.4       | )          | 0.4        |       |   |   |   |   |
|                                       |       |                                      |       |       |       |       |       | 0.4 |   | Decrease in operating loss |   |
|                                       |       |                                      |       |       |       |       |       |   |   |   |   |
| Net  income                                |       | $                                         | 16.5       |       | $          | 31.7       |       | $ | (15.2 | ) |   |   |   |   |

 

On May 2, 2008, we acquired all of theoutstanding stock of Carlton, a manufacturer of cutting chain for chainsawslocated near Portland, Oregon.  We paid atotal of $66.2 million in cash for Carlton, including related acquisition costsof $1.5 million, and also assumed liabilities totaling $21.3 million.  Carlton had $1.8 million in cash on the dateof acquisition, resulting in a net cash outflow of $64.4 million for theacquisition.  The acquisition wasfinanced with a combination of cash on hand and $58.5 million borrowed underthe Company’s revolving credit facility. The operating results of Carlton are included in the Company’sconsolidated financial statements from May 2, 2008 forward.  The Company accounted for the acquisition inaccordance with ASC 805.  Accordingly,Carlton’s assets and liabilities were recorded at their estimated fair valueson the date of acquisition.

 

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Sales in the nine months endedSeptember 30, 2009 decreased by $102.4 million (22.1%) from the sameperiod in 2008.  This sales decrease wasprimarily due to decreased unit volume of $112.5 million.  This volume-related decrease was partiallymitigated by the inclusion of Carlton sales for nine months of 2009 and only 5months of 2008.  Partially offsetting thevolume decrease was $18.9 million of selling price and mix improvements.  The translation of foreigncurrency-denominated sales transactions, given the stronger U.S. Dollar incomparison to the first nine months of 2008, reduced consolidated sales by $8.8million in the comparative period. International sales decreased by $71.4 million (23.0%) and domesticsales decreased by $31.0 million (20.2%). The decrease in international sales reflected worldwide weakness indemand and poor market conditions related to the global recession, as well asthe $8.8 million unfavorable foreign currency exchange rate impact on reportedsales compared to 2008.  We havecontinued to be cautious about extending credit to certain higher riskgeographical areas during the current global recession, which we believe hascontributed to a slowdown in sales and orders from portions of ourinternational customer base.  Thedecrease in U.S. sales is attributed to poor economic conditions related to theU.S. recession and weakness in demand for our products.  We believe that many of our customers havereduced or delayed orders for our products in the first half of 2009, andreduced their inventories of our products, over their concerns about the stateof the economy and lower order rates from their customers.

 

Consolidated order backlog at September 30,2009 was $81.7 million compared to $103.5 million at December 31,2008.  Backlog in the Outdoor Productssegment decreased $18.5 million, while the backlog for gear componentsdecreased by $3.3 million during the first nine months of 2009.

 

Gross profit decreased $31.1million (20.9%) from the first nine months of 2008 to the first nine months of2009.  Much lower sales volume andincreases in product costs were partially offset by improved pricing and mixand the net favorable effects of movement in foreign currency exchangerates.  Our manufacturing costs wereadversely affected during the first nine months of 2009 by lower productionvolumes, including a higher number of idle manufacturing days, which causedlower absorption rates and higher period expenses for fixed and semi-variablemanufacturing costs.  Steel costs arealso estimated to be $5.0 million higher in 2009 on a year-over-year basis forthe comparable nine-month periods.  Grossmargin in the first nine months of 2009 was 32.5% of sales compared to 32.0% inthe first nine months of 2008.

 

Fluctuations in currencyexchange rates increased our gross profit year-to-date in 2009 compared to thefirst nine months of 2008 by $2.6 million on a consolidated basis.  The translation of weaker foreign currenciesinto a stronger U.S. Dollar resulted in lower reported sales revenue from oursales outside the U.S. (primarily in Europe). However, lower reportedmanufacturing costs in Brazil and Canada as a result of weaker currencies inthose countries more than offset the unfavorable impact that translation ofweaker foreign currencies had on sales.

