Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

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

 

**for thequarterly period ended September 30, 2010.**

** **

**OR**

 

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

 

**Commission file number 001-11549**

 

**BLOUNT INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

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

 

**(503)653-8881**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

As of November 4, 2010 there were 48,126,844 shares outstanding of$0.01 par value common stock.

 

 

 

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**BLOUNTINTERNATIONAL, INC. AND SUBSIDIARIES**

 

**Index**

 
| ** **                                                                                                                    | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                          |     |
| Part I     Financial  Information                                                               |     |
|                                                                                                                          |     |
| Item 1. Consolidated Financial Statements                                                                                     |     |
|                                                                                                                          |     |
| Unaudited Consolidated Statements of Income Three and  nine months ended September 30, 2010 and 2009                     | 3        |
|                                                                                                                          |     |
| Unaudited Consolidated Balance Sheets  September 30, 2010 and December 31, 2009                                     | 4        |
|                                                                                                                          |     |
| Unaudited Consolidated Statements of Cash Flows Nine  months ended September 30, 2010 and 2009                           | 5        |
|                                                                                                                          |     |
| Unaudited Consolidated Statement of Changes in  Stockholders’ Equity (Deficit) Nine months ended September 30, 2010 | 6        |
|                                                                                                                          |     |
| Notes to Unaudited Consolidated Financial Statements                                                                          | 7        |
|                                                                                                                          |     |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                          | 18       |
|                                                                                                                          |     |
| Item  3. Quantitative and Qualitative Disclosures about Market Risk                                                           | 31       |
|                                                                                                                          |     |
| Item 4. Controls and Procedures                                                                                               | 31       |
|                                                                                                                          |     |
| Part II    Other  Information                                                                        |     |
|                                                                                                                          |     |
| Item 6. Exhibits                                                                                                              | 32       |
|                                                                                                                          |     |
| Signatures                                                                                                                    | 33       |

 

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**PART I      FINANCIAL INFORMATION**

 

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS**

 

**UNAUDITED CONSOLIDATED STATEMENTS OF INCOME**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Sales                                                                           |       | $                                                    | 162,581    |                                                | $          | 126,923 |   | $ | 440,498 |   | $ | 348,473 |   |
| Cost of sales                                                                   |       | 112,174                                              |       | 83,081                                              |       | 289,900 |   | 234,490 |   |
| Gross profit                                                                    |       | 50,407                                               |       | 43,842                                              |       | 150,598 |   | 113,983 |   |
| Selling, general, and administrative expenses                                   |       | 29,702                                               |       | 23,113                                              |       | 86,560 |   | 70,850 |   |
| Gain on sale of land and building                                               |       | —                                               |       | —                                              |       | — |   | (2,701 | ) |
| Plant closure and severance costs                                               |       | —                                               |       | 482                                                 |       | — |   | 6,886 |   |
| Operating income                                                                |       | 20,705                                               |       | 20,247                                              |       | 64,038 |   | 38,948 |   |
| Interest income                                                                 |       | 7                                                    |       | 35                                                  |       | 82 |   | 190 |   |
| Interest expense                                                                |       | (7,720                                               | )          | (6,159                                              | )          | (20,647 | ) | (18,516 | ) |
| Other income (expense), net                                                     |       | (7,189                                               | )          | 368                                                 |       | (7,221 | ) | 406 |   |
| Income from continuing operations before income  taxes                          |       | 5,803                                                |       | 14,491                                              |       | 36,252 |   | 21,028 |   |
| Provision (benefit) for income taxes                                            |       | (4,757                                               | )          | 3,491                                               |       | 7,207 |   | 5,378 |   |
| Income from continuing operations                                               |       | 10,560                                               |       | 11,000                                              |       | 29,045 |   | 15,650 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Discontinued operations:                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Income from discontinued operations before income  taxes                        |       | 11,796                                               |       | 538                                                 |       | 12,964 |   | 1,377 |   |
| Provision for income taxes                                                      |       | 6,743                                                |       | 196                                                 |       | 7,171 |   | 496 |   |
| Income from discontinued operations                                             |       | 5,053                                                |       | 342                                                 |       | 5,793 |   | 881 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                      |       | $                                                    | 15,613     |                                                | $          | 11,342 |   | $ | 34,838 |   | $ | 16,531 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings per share:                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                           |       | $                                                    | 0.22       |                                                | $          | 0.23 |   | $ | 0.61 |   | $ | 0.33 |   |
| Discontinued operations                                                         |       | 0.11                                                 |       | 0.01                                                |       | 0.12 |   | 0.02 |   |
| Net income                                                                      |       | $                                                    | 0.33       |                                                | $          | 0.24 |   | $ | 0.73 |   | $ | 0.35 |   |
| Diluted earnings per share                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Continuing operations                                                           |       | $                                                    | 0.22       |                                                | $          | 0.23 |   | $ | 0.60 |   | $ | 0.32 |   |
| Discontinued operations                                                         |       | 0.10                                                 |       | —                                              |       | 0.12 |   | 0.02 |   |
| Net income                                                                      |       | $                                                    | 0.32       |                                                | $          | 0.23 |   | $ | 0.72 |   | $ | 0.34 |   |
|                                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares used in per share  calculations:                        |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                           |       | 47,902                                               |       | 47,766                                              |       | 47,844 |   | 47,751 |   |
| Diluted                                                                         |       | 48,424                                               |       | 48,271                                              |       | 48,364 |   | 48,210 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**UNAUDITED CONSOLIDATED BALANCE SHEETS**

**Blount International, Inc. and Subsidiaries**

** **
| ** **                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands, except share and per share data)**                           | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                                                                                                                          |       |                   |       |                  |       |
| **Assets**                                                                                                                    | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                               |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                     |       | $                      | 91,000     |                  | $          | 55,070 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $3,860 and $3,339, respectively                               |       | 85,651                 |       | 74,475                |       |
| Inventories, net                                                                                                              |       | 103,730                |       | 78,179                |       |
| Deferred income taxes                                                                                                         |       | 10,844                 |       | 5,528                 |       |
| Other current assets                                                                                                          |       | 17,650                 |       | 23,962                |       |
| Total current assets                                                                                                          |       | 308,875                |       | 237,214               |       |
| Property, plant, and equipment, net                                                                                           |       | 108,051                |       | 114,470               |       |
| Deferred income taxes                                                                                                         |       | —                 |       | 16,006                |       |
| Intangible assets                                                                                                             |       | 59,582                 |       | 12,371                |       |
| Goodwill                                                                                                                      |       | 103,700                |       | 66,071                |       |
| Other assets                                                                                                                  |       | 28,106                 |       | 37,434                |       |
| Total Assets                                                                                                                  |       | $                      | 608,314    |                  | $          | 483,566 |   |
|                                                                                                                          |       |                   |       |                  |       |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                          |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                                          |       | $                      | 7,687      |                  | $          | 5,013 |   |
| Accounts payable                                                                                                              |       | 39,941                 |       | 31,539                |       |
| Accrued expenses                                                                                                              |       | 64,386                 |       | 50,614                |       |
| Deferred income taxes                                                                                                         |       | 318                    |       | 501                   |       |
| Total current liabilities                                                                                                     |       | 112,332                |       | 87,667                |       |
| Long-term debt, excluding current maturities                                                                                  |       | 367,013                |       | 280,852               |       |
| Deferred income taxes                                                                                                         |       | 9,507                  |       | 4,695                 |       |
| Employee benefit obligations                                                                                                  |       | 67,679                 |       | 75,780                |       |
| Other liabilities                                                                                                             |       | 20,753                 |       | 41,312                |       |
| Total liabilities                                                                                                             |       | 577,284                |       | 490,306               |       |
| Commitments and contingent liabilities                                                                                        |       |                   |       |                  |       |
| Stockholders’ equity (deficit):                                                                                          |       |                   |       |                  |       |
| Common stock: par value $0.01 per share,  100,000,000 shares authorized, 47,967,858 and 47,759,331 outstanding,  respectively |       | 479                    |       | 478                   |       |
| Capital in excess of par value of stock                                                                                       |       | 584,961                |       | 581,211               |       |
| Accumulated deficit                                                                                                           |       | (521,717               | )          | (556,555              | )          |
| Accumulated other comprehensive loss                                                                                          |       | (32,693                | )          | (31,874               | )          |
| Total stockholders’ equity (deficit)                                                                                     |       | 31,030                 |       | (6,740                | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit)                                                                    |       | $                      | 608,314    |                  | $          | 483,566 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                                               | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
|                                                                               |       |                                                    |       |   |   |
| **Cash flows from operating  activities:**                                         |       |                                                    |       |   |   |
| Net income                                                                         |       | $                                                       | 34,838     |   | $ | 16,531 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                    |       |   |   |
| Income from discontinued operations                                                |       | (5,793                                                  | )          | (881 | ) |
| Early extinguishment of debt                                                       |       | 7,110                                                   |       | — |   |
| Depreciation of property, plant, and equipment                                     |       | 15,692                                                  |       | 14,284 |   |
| Amortization of intangible assets and deferred  financing costs                    |       | 4,013                                                   |       | 4,250 |   |
| Stock compensation and other non-cash charges                                      |       | 2,758                                                   |       | 2,066 |   |
| Asset impairment charges                                                           |       | 264                                                     |       | 1,960 |   |
| Excess tax expense (benefit) from stock-based  compensation                        |       | (358                                                    | )          | 68 |   |
| Deferred income tax benefit                                                        |       | (574                                                    | )          | (1,730 | ) |
| (Gain) loss on disposal of assets                                                  |       | 826                                                     |       | (2,552 | ) |
| Changes in assets and liabilities, net of impact  of acquisition:                  |       |                                                    |       |   |   |
| (Increase) decrease in accounts receivable                                         |       | (4,800                                                  | )          | 3,644 |   |
| (Increase) decrease in inventories                                                 |       | (9,271                                                  | )          | 9,745 |   |
| (Increase) decrease in other assets                                                |       | 14,859                                                  |       | 728 |   |
| Increase (decrease) in accounts payable                                            |       | (2,231                                                  | )          | (3,905 | ) |
| Increase (decrease) in accrued expenses                                            |       | 4,834                                                   |       | (12,295 | ) |
| Increase (decrease) in other liabilities                                           |       | (30,575                                                 | )          | (5,832 | ) |
| Discontinued operations                                                            |       | 1,106                                                   |       | 2,774 |   |
| Net cash provided by operating activities                                          |       | 32,698                                                  |       | 28,855 |   |
|                                                                               |       |                                                    |       |   |   |
| **Cash flows from investing  activities:**                                         |       |                                                    |       |   |   |
| Purchases of property, plant, and equipment                                        |       | (14,017                                                 | )          | (12,737 | ) |
| Proceeds from sale of assets                                                       |       | 126                                                     |       | 3,282 |   |
| Acquisition of SpeeCo, net of cash acquired                                        |       | (90,854                                                 | )          | — |   |
| Discontinued operations                                                            |       | 25,176                                                  |       | (332 | ) |
| Net cash used in investing activities                                              |       | (79,569                                                 | )          | (9,787 | ) |
|                                                                               |       |                                                    |       |   |   |
| **Cash flows from financing  activities:**                                         |       |                                                    |       |   |   |
| Net borrowing (repayment) of principal under  revolving credit facility            |       | 21,300                                                  |       | (3,250 | ) |
| Proceeds from term loans                                                           |       | 350,000                                                 |       | — |   |
| Repayment of term loan principal                                                   |       | (107,465                                                | )          | (12,026 | ) |
| Repayment of 8 7/8% senior subordinated notes                                      |       | (175,000                                                | )          | — |   |
| Issuance costs related to debt                                                     |       | (6,863                                                  | )          | (1,900 | ) |
| Excess tax (expense) benefit from stock-based  compensation                        |       | 358                                                     |       | (68 | ) |
| Proceeds from stock-based compensation activity                                    |       | 1,308                                                   |       | 231 |   |
| Payment of employee taxes on restricted stock  awards                              |       | (333                                                    | )          | (328 | ) |
| Net cash provided by (used in) financing  activities                               |       | 83,305                                                  |       | (17,341 | ) |
|                                                                               |       |                                                    |       |   |   |
| Effect of exchange rate changes                                                    |       | (504                                                    | )          | (1,862 | ) |
|                                                                               |       |                                                    |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | 35,930                                                  |       | (135 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 55,070                                                  |       | 58,275 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                       | 91,000     |   | $ | 58,140 |   |