 

SG&A was $72.8 million inthe first nine months of 2009, compared to $78.5 million in the first ninemonths of 2008, representing a decrease of $5.8 million (7.3%).  As a percentage of sales, SG&A increasedfrom 16.9% in the first nine months of 2008 to 20.2% in the first nine monthsof 2009 due to the sharp decrease in sales revenue, which has outpaced thereduction in SG&A spending. Compensation expense decreased by $5.3 million year-over-year,reflecting reductions in staffing levels implemented during 2009 and a $1.9million decrease in stock compensation expense because no awards have beengranted to date in 2009.  Stockcompensation expense is expected to increase in the future as additional awardsare granted, including 750,000 stock options granted in October 2009 tothe President, Chief Operating Officer and CEO Designate.  Additionally, annual merit increases,traditionally implemented in the first quarter of the fiscal year, weredeferred for most of our salaried employees in 2009.  Employee benefit expenses increased by $3.8million, primarily due to higher costs for our U.S. and Canadian definedbenefit pension plans.  Expense for theseplans is higher in 2009 than it was in 2008 due to increased amortization ofactuarial losses and reduced return on plan assets following the significantmarket-related decrease in the value of the related pension assets.  We expect 2009 pension expense to beapproximately $6.0 million higher than it was in 2008.  The provision for bad debts increased by $1.0million in the first nine months of 2009 compared to the first nine months of2008, as the global recession has adversely affected our expectations for thecollectability of some of our receivables. Depreciation expense was $1.6 million lower in the first nine months of2009 than in the comparable 2008 period primarily because our enterpriseresource planning software system became fully depreciated during the thirdquarter of 2008.  International operatingexpenses decreased $3.2 million from the prior year due to the stronger U.S.Dollar in the first nine months of 2009 compared to the prior year and itseffect on the translation of foreign expenses.

 

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On June 25, 2009, we soldthe land and building representing our former European headquarters anddistribution center.  These operationshave moved to new, nearby leased facilities. We recognized a pre-tax gain of $2.7 million on the sale.

 

In January 2009, weannounced our intent to close our manufacturing facility in Milan, Tennessee,during the second quarter of 2009. Products previously manufactured in that facility are now produced inour other manufacturing facilities. During the first nine months of 2009, we recognized a total of $3.8million in charges related to the closure of this manufacturing plant,consisting of $2.0 million in asset impairment charges, $1.0 million inemployee severance and benefit costs and $0.8 million in other expenses.  Of these charges, $0.3 million are recognizedin cost of goods sold on the Consolidated Statements of Income for the ninemonths ended September 30, 2009. The land and building are currently being marketed for sale and areincluded in assets held for sale on the Consolidated Balance Sheet as of September 30,2009.

 

We have taken actions during2008 and 2009 to reduce the number of employees at certain of our otherlocations.  During the nine months ended September 30,2009, we recognized a total of $3.4 million in severance charges related tothis reduction in force.  Since December 31,2008, we have reduced our number of employees by over 600 positions, or 17% ofour total workforce.  We recognizedseverance charges of $1.5 million during the nine months ended September 30,2008 for similar actions.  We expect toincur a total of approximately $7.0 million of plant closure and severancecosts for 2009.

 

Operating income decreased by$28.0 million from the first nine months of 2008 to the first nine months of2009, resulting in an operating margin for 2009 of 11.2% of sales compared to14.7% for the first nine months of 2008. The decrease was due to lower salesand gross profit, as well as increased plant closure and severance costs,partially offset by reduced SG&A expenses and the gain on the sale ofproperty in Belgium.

 

Interest expense was $18.5million in the first nine months of 2009 compared to $20.5 million in the firstnine months of 2008.  The decrease wasdue to lower average interest rates on our variable rate debt.  Although the interest rate on our revolverborrowings was increased as a result of the April 2009 amendment of thatcredit facility, the amendment did not apply to the variable interest rate wepay on our term loans, which has been lower during the first nine months of2009 compared to the first nine months of 2008.