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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** **

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

**BlountInternational, Inc. and Subsidiaries**

 
| **(Amounts in thousands)**                                                                                            | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive   Loss** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|-----------|------------|
|                                                                                                                            |       |       |       |              |       |                                     |       |                     |       |                                              |       |      |       |
| Balance December 31, 2009                                                                                                  |       | 47,759     |       | $                 | 478        |                                     | $          | 581,211                  |       | $                                                 | (556,555   | )         | $          | (31,874 | ) | $ | (6,740 | ) |
|                                                                                                                            |       |       |       |              |       |                                     |       |                     |       |                                              |       |      |       |
| Net income                                                                                                                      |       |       |       |              |       |                                     |       | 34,838                   |       |                                              |       | 34,838    |       |
| Other comprehensive income:                                                                                                     |       |       |       |              |       |                                     |       |                     |       |                                              |       |      |       |
| Foreign currency translation                                                                                                    |       |       |       |              |       |                                     |       |                     |       | 489                                               |       | 489       |       |
| Unrealized losses                                                                                                               |       |       |       |              |       |                                     |       |                     |       | (1,308                                            | )          | (1,308    | )          |
| Comprehensive income, net                                                                                                       |       |       |       |              |       |                                     |       |                     |       |                                              |       | 34,019    |       |
| Stock options, stock appreciation rights (“SARs”),  restricted stock units (“RSUs”), & restricted stock |       | 209        |       | 1                 |       | 1,332                                    |       |                     |       |                                              |       | 1,333     |       |
| Stock compensation expense                                                                                                      |       |       |       |              |       | 2,418                                    |       |                     |       |                                              |       | 2,418     |       |
|                                                                                                                            |       |       |       |              |       |                                     |       |                     |       |                                              |       |      |       |
| Balance September 30, 2010                                                                                                 |       | 47,968     |       | $                 | 479        |                                     | $          | 584,961                  |       | $                                                 | (521,717   | )         | $          | (32,693 | ) | $ | 31,030 |   |

 

Othercomprehensive income (loss) was $3.0 million and ($0.8) million for the threeand nine months ended September 30, 2010, respectively.  These amounts are net of a deferred taxexpense (benefit) of $0.2 million and ($0.8) million for the three and ninemonths ended September 30, 2010, respectively.  Other comprehensive income, net of a deferredtax expense of $0.9 million and $1.8 million, was $2.4 million and $4.0 millionfor the three and nine months ended September 30, 2009, respectively.

 

Theaccompanying notes are an integral part of these Consolidated FinancialStatements.

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**UNAUDITED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OF PRESENTATION**

 

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

 

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

 

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

 

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

 

**NOTE2:  ACQUISITION OF SPEECO AND INTANGIBLEASSETS**

 

OnAugust 10, 2010, we acquired all of the outstanding stock of SP Companies, Inc.(“SpeeCo”) pursuant to a Stock Purchase Agreement (the “Agreement”), dated August 9,2010.  SpeeCo, located in Golden,Colorado, was founded in 1957 and is a supplier of log splitters, post-holediggers, tractor three-point linkage parts and equipment, and farm and ranchaccessories.  The acquisition of SpeeCoexpands our product offerings to our current markets and customers, as well asoffering opportunities for synergies in the areas of marketing, sales, anddistribution, including marketing SpeeCo’s products to our internationalcustomers.  We also expect to benefitfrom the acquisition of SpeeCo by leveraging its experience in low-costsourcing of materials and components.

 

Wepaid $91.7 million in cash for SpeeCo.  As part of the stock acquisition we assumed liabilities totaling $31.0million.  Pursuant to the terms of theAgreement, none of SpeeCo’s debt was assumed by Blount.  SpeeCo had $0.8 million in cash on theclosing date, resulting in a net cash outflow of $90.9 million for theacquisition.  Additionally, we incurredlegal and other third party fees totaling $0.7 million resulting in a totalcash outflow of $91.6 million for the acquisition.  These fees were expensed to selling, general,and administrative expenses (“SG&A”) in the Consolidated Statements ofIncome in the second and third quarters of 2010. The acquisition was financedwith a combination of cash on hand and borrowing under the Company’s revolvingcredit facility.  The operating resultsof SpeeCo are included in the Company’s Consolidated Financial Statements fromthe date of acquisition forward.

 

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TheCompany accounted for the acquisition in accordance with Accounting StandardsCodification (“ASC”) Section 805. Accordingly, SpeeCo’s assets and liabilities were recorded at theirestimated fair values on the date of acquisition.  The Company estimated the fair value ofassets using various methods and considering, among other factors, projected discountedcash flows, replacement cost less an allowance for depreciation, recentcomparable transactions, and historical book values.  The Company estimated the fair value ofinventory by considering the stage of completion of the inventory, estimated coststo complete the manufacturing and assembly process, and the normal gross profitmargin typically associated with its sale. The Company estimated the fair value of liabilities assumed consideringthe historical book values and projected future cash flows.  The fair value of goodwill represents theresidual enterprise value which does not qualify for separate recognition,including the value of the assembled workforce. Approximately $7.0 million ofthe SpeeCo goodwill is amortizable and deductible for U.S. income tax purposes.The Company has conducted a preliminary assessment of liabilities arising fromtax matters related to SpeeCo, and has recognized provisional amounts in itsinitial accounting for the acquisition for the identified tax liabilities.However, the Company is continuing its review of these matters during themeasurement period, and if new information obtained about facts andcircumstances that existed at the acquisition date identifies adjustments tothe tax liabilities initially recognized, as well as any additional tax liabilitiesthat existed as of the acquisition date, the acquisition accounting will berevised to reflect the resulting adjustments to the provisional tax amountsinitially recognized.  ** **A summary of thepurchase price allocation for the fair value of the assets acquired and theobligations assumed at the date of the acquisition is presented below.

** **

**Summary of SpeeCo Purchase Price Allocation**

 
| **(Amounts in thousands)**                              | ** ** | **August 10, 2010** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------|------------|
| Cash                                                              |       | $                             | 816        |   |
| Accounts receivable                                               |       | 7,525                         |       |
| Inventories                                                       |       | 18,868                        |       |
| Current intangible assets subject to amortization                 |       | 401                           |       |
| Other current assets                                              |       | 1,282                         |       |
| Property, plant, and equipment, net                               |       | 1,812                         |       |
| Non-current intangible assets subject to  amortization            |       | 43,214                        |       |
| Goodwill and other intangible assets not subject  to amortization |       | 48,762                        |       |
| Total assets acquired                                             |       | $                             | 122,680    |   |
|                                                              |       |                          |       |
| Current liabilities                                               |       | $                             | 13,762     |   |
| Non-current liabilities                                           |       | 106                           |       |
| Deferred income tax liability                                     |       | 17,142                        |       |
| Total liabilities assumed                                         |       | 31,010                        |       |
| Cash paid for acquisition, before consideration of  cash acquired |       | $                             | 91,670     |   |

 

Includedin operating results for the three and nine months ended September 30,2010 are non-cash charges totaling $1.6 million for amortization of intangibleassets and expense for the step-up to fair value of inventories related toSpeeCo.

 

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Thefollowing table summarizes the Company’s intangible assets related to SpeeCoand earlier acquisitions:

 
| ** **                           | ** ** | ** **        | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Life**          | ** ** | **Gross   Carrying**        | ** ** | **Accumulated**                 | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** |
| **(Amounts in thousands)** | ** ** | **In Years** | ** ** | **Amount**                       | ** ** | **Amortization**                | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Goodwill, SpeeCo acquisition         |       | Indefinite        |       | $                                | 42,794     |                            | $          | — |   | $ | — |   | $ | — |   |
| Goodwill, Gear Products (Note 3)     |       | Indefinite        |       | —                           |       | —                          |       | 5,165 |   | — |   |
| Goodwill, previous acquisitions      |       | Indefinite        |       | 60,906                           |       | —                          |       | 60,906 |   | — |   |
| Total goodwill                       |       |              |       | 103,700                          |       | —                          |       | 66,071 |   | — |   |
| Trademarks and trade names           |       | Indefinite        |       | 11,469                           |       | —                          |       | 5,500 |   | — |   |
| Total with indefinite lives          |       |              |       | 115,169                          |       | —                          |       | 71,571 |   | — |   |
|                                 |       |              |       |                             |       |                            |       |   |   |   |   |
| Backlog                              |       | 0.1 – 0.7    |       | 1,641                            |       | 1,641                           |       | 1,240 |   | 1,240 |   |
| Covenants not to compete             |       | 2 – 4        |       | 1,112                            |       | 501                             |       | 590 |   | 328 |   |
| Patents                              |       | 11 - 13           |       | 5,320                            |       | 579                             |       | 518 |   | 518 |   |
| Customer relationships               |       | 10 - 19           |       | 46,090                           |       | 3,329                           |       | 8,200 |   | 1,591 |   |
| Total with finite lives              |       |              |       | 54,163                           |       | 6,050                           |       | 10,548 |   | 3,677 |   |
|                                 |       |              |       |                             |       |                            |       |   |   |   |   |
| Total intangible assets              |       |              |       | $                                | 169,332    |                            | $          | 6,050 |   | $ | 82,119 |   | $ | 3,677 |   |

 

Amortizationexpense for intangible assets was $1.6 million and $0.4 million for the threemonths ended September 30, 2010 and 2009, respectively, and $2.4 millionand $1.1 million for the nine months ended September 30, 2010 and 2009,respectively.  Amortization expense forthese intangible assets is expected to total $4.4 million in 2010, $6.8 millionin 2011, $5.8 million in 2012, and $5.1 million in 2013.

 

Thefollowing unaudited pro forma results present the estimated effect as if theacquisition of SpeeCo had occurred on the first day of each period presented.   The unaudited pro forma results include thehistorical results of SpeeCo, pro forma purchase accounting effects, pro formainterest expense effects of additional borrowings to fund the transaction andthe related pro forma income tax effects. In addition to the pro forma amortization of intangible asset adjustmentsto fair value, the unaudited pro forma results for all periods presentedinclude charges of $0.5 million to expense the adjustment of inventory toestimated fair value and $0.4 million to amortize the estimated fair value ofSpeeCo’s backlog on the date of acquisition.

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| **(Amounts in thousands)** | ** ** | **As Reported**                                     | ** ** | **Pro Forma  (Unaudited)** | ** ** | **As Reported** | ** ** | **Pro Forma  (Unaudited)** | ** ** |
| Sales                                |       | $                                                        | 162,581    |   | $ | 172,136 |   | $ | 126,923 |   | $ | 150,001 |   |
| Net income                           |       | 15,613                                                   |       | 14,911 |   | 11,342 |   | 11,209 |   |
| Basic income per share               |       | $                                                        | 0.33       |   | $ | 0.31 |   | $ | 0.24 |   | $ | 0.23 |   |
| Diluted income per share             |       | 0.32                                                     |       | 0.30 |   | 0.23 |   | 0.22 |   |

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **(Amounts in thousands)** | ** ** | **As Reported**                                    | ** ** | **Pro Forma  (Unaudited)** | ** ** | **As Reported** | ** ** | **Pro Forma  (Unaudited)** | ** ** |
| Sales                                |       | $                                                       | 440,498    |   | $ | 485,628 |   | $ | 348,473 |   | $ | 401,522 |   |
| Net income                           |       | 34,838                                                  |       | 34,225 |   | 16,531 |   | 14,288 |   |
| Basic income per share               |       | $                                                       | 0.73       |   | $ | 0.72 |   | $ | 0.35 |   | $ | 0.30 |   |
| Diluted income per share             |       | 0.72                                                    |       | 0.71 |   | 0.34 |   | 0.29 |   |

 

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**NOTE 3:  DISCONTINUED OPERATIONS**

 

OnSeptember 30, 2010, we sold our indirect wholly-owned subsidiary GearProducts, Inc. (“Gear Products”) to Tulsa Winch, Inc., an operatingunit of Dover Industrial Products, Inc., for initial cash proceeds of$25.2 million.  Cash proceeds from thesale are expected to be $24.8 million after finalization of the purchaseprice.  Gear Products is a manufacturerof mechanical power transmission components for original equipmentmanufacturers (“OEMs”), serving the utility, construction, forestry, marine,and mining markets.  Under terms of thestock purchase agreement, the parties agreed to treat the stock sale as if itwere an asset sale for income tax purposes, which resulted in an increase inincome tax expense recognized on the sale. Gear Products results, which were previously reported within the Othercategory in our segment disclosures, are now reported as discontinuedoperations for all periods presented, and are summarized below:

** **
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales                                |       | $                                                        | 4,575      |                                                    | $          | 3,438 |   | $ | 12,297 |   | $ | 12,413 |   |
|                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating income (loss)              |       | $                                                        | (145       | )                                                       | $          | 538 |   | $ | 1,023 |   | $ | 1,377 |   |
| Gain on sale of subsidiary           |       | 11,941                                                   |       | —                                                  |       | 11,941 |   | — |   |
| Income before income taxes           |       | 11,796                                                   |       | 538                                                     |       | 12,964 |   | 1,377 |   |
| Income tax provision                 |       | 6,743                                                    |       | 196                                                     |       | 7,171 |   | 496 |   |
| Income from discontinued  operations |       | $                                                        | 5,053      |                                                    | $          | 342 |   | $ | 5,793 |   | $ | 881 |   |

 

**NOTE 4:  RESTRUCTURING ACTIVITIES**

 

***Gain on Sale of Land and Building.***  On June 25, 2009, we sold the land andbuilding representing the location of our previous European headquarters anddistribution center.  These operationswere moved into nearby leased facilities. We recognized a pre-tax gain of $2.7 million on the sale in the secondquarter of 2009.

 

***Plant Closure Costs.***  In the second quarter of 2009, we closed ourmanufacturing facility in Milan, Tennessee. Products previously manufactured in that facility are now produced inour other manufacturing facilities. During the nine months ended September 30, 2009, we recognized atotal of $3.8 million in charges related to this plant closure, consisting of$2.0 million in asset impairment charges, $1.0 million in employee severanceand benefit costs, and $0.8 million in other expenses.  Of these charges, $0.3 million are recognizedin cost of goods sold in 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 other assets on the Consolidated Balance Sheets.

 

***Severance Costs.***  We took actions during 2009 to reduce thenumber of employees at certain of our locations in addition to the Milanfacility mentioned above.  During thethree and nine months ended September 30, 2009, we recognized a total of$0.5 million and $3.4 million, respectively, in severance charges related tothis reduction in force.

 

**NOTE 5:  INVENTORIES, NET**

 

Inventoriesconsisted of the following:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Raw materials and supplies           |       | $                      | 18,170     |                  | $          | 11,510 |   |
| Work in progress                     |       | 14,949                 |       | 13,095                |       |
| Finished goods                       |       | 70,611                 |       | 53,574                |       |
| Total inventories, net               |       | $                      | 103,730    |                  | $          | 78,179 |   |

 

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**NOTE 6:  PROPERTY, PLANT, ANDEQUIPMENT**

 

Property,plant, and equipment consisted of the following:

 
| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Land                                      |       | $                      | 7,202      |                  | $          | 7,392 |   |
| Buildings and improvements                |       | 55,885                 |       | 58,335                |       |
| Machinery and equipment                   |       | 212,068                |       | 222,545               |       |
| Furniture, fixtures, and office equipment |       | 30,346                 |       | 28,783                |       |
| Transportation equipment                  |       | 950                    |       | 1,116                 |       |
| Construction in progress                  |       | 7,198                  |       | 6,345                 |       |
| Accumulated depreciation                  |       | (205,598               | )          | (210,046              | )          |
| Total property, plant, and equipment, net |       | $                      | 108,051    |                  | $          | 114,470 |   |

 

**NOTE 7:  LONG-TERM DEBT**

 

Long-termdebt consisted of the following:

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Revolving credit facility                          |       | $                      | 24,700     |                  | $          | 3,400 |   |
| Term loan A                                        |       | 75,000                 |       | —                |       |
| Term loan B                                        |       | 275,000                |       | 107,465               |       |
| 8 7/8% senior subordinated notes                   |       | —                 |       | 175,000               |       |
| Total debt                                         |       | 374,700                |       | 285,865               |       |
| Less current maturities                            |       | (7,687                 | )          | (5,013                | )          |
| Long-term debt                                     |       | $                      | 367,013    |                  | $          | 280,852 |   |
| Weighted average interest rate on outstanding debt |       | 5.17                   | %          | 7.54                  | %          |

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as agent on May 15, 2003.  The agreement has been amended and restated onseveral occasions, most recently on August 9, 2010.  As of September 30, 2010, the seniorcredit facilities consist of a revolving credit facility, a term loan A, and aterm loan B.