 

Other income decreased $1.1million reflecting the sale in 2008 of temporary investments and no similaractivity in 2009.

 

The following table summarizesour income tax provision for continuing operations in 2009 and 2008:

 
| ** **                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Income from continuing  operations before income taxes |       | $                                        | 22,405     |   | $ | 50,259 |   |
| Provision for income  taxes                            |       | 5,874                                    |       | 18,171 |   |
| Effective tax rate                                     |       | 26.2                                     | %          | 36.2 | % |
|                                                        |            |                                          |            |  |  |  |  |

 

The effective tax rate for thefirst nine months of 2009 was reduced from the federal statutory rate by theimpact of lower taxes on our foreign operations and the positive effect fromfinalization of our APA with Canada and the U.S.  Finalization of the APA resulted in therecognition of interest on refunds from prior years.  Additionally, our effective tax rate in 2009was reduced by federal and state tax credits. Taxes on our foreign operationsare lower than in the U.S. because of lower statutory tax rates and increaseddeductions for tax purposes in foreign jurisdictions that are not recognized asexpenses for book purposes.  Partiallyoffsetting these tax rate reductions were additional tax expenses recognized oninterest and dividends repatriated from certain of our foreign locations.  The effective tax rate in the first ninemonths of 2008 was also reduced from the federal statutory rate by the impactof lower tax rates on our foreign operations.

 

Income from continuingoperations in the first nine months of 2009 was $16.5 million, or $0.34 perdiluted share, compared to $32.1 million, or $0.67 per diluted share, in thefirst nine months of 2008.

 

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Discontinued operations aresummarized as follows:

 
| ** **                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                                | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Sales                                                     |       | $                                        | —     |   | $ | — |   |
| Operating loss before  taxes from discontinued operations |       | —                                   |       | (367 | ) |
| Income tax provision                                      |       | —                                   |       | 39 |   |
| Loss from discontinued  operations                        |       | $                                        | —     |   | $ | (406 | ) |

 

The 2008 results consisted ofwind-down and exit activities related to our discontinued Forestry Division,which was sold on November 5, 2007.

 

***Segment Results. ***The followingtable reflects segment sales and operating results for 2009 and 2008:

 
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **Percent  Change** | ** ** |
| Sales:                     |       |                                     |       |   |   |   |   |
| Outdoor Products           |       | $                                        | 348,473    |   | $ | 438,800 |   | (20.6 | )% |
| Other                      |       | 12,413                                   |       | 24,465 |   | (49.3 | ) |
| Total sales                |       | $                                        | 360,886    |   | $ | 463,265 |   | (22.1 | )% |
| Operating income:          |       |                                     |       |   |   |   |   |
| Outdoor Products           |       | $                                        | 56,020     |   | $ | 81,244 |   | (31.0 | )% |
| Other                      |       | (15,695                                  | )          | (12,945 | ) | (21.2 | ) |
| Operating income           |       | $                                        | 40,325     |   | $ | 68,299 |   | (41.0 | )% |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Productssegment decreased $90.3 million (20.6%) in the first nine months of 2009compared to the first nine months of 2008. Lower sales volume reduced sales by $99.9 million, reflecting weakmarket conditions and lower shipments for all product lines, geographic regionsand sales channels due to the global recession. Improved price and product mix of $18.4 million partially offset thevolume decline.  Fluctuations in foreigncurrency exchange rates further reduced reported segment sales revenue by $8.8million compared to the first nine months of 2008.  Sales of wood-cutting chainsaw componentswere down 22.2% and sales of outdoor care products were down 7.0%.  Sales of concrete-cutting products were down33.8% due to continued weak market conditions in the construction equipmentindustry.  Sales to OEM customersdecreased by 25.1%, while replacement market sales decreased by 19.2%.  International sales declined 23.0% for the firstnine month comparable periods, while domestic sales decreased 14.9%.