 

***April 2009 Amendment to Revolving Credit Facility***.  On April 30, 2009, we entered into anamendment to the revolving credit facility that extended the maturity date to August 9,2010, reduced the availability to $90.0 million, and increased the interestrate and commitment fees.  This amendmentdid not affect the term loan B facility in place at that time.  The Company incurred fees and third partycosts of $2.0 million related to this amendment.

 

***December 2009 Amendment and Restatement of Senior CreditFacilities.***  On December 4,2009, the senior credit facility was amended and restated to extend thematurity date for both the revolving credit facility and the term loan Bfacility to February 9, 2012, reduce the availability under the revolvingcredit facility to $60.0 million, increase the interest rate on the term loanB, and modify certain financial covenants. The Company incurred fees and third party costs of $3.3 million relatedto this amendment and restatement.  Existing term loans representing $3.9 million of the total of $107.5million term loan principal outstanding at the time were not affected by thisamendment and restatement, and the terms for this portion of the term loansremained unchanged, including interest at the prime rate and a maturity date ofAugust 9, 2010.  The principal amountof these unchanged term loans was included in current maturities of long-termdebt on the Consolidated Balance Sheet as of December 31, 2009, and waspaid in full on August 9, 2010.

 

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

 

·                  Maximum borrowings under the revolving creditfacility were increased to $75.0 million and the maturity date was extended toAugust 2015.

·                  The term loan B facility was increased to$275.0 million and the maturity date was extended to August 2016.

·                  The interest rates on the revolving creditfacility and the term loan B were changed, as described below.

·                  A term loan A facility was established at$75.0 million with a maturity date of August 2015.

·                  Certain financial and other covenants wereamended and revised, as described below.

·                  The Company paid $6.9 million in fees andtransaction costs in connection with these transactions.

 

TheCompany used the $350.0 million combined proceeds of the term loans and repaidthe principal outstanding under its previous term loan B facility and its 87/8% senior subordinated notes originally due August 1, 2012, followingthe expiration of the required redemption notification period. These 8 7/8%senior subordinated notes were redeemed in full on September 16,2010.  In conjunction with the redemptionof the 8 7/8% senior subordinated notes, and the repayment of principal on theprevious term loan B, the Company expensed $3.5 million in unamortized deferredfinancing costs.

 

Therevolving credit facility provides for total available borrowings up to $75.0million, reduced by outstanding letters of credit and further restricted by aspecific leverage ratio.  As of September 30,2010, the Company had the ability to borrow an additional $47.0 million underthe terms of the revolving credit agreement. On October 1, 2010, we applied the proceeds from the sale of GearProducts to the outstanding principal on the revolving credit facility andavailability under the revolving credit facility was increased to approximately$72 million. The revolving credit facility bears interest at the LIBOR rate, asdefined in the credit agreement (the “LIBOR Rate”), plus 3.50%, or the indexrate, as described in the credit agreement (the “Index Rate”), plus 2.50%, andmatures on August 9, 2015.  Interestis payable on the individual maturity dates for each LIBOR-based borrowing andmonthly on Index Rate-based borrowings. Any outstanding principal is due in its entirety on the maturity date.

 

Theterm loan A bears interest at the LIBOR Rate plus 3.50%, or the Index Rate plus2.50%, and matures on August 9, 2015. The term loan A facility requires quarterly principal payments of $1.9million commencing on January 1, 2011, with a final payment of $39.4million due on the maturity date.  Oncerepaid, principal under the term loan A facility may not be re-borrowed.

 

Theterm loan B bears interest at the LIBOR Rate plus 4.00%, or the Index Rate plus3.00%, and matures on August 9, 2016. The term loan B facility requires quarterly principal payments of $0.7million commencing on January 1, 2011, with a final payment of $259.2million due on the maturity date.  Oncerepaid, principal under the term loan B facility may not be re-borrowed.

 

Theamended and restated senior credit facilities contain financial covenantsrelating to:

 

·                  Maximum capital expenditures of $42.5 millionper calendar year.

·                  Minimum fixed charge coverage ratio of 1.15,defined as earnings from continuing operations before interest, taxes,depreciation, amortization, and certain other items (“EBITDA”) divided by cashpayments for interest, taxes, capital expenditures, scheduled debt principalpayments, and certain other items, calculated on a trailing twelve-month basis.

·                  Maximum leverage ratio of 4.25, defined astotal debt divided by EBITDA, calculated on a trailing twelve-month basis.

 

Inaddition, there are covenants or restrictions relating to, among othercategories, acquisitions, investments, loans and advances, indebtedness,dividends on our stock, and the sale of stock or assets.  We were in compliance with all debt covenantsas of September 30, 2010. Non-compliance with these covenants, if it were to become an event ofdefault under the terms of the credit agreement, could result in severelimitations to our overall liquidity, and the term loan lenders could requireimmediate repayment of outstanding amounts, potentially requiring sale of ourassets.  Our debt is not subject to anytriggers that would require early payment due to any adverse change in ourcredit rating.

 

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

 

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

 

 

**NOTE 8:  PENSION AND OTHERPOST-EMPLOYMENT BENEFIT PLANS**

 

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

 

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

 
| ** **                           | ** ** | **Pension Benefits**                                | ** ** | **Other Post-Employment  Benefits** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
| **(Amounts in thousands)** | ** ** | **2010**                                                 | ** ** | **2009**                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                         |       | $                                                        | 624        |                                     | $          | 548 |   | $ | 67 |   | $ | 66 |   |
| Interest cost                        |       | 2,734                                                    |       | 2,656                                    |       | 524 |   | 505 |   |
| Expected return on plan assets       |       | (2,991                                                   | )          | (2,504                                   | )          | — |   | — |   |
| Amortization of prior service cost   |       | (2                                                       | )          | (2                                       | )          | — |   | — |   |
| Amortization of net actuarial losses |       | 924                                                      |       | 1,261                                    |       | 212 |   | 192 |   |
| Total net periodic benefit cost      |       | $                                                        | 1,289      |                                     | $          | 1,959 |   | $ | 803 |   | $ | 763 |   |

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                         |       | $                                                       | 1,872      |   | $ | 1,644 |   | $ | 201 |   | $ | 198 |   |
| Interest cost                        |       | 8,202                                                   |       | 7,968 |   | 1,572 |   | 1,515 |   |
| Expected return on plan assets       |       | (8,973                                                  | )          | (7,512 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (6                                                      | )          | (6 | ) | — |   | — |   |
| Amortization of net actuarial losses |       | 2,772                                                   |       | 3,783 |   | 636 |   | 576 |   |
| Total net periodic benefit cost      |       | $                                                       | 3,867      |   | $ | 5,877 |   | $ | 2,409 |   | $ | 2,289 |   |

 

TheCompany expects to contribute a total of approximately $15 million to $17million to its funded pension plans during 2010.

 

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

 

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**NOTE 9:  FINANCIAL GUARANTEES ANDCOMMITMENTS**

 

Significantfinancial guarantees and commitments are summarized in the following table:

 
| ** **                                 | ** ** | **September 30,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| **(Amounts in thousands)**       | ** ** | **2010**               | ** ** |
| Letters of credit outstanding              |       | $                      | 3,330      |   |
| Other financial guarantees                 |       | 1,253                  |       |
| Total financial guarantees and commitments |       | $                      | 4,583      |   |

 

**NOTE 10:  CONTINGENT LIABILITIES**

 

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

 

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

 

InMarch 2010, the Company received an offer from Region 9 of theEnvironmental Protection Agency of the U.S. to resolve its potential liabilityregarding the Operating Industries, Inc. Superfund Site in Monterey Park,California, involving a subsidiary of the former Omark Industries, Inc.,which merged with the Company in 1985. The Company submitted its consent to enter into an administrativesettlement agreement for the Company’s pro rata share of the site’s clean-upcosts as a de minimis participant. Accordingly, the Company recognized a charge of $0.1 million in the firstquarter of 2010 in settlement of this matter. However, the settlement agreement is subject to a public comment periodof 30 days and other procedures pursuant to the Comprehensive EnvironmentalResponse, Compensation, and Liability Act. The Company is awaiting notice from the EPA that the de minimissettlement agreement has been accepted by a sufficient number of parties tobegin the public comment process.

 

 

**NOTE 11:  EARNINGS PER SHARE DATA**

 

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

 
| ** **                                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| **(Shares in thousands)**                                                            | ** ** | **2010**                                        | ** ** | **2009**                                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Shares for basic per share computation — weighted  average common shares outstanding      |       | 47,902                                          |       | 47,766                                         |       | 47,844 |   | 47,751 |   |
| Dilutive effect of common stock equivalents                                                    |       | 522                                             |       | 505                                            |       | 520 |   | 459 |   |
| Shares for diluted per share computation                                                       |       | 48,424                                          |       | 48,271                                         |       | 48,364 |   | 48,210 |   |
| Options and SARs excluded from computation as  anti-dilutive because they are out-of-the-money |       | 2,029                                           |       | 1,547                                          |       | 1,929 |   | 1,607 |   |

 

Theamount of unvested restricted stock and restricted stock units (“RSUs”)considered participating securities at September 30, 2010 and September 30,2009 was 132 thousand and 176 thousand, respectively.  The allocation of undistributed earnings (netincome) to the participating securities under the two class method had noeffect on the calculation of earnings per share.

 

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**NOTE 12:  STOCK-BASEDCOMPENSATION**

 

TheCompany did not grant any stock-based compensation awards during the ninemonths ended September 30, 2009 but did grant the following awards during thenine months ended September 30, 2010:

 
|                                 |   | **Nine Months Ended  September 30, 2010** |   |
|--------------------------------------|--------|----------------------------------------------------------|--------|
| **(Amounts in thousands)** |   | **Shares**                                               |   | **Aggregate  Fair Value** |   |
| SARs granted                         |   | 565                                                      |   | $ | 3,175 |   |
| RSUs granted                         |   | 120                                                      |   | $ | 1,335 |   |

 

Themajority of the SARs and RSUs granted in the nine months ended September 30,2010 vest in one twelfth tranches quarterly over a three-year period and arerestricted from exercise, sale, or other transfer until March 31, 2013.  The SARs granted have a ten-year term fromdate of issuance.

 

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

 
| ** **                             | ** ** | **2010** | ** ** |
|----------------------------------------|------------|----------|------------|
| Estimated average life                 |       | 6 years  |       |
| Risk-free interest rate                |       | 2.8      | %          |
| Expected volatility                    |       | 49.8     | %          |
| Weighted average volatility            |       | 49.8     | %          |
| Dividend yield                         |       | 0.0      | %          |
| Exercise price                         |       | $        | 11.84      |   |
| Weighted average grant date fair value |       | $        |  5.95 |   |

 

Asof September 30, 2010, the total unrecognized stock-based compensation expenserelated to previously granted awards was $6.4 million. The weighted averageperiod over which this expense is expected to be recognized is 27 months.  The Company’s policy upon the exercise ofoptions, restricted stock awards, RSUs, or SARs has been to issue new sharesinto the public market from the stockholder-approved 2006 Equity IncentivePlan.

 

**NOTE 13:  SUPPLEMENTAL CASH FLOWINFORMATION**

 
| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** **   |
|--------------------------------------|------------|-----------------------------------------------------|--------------|
| **(Amounts in thousands)** | ** ** | **2010**                                            | ** **   | **2009** | ** ** |
| Interest paid                        |       | $                                                   |  24,052 |   | $ |  19,674 |   |
| Income taxes paid, net               |       | 9,119                                               |         | 9,932 |   |
|                                      |            |                                                     |              |  |  |  |  |

 

**NOTE 14:  FAIR VALUE OF FINANCIALINSTRUMENTS AND CREDIT RISK CONCENTRATION**

 

TheCompany has manufacturing or distribution operations in Brazil, Canada, China,Europe, Japan, Russia, and the U.S. The Company sells to customers in theselocations and other countries throughout the world.  At September 30, 2010, approximately 66% ofaccounts receivable were from customers outside the U.S.  If the U.S. Dollar strengthens againstforeign currencies, it becomes more costly for these foreign customers to paytheir U.S. Dollar balances owed.  Theymay have difficulty in repaying these amounts, and, in turn, the Company’s baddebt expense may increase.  Accountsreceivable are principally from distributors, dealers, mass merchants, chainsawmanufacturers, and other OEMs and are normally not collateralized.

 

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Thecarrying amount of cash and cash equivalents approximates fair value because ofthe short-term maturity of those instruments. The carrying amount of accountsreceivable approximates fair value because the maturity period is short and theCompany has reduced the carrying amount to the estimated net realizable valuewith an allowance for doubtful accounts. The carrying amount of any principal outstanding on the revolving creditfacility approximates fair value because the applicable interest rates arevariable and the maturity period is relatively short on each borrowingtranche.  The fair value of the term loansis determined 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 was determined as of December 31, 2009 by referenceto quoted market prices.  Derivativefinancial instruments are carried on the Consolidated Balance Sheets at fairvalue.  The carrying amount of otherfinancial instruments approximates fair value because of the short-termmaturity periods and variable interest rates associated with the instruments.

 

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

 
| ** **                           | ** ** | **September 30, 2010** | ** **    | **December 31, 2009** | ** ** |
|--------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **Carrying  Amount**             | ** **    | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Term loans                           |       | $                                |  350,000 |                            | $          |  351,750 |   | $ |  107,465 |   | $ |  107,734 |   |
| 8 7/8% senior subordinated notes     |       | —                           |          | —                          |       | 175,000 |   | 178,500 |   |
|                                      |            |                                  |               |                                 |            |  |  |  |  |  |  |  |  |

 

***Derivative Financial Instruments and ForeignCurrency Hedging.***  TheCompany makes regular payments to its wholly-owned subsidiary in Canada, BlountCanada Ltd. (“Blount Canada”), for contract manufacturing services performed byBlount Canada for conversion of raw materials into finished goods.  We 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 of 2008, we havemanaged a portion of Canadian Dollar exchange rate exposures with derivativefinancial instruments.  These derivativefinancial instruments are zero-cost collar option combinations, consisting of apurchased call option to buy Canadian Dollars and a written put option to sellCanadian Dollars. We apply cash flow hedge accounting to our CanadianDollar-related derivative financial instruments, and therefore defer the gainsor losses on those instruments in accumulated other comprehensive loss on theConsolidated Balance Sheets until maturity, or if it becomes probable that theforecasted transaction will not occur, at which time the gain or loss isrecognized in the Consolidated Statements of Income.

 

As of September 30, 2010,the cumulative unrealized pre-tax gain on these contracts included in othercomprehensive loss on the Consolidated Balance Sheets was $0.1 million.  During the three and nine months endedSeptember 30, 2010, gains of $0.1 million and $2.2 million, respectively, wererecognized in cost of goods sold in the Consolidated Statements of Income atthe maturity of the related Canadian Dollar derivative financialinstruments.  During the three and ninemonths ended September 30, 2009, a gain of $0.4 million and a loss of $0.6million, respectively, were recognized in cost of goods sold in theConsolidated Statements of Income at the maturity of the related CanadianDollar derivative financial instruments. Gains and losses on these Canadian Dollar derivative financialinstruments are largely offset in cost of goods sold by the effects of currencyexchange rate changes on the underlying transactions.  Through September 30, 2010, the Company hasnot recognized any amount from these contracts in earnings due toineffectiveness, or due to a probability that the forecasted transaction willnot occur.  The aggregate notional amountof these Canadian Dollar contracts outstanding was $31.8  million at September 30, 2010 and $30.3 millionat December 31, 2009.

 

We hedge the interest rateand foreign currency exposure on a portion of our cash and cash equivalentsinvested in Brazil with interest rate swap agreements.  The change in fair value of these instrumentsis recognized in interest income in the Consolidated Statements of Income.  Any change in fair value of these derivativecontracts is fully offset by the change in fair value of the underlyinginvestments.  The Consolidated Statementsof Income include income of $0.1 million for the nine months ended September30, 2010, and income of $0.7 million and expense of $1.0 million, respectively,for the three and nine months ended September 30, 2009, from the change in fairvalue of these interest rate swap contracts. There was no impact from these interest rate swap contracts in the threemonths ended September 30, 2010.  Theaggregate notional amount of these interest rate swap agreements outstandingwas zero at September 30, 2010 and $13.0 million at December 31, 2009.

 

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

 

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

 

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

 

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

 

Thefair values of derivatives held by the Company were:

 
| **(Amounts in thousands)** | ** ** | **Carrying  Value** | ** **                  | **Measured at  Fair Value** | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|--------------------------------------|------------|---------------------|-----------------------------|---------------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| September 30, 2010                   |       | $                   |      93 |                                  | $          |      93 |       | $                | —     |             | $          |      93 |   | $ | — |   |
| December 31, 2009                    |       | 2,052               |                        | 2,052                                 |       | —                      |       | 2,052            |       | —           |       |
|                                      |            |                     |                             |                                       |            |                             |            |                  |            |                  |            |  |  |  |  |  |

 

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

 

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

 

**NOTE 15:  RECENT ACCOUNTINGPRONOUNCEMENTS**

 

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

 

**NOTE 16:  INCOME TAXES**

 

Duringthe three months ended September 30, 2010, the Company released a net amount of$5.9 million in previously provided income tax expense on uncertain taxpositions, due to the expiration of the related statute of limitations.  These uncertain tax positions were previouslyincluded in other non-current assets and other non-current liabilities on theConsolidated Balance Sheets.

 

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**ITEM 2.**  **MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**Acquisition of SpeeCo**

 

OnAugust 10, 2010, we acquired all of the outstanding stock of SpeeCo.  SpeeCo, located in Golden, Colorado, is asupplier of log splitters, post-hole diggers, tractor three-point linkage partsand equipment, and farm and ranch accessories. The acquisition of SpeeCo expands our product offerings to our currentmarkets and customers, as well as offering opportunities for synergies in theareas of marketing, sales, anddistribution, includingmarketing SpeeCo’s products to our international customers.  We also expect to benefit from theacquisition of SpeeCo by leveraging its experience in low-cost sourcing ofmaterials and components.

 

Wepaid $91.7 million in cash for SpeeCo. As part of the stock acquisition we assumed liabilities totaling $31.0million.  Pursuant to the terms of theAgreement, none of SpeeCo’s debt was assumed by Blount.  SpeeCo had $0.8 million in cash on theclosing date, resulting in a net cash outflow of $90.9 million for theacquisition.  Additionally, we incurredlegal and other third party fees totaling $0.7 million resulting in a totalcash outflow of $91.6 million for the acquisition.  These fees were expensed to SG&A in theConsolidated Statements of Income in the second and third quarters of 2010. Theacquisition was financed with a combination of cash on hand and borrowing underthe Company’s revolving credit facility.