 

Segment contribution tooperating income decreased $25.2 million (31.0%) in the first nine months of2009 compared to the first nine months of 2008. The favorable effects of improved price and mix ($18.4 million), lowerSG&A costs ($1.2 million) and the positive effects of fluctuations inforeign currency translation rates ($5.8 million) were offset by the neteffects of lower sales volume ($37.0 million) and higher product cost and mix($13.6 million).  The higher product costand mix includes $5.6 million in higher steel costs on a year-over-year basis.The reduction in segment SG&A expenses included lower compensation,depreciation and advertising costs, partially offset by higher legal fees andcharges for bad debts.

 

***Other.***  The othercategory includes centralized administrative functions, the results of our gearcomponents manufacturing business, a gain on sale of land and building andplant closure and severance costs.  Salesof gear-related products decreased 49.3% from the first nine months of 2008 to thefirst nine months of 2009.  Lower volumeof $12.6 million was partially offset by a $0.5 million favorable effect ofprice and mix improvements. The contribution to operating income from our gearcomponents business decreased $1.0 million (41.6%) year-over-year due to thelower sales volume, partially offset by reduced expenses from cost-cuttingactions taken during 2009.  Centraladministrative expenses decreased $0.9 million (6.6%) for the comparableperiods, largely due to lower compensation and audit expenses, partially offsetby higher costs for employee benefit plans. We recognized a pre-tax gain of $2.7 million on the sale of property inBelgium during the second quarter of 2009. Plant closure and severance costs were $6.9 million in the first ninemonths of 2009 compared to $1.5 million in the first nine months of 2008.

 

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**FinancialCondition, Liquidity and Capital Resources**

 

Total debt at September 30,2009 was $310.2 million compared to $325.5 million at December 31, 2008:

 
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Revolving credit  facility        |       | $                      | 27,500     |                  | $          | 30,750 |   |
| Term loans                        |       | 107,744                |       | 119,770               |       |
| 8 7/8% senior  subordinated notes |       | 175,000                |       | 175,000               |       |
| Total debt                        |       | 310,244                |       | 325,520               |       |
|                              |       |                   |       |                  |       |
| Less current maturities           |       | (135,244               | )          | (31,981               | )          |
| Long-term debt                    |       | $                      | 175,000    |                  | $          | 293,539 |   |

 

The revolving credit facilityand the term loan facility mature on August 9, 2010 and are thereforeclassified as current liabilities on the balance sheet as of September 30,2009.  Before these facilities mature, weplan to obtain replacement financing.  Weare currently in negotiations with GECC to amend and extend these senior creditfacilities.  If successful, we expect tocomplete the amendment and extension by the end of 2009.  The proposed terms include an extension ofthe maturity date, an increase in the interest rate applicable to the termloans and a reduction in the borrowing capacity of the revolving creditfacility.  However, given the conditionsin global credit markets, we may not be successful in consummating the proposedagreements.

 

***8 7/8% Senior Subordinated Notes.***  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at the option of the Company, in whole or in part, at redemptionprices of 102.219% from August 1, 2009 through July 31, 2010; and at100% on 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% seniorsubordinated notes, none of Blount’s existing foreign subsidiaries (“non-guarantorsubsidiaries”) guarantee these notes. See also Note 16.

 

***Senior Credit Facilities.******* The Company, through its wholly-owned subsidiary,Blount, Inc., first entered into a credit agreement with GECC as Agent on May 15,2003.  The agreement was amended andrestated on August 9, 2004, and has had several subsequentamendments.  The senior credit facilitiesconsist of a revolving credit facility and a term loan facility.

 

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

 

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

 

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

 

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

 

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

 

We paid fees and expenses of $1.9 million to amend therevolving credit facility in April 2009. The revolving credit facilityprincipal balance outstanding was classified as current on the December 31,2008 Consolidated Balance Sheet because, before the maturity date was extendedby the amendment, the maturity date was less than 12 months from the balancesheet date at that time.  There were nochanges to financial covenants, nor did this amendment affect the term loanfacility.

 

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As of September 30, 2009, the revolving creditfacility provided for total available borrowings up to $90.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of September 30, 2009, the Company hadthe ability to borrow an additional $45.9 million under the terms of therevolving credit agreement. Interest is payable monthly in arrears on any primerate borrowing and at the individual maturity dates for any LIBOR-basedborrowing.  Any outstanding principal isdue in its entirety on the maturity date of August 9, 2010.

 

The term loan facility bearsinterest at the LIBOR rate plus 1.75%, or at the prime rate, depending on thetype of loan, and also matures on August 9, 2010.  The term loan facility requires quarterlypayments of $0.3 million, with a final payment of $106.6 million due on thematurity date.  Once repaid, principalunder the term loan facility may not be re-borrowed by the Company.

 

The amended and restatedsenior credit facilities contain financial covenant requirements relating tomaximum capital expenditures, minimum fixed charge coverage ratio, maximumleverage ratio and maximum first lien credit facilities leverage ratio.  In addition, there are covenants relating,among other categories, to investments, acquisitions, loans and advances,indebtedness and the sale of stock or assets. The Company was in compliance with all debt covenants through September 30,2009.  While management expects theCompany to remain in compliance with all debt covenants, a further decline inoperating results could make remaining in compliance more difficult in thefuture.

 

The amended and restated senior credit facilities maybe prepaid at any time.  There can alsobe additional mandatory repayment requirements related to the sale of Companyassets, the issuance of stock under certain circumstances or upon the Company’sannual generation of excess cash flow, as determined under the creditagreement.

 

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

 

Our debt instruments and general credit are rated byboth Standard & Poor’s and Moody’s. There were no changes to these ratings during the three or nine monthsended September 30, 2009.  As of September 30,2009, the credit ratings for the Company were as follows:

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

 

We intend to fund workingcapital, capital expenditures, debt service requirements and obligations underour post-employment benefit plans for the next twelve months through cash flowsgenerated from operations and the amounts available under our revolving creditfacility and any replacement revolving credit facility.  We expect our financial resources will besufficient to cover any additional increases in working capital and capitalexpenditures.  There can be no assurance,however, that these resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs, including, but not limited to,the postponement of discretionary contributions to post-employment benefitplans, the postponement of capital expenditures, restructuring of our creditfacilities and issuance of new debt or equity securities.

 

Our interest expense may varyin the future because the revolving credit facility and term loan interestrates are variable. In addition, any replacement financing for the term loan isexpected to involve a higher interest rate premium over benchmark interestrates than we currently pay. The interest rate is fixed on the seniorsubordinated notes.  Our weighted averageinterest rate on all debt was 6.37% as of September 30, 2009 compared to6.42% as of December 31, 2008.

 

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Cash and cash equivalents at September 30,2009 were $58.1 million compared to $58.3 million at December 31,2008.  As of September 30, 2009,most of our cash was held at our foreign operations.

 

Cash provided by operatingactivities is summarized in the following table:

 
| ** **                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**              | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Income from continuing  operations      |       | $                                        | 16,531     |   | $ | 32,088 |   |
| Non-cash items                          |       | 19,045                                   |       | 23,153 |   |
| Subtotal                                |       | 35,576                                   |       | 55,241 |   |
| Changes in assets and  liabilities, net |       | (6,615                                   | )          | (11,333 | ) |
| Discontinued  operations, net           |       | (106                                     | )          | (4,199 | ) |
| Cash provided by  operating activities  |       | $                                        | 28,855     |   | $ | 39,709 |   |

 

Non-cash items consist ofexpenses for depreciation of property, plant and equipment; amortization; stockcompensation and other non-cash charges; asset impairment charges; the taxbenefit or expense from share-based compensation; deferred income taxes; andgains or losses on disposal of property, plant and equipment.