 

SpeeCo’sassets and liabilities were recorded at their estimated fair values on the dateof acquisition.  The Company estimatedthe fair value of assets using various methods and considering, among otherfactors, projected discounted cash flows, replacement cost less an allowancefor depreciation, recent comparable transactions, and historical bookvalues.  The Company estimated the fairvalue of inventory by considering the stage of completion of the inventory,estimated costs to complete the manufacturing and assembly process, and thenormal gross profit margin typically associated with its sale.  The Company estimated the fair value ofliabilities assumed considering the historical book values and projected futurecash flows.  The Company has conducted apreliminary assessment of liabilities arising from tax matters related toSpeeCo, and has recognized provisional amounts in its initial accounting forthe acquisition for the identified tax liabilities. However, the Company iscontinuing its review of these matters during the measurement period, and ifnew information obtained about facts and circumstances that existed at theacquisition date identifies adjustments to the tax liabilities initiallyrecognized, as well as any additional tax liabilities that existed as of theacquisition date, the acquisition accounting will be revised to reflect theresulting adjustments to the provisional tax amounts initially recognized.

 

Theoperating results of SpeeCo are included in the Company’s ConsolidatedFinancial Statements from the acquisition date forward. Included in operatingresults for the three and nine months ended September 30, 2010 are non-cashcharges totaling $1.6 million for amortization of intangible assets and expensefor the step-up to fair value of inventories related to SpeeCo.  Amortization of purchase accountingadjustments for SpeeCo and previous acquisitions are expected to total $4.4million in 2010, $6.8 million in 2011, $5.8 million in 2012, and $5.1 millionin 2013.

 

**Dispositionof Gear Products**

 

OnSeptember 30, 2010, we sold our indirect wholly-owned subsidiary Gear Productsto Tulsa Winch, Inc., an operating unit of Dover Industrial Products, Inc., for$24.8 million in cash.  Gear Products isa manufacturer of mechanical power transmission components for OEMs, servingthe utility, construction, forestry, marine, and mining markets.  Under terms of the related stock purchaseagreement, the parties agreed to treat the stock sale as if it were an assetsale for income tax purposes, which resulted in an increase in income taxexpense recognized on the sale.  GearProducts results, which are reported as discontinued operations for all periodspresented, are summarized below:

 

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| **Discontinued Operations**          | ** ** | **Three Months Ended September 30,** | ** **         | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|--------------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**                                                 | ** **         | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                 |       |                                                     |               |                                                    |       |   |   |   |   |
| Sales                                |       | $                                                        |    4,575 |                                                    | $          |   3,438 |   | $ |  12,297 |   | $ |  12,413 |   |
|                                 |       |                                                     |               |                                                    |       |   |   |   |   |
| Operating income (loss)              |       | $                                                        |    (145  | )                                                       | $          |      538 |   | $ |    1,023 |   | $ |    1,377 |   |
| Gain on sale of subsidiary           |       | 11,941                                                   |               | —                                                  |       | 11,941 |   | — |   |
| Income before income taxes           |       | 11,796                                                   |               | 538                                                     |       | 12,964 |   | 1,377 |   |
| Income tax provision                 |       | 6,743                                                    |               | 196                                                     |       | 7,171 |   | 496 |   |
| Income from discontinued operations  |       | $                                                        |   5,053       |                                                    | $          |      342 |   | $ |   5,793 |   | $ |     881 |   |

 

 

 

**Operating Results**

 

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

 

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

 
| ** **                                                              | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                                     | ** ** | **2010**                                                 | ** ** | **2009**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not sum due to rounding)** | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Sales                                                                   |       | $                                                        | 162.6      |       | $          | 126.9      |       | $ | 35.7 |   |   |   |   |   |
|                                                                    |       |                                                     |       |       |       |       |       | $ | 37.1 |   | Sales volume |   |
|                                                                    |       |                                                     |       |       |       |       |       | — |   | Selling price and mix |   |
|                                                                    |       |                                                     |       |       |       |       |       | (1.4 | ) | Foreign currency translation |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Gross profit                                                            |       | 50.4                                                     |       | 43.8       |       | 6.6        |       |   |   |   |   |
| *Gross margin*                                                          | * *   | *31.0*                                                   | *%*        | *34.5*     | *%*        |       |       | 13.8 |   | Sales volume |   |
|                                                                    |       |                                                     |       |       |       |       |       | — |   | Selling price and mix |   |
|                                                                    |       |                                                     |       |       |       |       |       | (1.2 | ) | Product cost and mix |   |
|                                                                    |       |                                                     |       |       |       |       |       | (1.6 | ) | SpeeCo purchase accounting |   |
|                                                                    |       |                                                     |       |       |       |       |       | (1.3 | ) | Strategic initiatives |   |
|                                                                    |       |                                                     |       |       |       |       |       | (3.1 | ) | Foreign currency translation |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| SG&A                                                                |       | 29.7                                                     |       | 23.1       |       | 6.6        |       |   |   |   |   |
|                                                                    |       |                                                     |       |       |       |       |       | 2.2 |   | Compensation |   |
|                                                                    |       |                                                     |       |       |       |       |       | 1.3 |   | Advertising |   |
|                                                                    |       |                                                     |       |       |       |       |       | 0.9 |   | Strategic initiatives |   |
|                                                                    |       |                                                     |       |       |       |       |       | 0.8 |   | Personnel-related |   |
|                                                                    |       |                                                     |       |       |       |       |       | 1.0 |   | SpeeCo SG&A |   |
|                                                                    |       |                                                     |       |       |       |       |       | (0.3 | ) | Foreign currency translation |   |
|                                                                    |       |                                                     |       |       |       |       |       | 0.7 |   | Other |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Operating income                                                        |       | 20.7                                                     |       | 20.2       |       | 0.5        |       |   |   |   |   |
| *Operating margin*                                                      | * *   | *12.7*                                                   | *%*        | *16.0*     | *%*        |       |       | 6.6 |   | Increase in gross profit |   |
|                                                                    |       |                                                     |       |       |       |       |       | (6.6 | ) | Increase in SG&A |   |
|                                                                    |       |                                                     |       |       |       |       |       | 0.5 |   | Plant closure and severance costs |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Income from continuing  operations                                      |       | 10.6                                                     |       | 11.0       |       | (0.4       | )          |   |   |   |   |
|                                                                    |       |                                                     |       |       |       |       |       | 0.5 |   | Increase in operating income |   |
|                                                                    |       |                                                     |       |       |       |       |       | (1.6 | ) | Increase in interest expense |   |
|                                                                    |       |                                                     |       |       |       |       |       | (7.1 | ) | Refinancing costs |   |
|                                                                    |       |                                                     |       |       |       |       |       | (0.4 | ) | Other income (expense), net |   |
|                                                                    |       |                                                     |       |       |       |       |       | 8.2 |   | Decrease in income taxes |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Income from discontinued operations                                     |       | 5.1                                                      |       | 0.3        |       | 4.7        |       |   |   |   |   |
|                                                                    |       |                                                     |       |       |       |       |       | (0.7 | ) | Operating results |   |
|                                                                    |       |                                                     |       |       |       |       |       | 11.9 |   | Gain on sale of Gear Products |   |
|                                                                    |       |                                                     |       |       |       |       |       | (6.5 | ) | Income tax provision |   |
|                                                                    |       |                                                     |       |       |       |       |       |   |   |   |   |
| Net income                                                              |       | $                                                        | 15.6       |       | $          | 11.3       |       | $ | 4.3 |   |   |   |   |   |
|                                                                         |            |                                                          |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

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Salesin the three months ended September 30, 2010 increased by $35.7 million (28.1%)from the same period in 2009.  This salesincrease was primarily due to increased unit volume of $37.1 million, includingincremental sales attributable to SpeeCo, which was acquired on August 10,2010.  Average selling prices and productmix were unchanged.  In the third quarterof 2010, the stronger U.S. Dollar in comparison to the third quarter of 2009reduced consolidated sales by $1.4 million. Sales of chainsaw components and accessories were up 19.8%, and concretecutting saws and components were up 14.0% in the third quarter of 2010 comparedto 2009.  Outdoor equipment parts andaccessories, excluding SpeeCo, increased 3.6% in the comparative quarters.  International sales increased by $18.0million (19.8%) and domestic sales increased by $3.8 million (10.7%), excludingthe effects of SpeeCo.  The increase ininternational and domestic sales reflected stronger world-wide marketconditions and demand for our products compared to market conditions in thethird quarter of 2009. Sales to OEM customers increased by 30.7% andreplacement market sales increased by 13.6%, both excluding the effects ofSpeeCo.

 

Consolidated order backlog at September 30, 2010 was$130.4 million compared to $121.2 million at June 30, 2010.  The addition of SpeeCo accounted for $10.3million of the backlog at September 30, 2010.

 

Grossprofit increased $6.6 million (15.0%) from the third quarter of 2009 to thethird quarter of 2010.  Higher sales unitvolume was partially offset by the net unfavorable effects of movement inforeign currency exchange rates.  Ourmanufacturing costs were positively affected during the third quarter of 2010by higher production volumes, including a lower number of idle manufacturingdays, which improved absorption rates for fixed and semi-variable manufacturingcosts when compared to the third quarter of 2009.  Partially offsetting these efficiency gainswere higher year-over-year costs for steel, purchase accounting effects relatedto SpeeCo, and charges related to our strategic initiatives.  We estimate that year-over-year steel costswere $1.0 million higher for the comparable third quarter periods.  SpeeCo purchase accounting effects related toamortization of intangible assets and expensing of the step-up to estimatedfair value for inventories, included in cost of sales for the third quarter of2010, were $1.6 million.  Also recognizedin cost of sales in the third quarter of 2010 were charges of $1.3 millionrelating to our strategic initiatives to re-align and consolidate manufacturingfor certain product lines and to eliminate low volume items from our product offerings.Gross margin in the third quarter of 2010 was 31.0% of sales compared to 34.5%in the third quarter of 2009.