 

During the first nine monthsof 2009, operating activities provided $28.9 million of cash.  Income from continuing operations, plusnon-cash items, totaled $35.6 million in the first nine months of 2009,reflecting reduced income compared with the first nine months of 2008, as wellas lower non-cash items. The change in non-cash items is primarily due to theinclusion in 2009 of the $2.7 million gain on sale of our land and building inBelgium.  The net change in workingcapital components and other assets and liabilities during the period used $6.6million in cash flow from operating activities. Decreases in accounts receivable of $5.0 million, inventories of $10.2million and other assets of $0.8 million all positively affected cash flowsfrom operating activities.  Thesepositive effects were offset by reductions in accounts payable and accruedexpenses of $16.7 million and a reduction in other liabilities of $5.8million.  Discontinued operations used$0.1 million in cash during the first nine months of 2009 as certain accruedobligations and liabilities related to these former operations were paid.  Cash payments during the first nine months of2009 also included $19.7 million for interest and $9.9 million for incometaxes. In September 2009, we made a $10 million cash contribution to ourU.S. defined benefit pension plan.  Weexpect to contribute a total of approximately $14 to $15 million to our fundedpension plans during 2009.

 

During the nine months ended September 30,2008, operating activities provided $39.7 million of cash.  Income from continuing operations, plusnon-cash items, totaled $55.2 million in the first nine months of 2008,reflecting improved operating results and larger non-cash items.  The non-cash items reflect higherdepreciation and amortization expenses offset by fluctuations in the deferredincome tax provision.  In addition,purchase accounting for the Carlton acquisition resulted in non-cash charges of$2.8 million, which was recognized in the first nine months of 2008.  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 $10.3 million and an increase in inventories of $2.7 million.  Discontinued operations used $4.2 million incash during the first nine months of 2008 as certain obligations andliabilities related to the sale of our Forestry Division were paid in2008.  Cash payments during the firstnine months of 2008 also included $21.7 million for interest and $11.8 millionfor income taxes.

 

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Cash used in investingactivities is summarized as follows:

 

| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Proceeds from sale of  assets               |       | $                                        | 3,282      |   | $ | 1,349 |   |
| Purchases of property,  plant and equipment |       | (13,069                                  | )          | (17,675 | ) |
| Acquisition of Carlton                      |       | —                                   |       | (64,381 | ) |
| Discontinued operations                     |       | —                                   |       | 1,725 |   |
| Cash used in investing  activities          |       | $                                        | (9,787     | ) | $ | (78,982 | ) |

 

In June 2009, we soldproperty in Belgium for proceeds of $3.2 million and moved our Europeanheadquarters and distribution center to new leased facilities nearby.  Purchases of property, plant and equipmentare primarily for productivity improvements, expanded manufacturing capacityand replacement of consumable tooling and equipment. Generally, about one-thirdof our capital spending represents replacement of consumable tooling, dies andexisting equipment, with the remainder devoted to capacity and productivityimprovements.  During 2009, we expect toinvest $17 million to $19 million in available cash for capital expenditurescompared to $26.1 million for the full year in 2008.

 

Discontinued operationsprovided net cash from investing activities of $1.7 million in the first ninemonths of 2008, as we collected a purchase price adjustment from the sale ofour Forestry Division.

 

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

 

| ** **                                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|
| **(Amounts in thousands)**                              | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Net increase (decrease)  in debt principal outstanding  |       | $                                        | (15,276    | ) | $ | 35,079 |   |
| Issuance costs related  to debt                         |       | (1,900                                   | )          | — |   |
| Proceeds and tax  effects from stock-based compensation |       | (165                                     | )          | 1,034 |   |
| Cash provided by (used  in) financing activities        |       | $                                        | (17,341    | ) | $ | 36,113 |   |

 

Cash used in financingactivities in the first nine months of 2009 consisted of $15.3 million in netrepayments of principal on our revolving credit and term debt facilities.  We also incurred $1.9 million in costs toamend and extend the maturity date of our revolving credit facility in April ofthis year.  Cash provided by financingactivities in the first nine months of 2008 consisted of net borrowing underour revolving credit facility, primarily to fund the acquisition of Carlton,partially offset by scheduled quarterly principal payments on our term debtfacility.  Activity under our stockcompensation plans, including the related income tax effects, used $0.2 millionof cash during the first nine months of 2009 and provided $1.0 million in cashduring the first nine months of 2008.

 

**CriticalAccounting Policies**

 

There have been no material changes to our criticalaccounting policies and estimates from the information provided in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”included in our Form 10-K for the fiscal year ended December 31,2008.

 

**RecentAccounting Pronouncements**

 

In December 2007, the FASB revised theauthoritative guidance for business combinations.  The revised guidance was effective for us on January 1,2009.  The impact of this revisedguidance will depend on the nature, terms and size of any business combinationscompleted after the effective date.  Inaddition, certain transaction-related expenses that would have been capitalizedas part of a transaction under previous authoritative guidance are expensed asincurred under the revised guidance beginning January 1, 2009.

 

In December 2007, the FASB issued authoritativeguidance on non-controlling interests in consolidated financial statements.  The new authoritative guidance was effectivefor us on January 1, 2009 and did not have a material impact on ourfinancial position or results of operations.

 

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In April 2008, the FASB revised authoritativeguidance regarding the determination of the useful life of intangibleassets.  This revised authoritativeguidance amends the factors that should be considered in developing assumptionsused to determine useful lives of recognized intangible assets. The revisedauthoritative guidance was effective for us on January 1, 2009.  The impact of adopting this revisedauthoritative guidance depends on the nature, terms and size of any businesscombinations completed after the effective date.

 

In June 2008, the FASB issued new authoritativeguidance for determining whether instruments granted in share-based paymenttransactions are participating securities prior to vesting and, therefore, needto be included in the earnings allocation in computing earnings per share underthe two-class method described in paragraph 45-60B of ASC 260.10.45.  This authoritative guidance was effective forus on January 1, 2009 and had no impact on the calculation of earnings pershare.

 

In December 2008, the FASB revised authoritativeguidance regarding employers’ disclosures about postretirement benefit planassets to require expanded disclosures about plan assets of a defined benefitpension or other postretirement plan.  InSeptember 2009, the FASB further revised the authoritative guidance forfair value measurements and disclosures to permit a reporting entity to measurethe fair value of an investment on the basis of the net asset value per shareof the investment.  This revised authoritative guidance will be effectivefor us in our 2009 Form 10-K, and will result in expanded disclosures inthe notes to our consolidated financial statements.

 

In April 2009, the FASB revised authoritativeguidance regarding interim disclosures about fair value of financialinstruments.  This revised authoritative guidance requires expandeddisclosures about fair value of financial instruments for interim periods andalso requires those disclosures in summarized financial information at interimreporting periods.  We adopted this revised authoritative guidance in thefirst quarter of 2009. With this adoption, we also adopted new authoritativeguidance regarding determining fair value when the volume and level of activityfor the asset or liability have significantly decreased and identifyingtransactions that are not orderly and recognition and presentation ofother-than-temporary impairments.  The impact of adopting thisauthoritative guidance resulted in expanded disclosures in the notes to ourconsolidated financial statements.

 

In May 2009, the FASB issued new authoritativeguidance on subsequent events that sets out general standards of accounting forand disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.  This authoritative guidance requiresdisclosure of the date through which subsequent events have been evaluated, thenature of any event and an estimate of its financial effect or disclosure thatsuch estimate cannot be made.  We adoptedthis authoritative guidance in the quarter ended June 30, 2009 and suchadoption resulted in additional disclosure regarding subsequent events.