 

Fluctuationsin currency exchange rates decreased our gross profit in the third quarter of2010 compared to 2009 by $3.1 million. The translation of weaker foreign currencies into a stronger U.S. Dollarin the European economic zone resulted in lower reported sales revenue.  However, the U.S. Dollar was weaker for thequarter on a year-over-year basis in relationship to the Canadian Dollar andBrazilian Real.  This weakening of theU.S. Dollar in comparison to currencies of countries where we have foreignmanufacturing facilities resulted in higher cost of sales for those locations.  The combined net effect of these currencymovements reduced our gross profit for the quarter.

 

SG&Awas $29.7 million in the third quarter of 2010 compared to $23.1 million in thethird quarter of 2009, representing an increase of $6.6 million (28.5%).  As a percentage of sales, SG&A increasedslightly from 18.2% in the third quarter of 2009 to 18.3% in the third quarterof 2010.  Compensation expense for thequarter increased by $2.2 million on a year-over-year basis, reflectingincreased staffing levels, annual merit increases implemented in the firstquarter of 2010, increased incentive compensation expense driven by improvedoperating performance, and increased stock compensation expense from equityawards granted in March 2010 compared to no awards granted in the first ninemonths of 2009.  We also increased ouradvertising expenditures by $1.3 million in the third quarter of 2010 comparedto the third quarter of 2009 after the significant reduction implemented in2009.  Incremental expenses of $0.9million were incurred in SG&A in the three months ended September 30, 2010related to our strategic initiatives, including projects to improvemanufacturing and supply chain efficiency. Personnel-related costs for recruitment, relocation, travel, andtraining were also up $0.8 million on a year-over-year basis.  The addition of SpeeCo contributed $1.0million to the year-over-year increase in SG&A.  International SG&A expenses decreased, by$0.3 million from the prior year period, due to the stronger U.S. Dollar inrelationship to European currencies and its effect on the translation offoreign expenses.

 

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Wetook actions during 2009 to reduce the number of employees at certain of ourlocations.  During the three months endedSeptember 30, 2009, we recognized a total of $0.5 million in severance chargesrelated to this reduction in force. These actions were not repeated in the comparative third quarter of2010.

 

Operatingincome increased by $0.5 million from the third quarter of 2009 to the thirdquarter of 2010, resulting in an operating margin for 2010 of 12.7% of salescompared to 16.0% for the third quarter of 2009.

 

Interestexpense was $7.7 million in the third quarter of 2010 compared to $6.2 millionin the third quarter of 2009.  Theincrease was primarily due to higher average outstanding debt balances in thecomparable periods.  During the thirdquarter of 2010, we amended and restated our senior credit facilities andredeemed our 8 7/8% senior subordinated notes. During the mandatory redemption waiting period, we continued to incurinterest on the outstanding 8 7/8% senior subordinated notes after we hadborrowed the funds under the new credit facilities with which to pay off thesenotes.  In addition, we increased ourborrowings in the third quarter to fund a portion of the acquisition of SpeeCoin August, 2010.

 

Otherincome (expense), net in the third quarter of 2010 included charges of $7.1million related to the refinancing of our debt. These charges included the write-off of previously deferred financingcosts totaling $3.5 million from the early extinguishment of debt, as well as$3.6 million in new costs associated with these transactions.  In the third quarter of 2009, other income(expense), net reflected a gain of $0.4 million related to an insurancereimbursement.

 

Thefollowing table summarizes our income tax provision for continuing operationsin 2010 and 2009:

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| Income from continuing operations before income  taxes |       | $                                                    | 5,803      |   | $ | 14,491 |   |
| Provision (benefit) for income taxes                   |       | (4,757                                               | )          | 3,491 |   |
| Effective tax rate                                     |       | (82.0                                                | )%         | 24.1 | % |
|                                                        |            |                                                      |            |  |  |  |  |

 

Theincome tax benefit recognized in the third quarter of 2010 reflects the releaseof the net amount of $5.9 million in previously provided income tax expense onuncertain tax positions.  Excluding theeffect of this release, the effective tax rate for the third quarter of 2010would have been 19.1 %.  The effectivetax rate was further reduced from the federal statutory rate in the thirdquarter of 2010 by increased estimated tax credits for research and experimentationand by the impact of lower taxes on our foreign operations, partially offset bystate income taxes.

 

Theeffective tax rate in the three months ended September 30, 2009 was reducedfrom the federal statutory rate by the impact of lower taxes on our foreignoperations and the positive effect from finalization of our advanced pricingagreement (“APA”) with Canada and the U.S. Finalization of the APA resulted in the recognition of interest onrefunds from prior years.  Additionally,our effective tax rate in 2009 was reduced by federal and state tax credits.Taxes on our foreign operations are lower than in the U.S. because of lowerstatutory tax rates and increased deductions for tax purposes in foreignjurisdictions that are not recognized as expenses for book purposes.  Partially offsetting these foreign tax ratereductions in both periods were additional tax expenses recognized on interestand dividends repatriated from certain of our foreign locations.

 

Incomefrom continuing operations in the third quarter of 2010 was $10.6 million, or$0.22 per diluted share, compared to $11.0 million, or $0.23 per diluted share,in the third quarter of 2009.

 

***Operating Results by Segment.***** **The Company identifiesoperating segments primarily based on organizational structure and theevaluation of the Chief Operating Decision Maker (Chief ExecutiveOfficer).  The Company has one reportablesegment: Outdoor Products.  The OutdoorProducts segment is a global manufacturer and marketer of saw chain and guidebars for chainsaws, and replacement parts, equipment, and accessories for theforestry, lawn and garden, farm and ranch, and construction industries. TheCompany reports centralized administrative functions, gain or loss on sale ofland and buildings, plant closure costs, and severance costs in the Othercategory. The results of Gear Products were previously reported within theOther category but are now reported as discontinued operations for all periodspresented.

 

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Thefollowing table reflects operating results by segment:

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**                                                 | ** ** | **2009** | ** ** | **Percent  Change** | ** ** |
| Operating income:                    |       |                                                     |       |   |   |   |   |
| Outdoor Products segment             |       | $                                                        | 26,985     |   | $ | 25,506 |   | 5.8 | % |
| Other                                |       | (6,280                                                   | )          | (5,259 | ) | (19.4 | ) |
| Operating income                     |       | $                                                        | 20,705     |   | $ | 20,247 |   | 2.3 | % |

 

***Outdoor Products Segment.***  The discussion above concerning sales, grossprofit, and SG&A expenses is applicable to the Company’s Outdoor Productssegment.

 

***Other.***  Net expenses in the Other category increasedby $1.0 million for the comparable period, primarily due to higher compensationexpense reflecting increased staffing levels, annual merit increasesimplemented in the first quarter of 2010, increased incentive compensationexpense driven by improved operating performance, and increased stockcompensation expense from equity awards granted in March 2010 compared to noawards granted in the first nine months of 2009.  Partially offsetting these increases was theeffect of severance costs incurred in the third quarter of 2009, which were notrepeated in the third quarter of 2010.

 

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** **

**Nine months ended September 30, 2010 (unaudited) compared to ninemonths ended September 30, 2009 (unaudited).**

 

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

 
| ** **                                                              | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|------------|------------|
| **(Amounts in millions)**                                     | ** ** | **2010**                                                | ** ** | **2009**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
| **(Amounts may not sum due to rounding)** | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Sales                                                                   |       | $                                                       | 440.5      |       | $          | 348.5      |       | $ | 92.0 |   |   |   |   |   |
|                                                                    |       |                                                    |       |       |       |       |       | $ | 94.3 |   | Sales volume |   |
|                                                                    |       |                                                    |       |       |       |       |       | (3.0 | ) | Selling price and mix |   |
|                                                                    |       |                                                    |       |       |       |       |       | 0.8 |   | Foreign currency translation |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Gross profit                                                            |       | 150.6                                                   |       | 114.0      |       | 36.6       |       |   |   |   |   |
| *Gross margin*                                                          | * *   | *34.2*                                                  | *%*        | *32.7*     | *%*        | * *   |       | 34.4 |   | Sales volume |   |
|                                                                    |       |                                                    |       |       |       |       |       | (3.0 | ) | Selling price and mix |   |
|                                                                    |       |                                                    |       |       |       |       |       | 14.5 |   | Product cost and mix |   |
|                                                                    |       |                                                    |       |       |       |       |       | (1.6 | ) | SpeeCo purchase accounting |   |
|                                                                    |       |                                                    |       |       |       |       |       | (2.3 | ) | Strategic initiatives |   |
|                                                                    |       |                                                    |       |       |       |       |       | (5.4 | ) | Foreign currency translation |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| SG&A                                                                |       | 86.6                                                    |       | 70.9       |       | 15.7       |       |   |   |   |   |
|                                                                    |       |                                                    |       |       |       |       |       | 7.3 |   | Compensation |   |
|                                                                    |       |                                                    |       |       |       |       |       | 2.3 |   | Advertising |   |
|                                                                    |       |                                                    |       |       |       |       |       | 2.1 |   | Strategic initiatives |   |
|                                                                    |       |                                                    |       |       |       |       |       | 2.1 |   | Personnel-related |   |
|                                                                    |       |                                                    |       |       |       |       |       | 1.0 |   | SpeeCo SG&A |   |
|                                                                    |       |                                                    |       |       |       |       |       | 0.8 |   | Foreign currency translation |   |
|                                                                    |       |                                                    |       |       |       |       |       | 0.1 |   | Other |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Operating income                                                        |       | 64.0                                                    |       | 38.9       |       | 25.1       |       |   |   |   |   |
| *Operating margin*                                                      | * *   | *14.5*                                                  | *%*        | *11.2*     | *%*        | * *   |       | 36.6 |   | Increase in gross profit |   |
|                                                                    |       |                                                    |       |       |       |       |       | (15.7 | ) | Increase in SG&A |   |
|                                                                    |       |                                                    |       |       |       |       |       | (2.7 | ) | Gain on sale of land & building |   |
|                                                                    |       |                                                    |       |       |       |       |       | 6.9 |   | Plant closure and severance costs |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Income from continuing  operations                                      |       | 29.0                                                    |       | 15.7       |       | 13.4       |       |   |   |   |   |
|                                                                    |       |                                                    |       |       |       |       |       | 25.1 |   | Increase in operating income |   |
|                                                                    |       |                                                    |       |       |       |       |       | (2.1 | ) | Increase in interest expense |   |
|                                                                    |       |                                                    |       |       |       |       |       | (7.1 | ) | Refinancing costs |   |
|                                                                    |       |                                                    |       |       |       |       |       | (0.7 | ) | Other income (expense), net |   |
|                                                                    |       |                                                    |       |       |       |       |       | (1.8 | ) | Income tax provision |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Income from discontinued  operations                                    |       | 5.8                                                     |       | 0.9        |       | 4.9        |       |   |   |   |   |
|                                                                    |       |                                                    |       |       |       |       |       | (0.4 | ) | Decrease in operating results |   |
|                                                                    |       |                                                    |       |       |       |       |       | 11.9 |   | Gain on sale of Gear Products |   |
|                                                                    |       |                                                    |       |       |       |       |       | (6.7 | ) | Income tax provision |   |
|                                                                    |       |                                                    |       |       |       |       |       |   |   |   |   |
| Net income                                                              |       | $                                                       | 34.8       |       | $          | 16.5       |       | $ | 18.3 |   |   |   |   |   |
|                                                                         |            |                                                         |            |            |            |            |            |  |  |  |  |  |  |  |  |