 

In August 2009, the FASB revised the authoritativeguidance on fair value measurements and disclosures for liabilities.  This revised authoritative guidance waseffective for us in the quarter ended September 30, 2009 and did not havea material impact on our financial position, results of operations or fairvalue disclosures.

 

**ForwardLooking Statements**

 

“Forward looking statements,”as defined by the Private Securities Litigation Reform Act of 1995, used inthis report, including without limitation our “outlook,” “guidance,” “expectations,”  “beliefs,” “plans,” “indications,” “estimates,”“anticipations,” and their variants, are based upon available information andupon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning availability and estimated costs of financing,the global economic climate, foreign currency exchange rates, the cost to theCompany of commodities in general, and of steel in particular, the anticipatedlevel of applicable interest rates and the anticipated effects of discontinuedoperations involve certain estimates and assumptions. To the extent that these,or any other such assumptions, are not realized going forward, or otherunforeseen factors arise, actual results for the periods subsequent to the dateof this report may differ materially.

 

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

We are exposed to market risksfrom changes in interest rates, foreign currency exchange rates and commodityprices, including raw materials such as steel. We manage our exposure to thesemarket risks through our regular operating and financing activities, and, whendeemed appropriate, through the use of derivatives. When utilized, derivativesare used as risk management tools and not for trading or speculative purposes.

 

We manage our ratio of fixed to variable rate debtwith the objective of achieving a mix that management believes is appropriate.Our 8 7/8% senior subordinated notes carry a fixed interest rate.  The interest rates are variable on our termand revolver loans and we are subject to market risk from movement in benchmarkrates.  When we amended the revolvingcredit facility in April 2009, the interest rate on our revolving creditfacility was increased significantly. Given the current global economic environment and global credit markets,we will continue to be subject to market risk and will likely incur higherinterest expense and borrowing costs on any replacement financing we obtain.

 

See also, the Market Risksection of Management’s Discussion and Analysis of Financial Condition andResults of Operations in our most recent Form 10-K, filed with the SEC on March 10,2009, for further discussion of market risk.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

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

 

The Company, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures asof the end of the period covered by this report. Based on this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded thatthe Company’s disclosure controls and procedures were effective at thereasonable assurance level.

 

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

 

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**PART II     OTHERINFORMATION**

 

**ITEM 5.  OTHER INFORMATION**

 

On October 1, 2009, Blount filed a report on Form 8-Kwhich, among other things, announced the selection of Joshua L. Collins asPresident, Chief Operating Officer and CEO Designate and attached the pressrelease that the Company issued in connection with Mr. Collins’ selectionand Mr. Collins’ Executive Employment Agreement as exhibits to thereport.  At that time, it wascontemplated that Mr. Collins would report to Blount on October 15,2009.

 

Subsequently, due both to travel schedules and thetiming of certain orientation programs, it was decided that the starting datefor Mr. Collins to report to work should be postponed to Monday, October 19,2009 for all purposes. As a consequence, October 19, 2009 became the “EffectiveDate” for Mr. Collins’ employment agreement, as defined therein.

 

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

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

 

**31.2Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 byCalvin E. Jenness, Senior Vice President and Chief Financial Officer.

 

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

 

**32.2Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 byCalvin E. Jenness, Senior Vice President and Chief Financial Officer.

 

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

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the duly authorized undersigned.

 
| BLOUNT INTERNATIONAL, INC.   |   |                                     |   |
|------------------------------|--------|------------------------------------------|--------|
| Registrant                   |   |                                     |   |
|                         |   |                                     |
|                         |   |                                     |
| /s/ Calvin E. Jenness        |   | /s/ Mark V. Allred                       |
| Calvin E. Jenness            |   | Mark V. Allred                           |
| Senior Vice President and    |   | Vice President and Corporate  Controller |
| Chief Financial Officer      |   | (Principal Accounting  Officer)          |
|                         |   |                                     |
| Dated: November 6, 2009 |   |                                     |

 

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