 

Salesin the nine months ended September 30, 2010 increased by $92.0 million (26.4%)from the same period in 2009.  This salesincrease was primarily due to increased unit volume of $94.3 million, includingincremental sales attributable to SpeeCo, which was acquired on August 10, 2010.  This volume-related increase reflectedimproved market conditions and demand for our products, especially ininternational markets, after the weak market conditions we experienced in 2009during the global recession.  The volumeincrease was partially offset by a decrease in average unit selling prices andproduct mix of $3.0 million.  Thetranslation of foreign currency-denominated sales transactions, given theslightly weaker U.S. Dollar in comparison to the first nine months of 2009,increased sales by $0.8 million in the comparative 2010 period.  International sales increased by $72.2million (30.4%) and domestic sales increased by $6.0 million (5.4%), exclusiveof the effects of SpeeCo.  Sales ofchainsaw components and accessories increased by 25.9% and sales ofconcrete-cutting saws and components increased by 20.1% in the first ninemonths of 2010 compared to the first nine months of 2009.  Excluding the effects of SpeeCo, sales ofoutdoor care parts and accessories increased by 7.1% from 2009 to 2010.  Sales to OEMs increased by 31.2%, whilereplacement market sales increased by 19.9%, both exclusive of SpeeCo sales.

 

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Consolidated order backlog at September 30, 2010 was$130.4 million compared to $78.1 million at December 31, 2009.  SpeeCo accounted for $10.3 million of theconsolidated backlog at September 30, 2010.

 

Grossprofit increased $36.6 million (32.1%) from the first nine months of 2009 tothe first nine months of 2010.  Highersales unit volume and improvements in product cost and mix were partiallyoffset by lower average unit selling prices and the net unfavorable effects ofmovement in foreign currency exchange rates. Our manufacturing costs were positively affected during the first ninemonths of 2010 by higher production volumes, including a lower number of idlemanufacturing days, which improved absorption rates for fixed and semi-variablemanufacturing costs when compared to the first nine months of 2009.  On a year-to-date comparative basis, steelcosts were lower in 2010 by $4.9 million compared to 2009 but this trendreversed in the third quarter of 2010, and we expect to incur higher steelcosts for the balance of 2010. Offsetting these efficiency and steel cost gains were the purchaseaccounting effects related to SpeeCo and charges related to our strategicinitiatives.  Purchase accounting effectsattributable to SpeeCo included in cost of sales for the nine months endedSeptember 30, 2010 were $1.6 million. Also recognized in cost of sales in the first nine months of 2010 werecharges of $2.3 million relating to our strategic initiatives to re-align andconsolidate manufacturing for certain product lines and to eliminate low volumeitems from our product offerings. Year-to-date gross margin in 2010 was 34.2%of sales compared to 32.7% for the comparable nine months of 2009.

 

Fluctuationsin currency exchange rates decreased our gross profit in the first nine months of2010 compared to 2009 by $5.4 million. The translation of slightly stronger average foreign currencies into aweaker U.S. Dollar resulted in higher reported sales revenue.  However, the U.S. Dollar was weaker in theperiod on a year-over-year basis in relationship to the Canadian Dollar andBrazilian Real.  This weakening of theU.S. Dollar in comparison to currencies of countries where we have foreignmanufacturing facilities resulted in higher cost of sales for thoselocations.  The combined effects of thesecurrency movements reduced our gross profit for the first nine months of 2010.

 

SG&Awas $86.6 million in the first nine months of 2010, compared to $70.9 millionin the first nine months of 2009, representing an increase of $15.7 million(22.2%).  As a percentage of sales,SG&A decreased from 20.3% in the first nine months of 2009 to 19.7% in thefirst nine months of 2010, as our sales increased at a faster rate than ourSG&A costs.  Year-to-datecompensation expense increased by $7.3 million on a year-over-year basis,reflecting increases in staffing levels, annual merit increases implemented inthe first quarter of 2010, increased incentive compensation expense driven byimproved operating performance, and increased stock compensation expense fromequity awards granted in March 2010 compared to no awards granted in the firstnine months of 2009.    We increased ouradvertising expenditures by $2.3 million in the first nine months of 2010compared to the first nine months of 2009 after the significant reductionimplemented during 2009.  During thefirst three quarters of 2010, expenses of $2.1 million were incurred inSG&A related to our strategic initiatives, including projects to improvemanufacturing and supply chain efficiency, as well as our acquisitionprogram.  Personnel-related costs forrecruitment, relocation, travel, and training were also up $2.1 million on ayear-over-year basis.  The addition ofSpeeCo in August 2010 contributed $1.0 million to the year-over-year increasein SG&A.  International operatingexpenses increased by $0.8 million from the prior year period due to the weakerU.S. Dollar in relationship to foreign currencies and its effect on thetranslation of foreign expenses.

 

OnJune 25, 2009, we sold the land and building representing our former Europeanheadquarters and distribution center. These operations have moved to new, nearby leased facilities.  We recognized a pre-tax gain of $2.7 millionon the sale.

 

InJanuary 2009, we announced our intent to close our manufacturing facility inMilan, Tennessee, during the second quarter of 2009.  Products previously manufactured in thatfacility are now produced in our other manufacturing facilities.  During the first nine months of 2009, werecognized a total of $3.8 million in charges related to the closure of thismanufacturing plant, consisting of $2.0 million in asset impairment charges,$1.0 million in employee severance and benefit costs and $0.8 million in otherexpenses.  Of these charges, $0.3 millionwere 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 being marketed for sale and areincluded in other assets on the Consolidated Balance Sheet as of September 30,2010.

 

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Wetook actions during 2009 to reduce the number of employees at certain of ourother locations.  During the nine monthsended September 30, 2009, we recognized a total of $3.4 million in severancecharges related to this reduction in force.

 

Operatingincome increased by $25.1 million from the first nine months of 2009 to thefirst nine months of 2010, resulting in an operating margin for 2010 of 14.5%of sales compared to 11.2% for the first nine months of 2009.

 

Interestexpense was $20.6 million in the first nine months of 2010 compared to $18.5million in the first nine months of 2009. The increase was primarily due to higher average outstanding debtbalances in the comparable periods. During the third quarter of 2010, we amended and restated our seniorcredit facilities and redeemed our 8 7/8% senior subordinated notes.  During the mandatory redemption waitingperiod, we continued to incur interest on the outstanding 8 7/8% senior subordinatednotes after we had borrowed the funds under the new credit facilities withwhich to pay off the notes.  In addition,we increased our borrowings to fund a portion of the acquisition cost of SpeeCoin August, 2010.

 

Otherincome (expense), net in the first nine months of 2010 included charges of $7.1million related to the refinancing of our debt. These charges included the write-off of previously deferred financingcosts totaling $3.5 million from the early extinguishment of debt, as well as$3.6 million in new costs associated with these transactions.  In the first nine months of 2009, otherincome (expense), net reflected a gain of $0.4 million related to an insurancereimbursement.

 

Thefollowing table summarizes our income tax provision for continuing operationsin 2010 and 2009:

 
| ** **                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                   | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Income from continuing operations before income  taxes |       | $                                                       | 36,252     |   | $ | 21,028 |   |
| Provision for income taxes                             |       | 7,207                                                   |       | 5,378 |   |
| Effective tax rate                                     |       | 19.9                                                    | %          | 25.6 | % |
|                                                        |            |                                                         |            |  |  |  |  |

 

The income tax provision recognized in the firstnine months of 2010 reflects the release of a net amount of $5.9 million inpreviously provided income tax expense on uncertain tax positions.  Excluding the effect of this release, theeffective tax rate for the first nine months of 2010 would have been36.1%.  The 2010 year-to-date effectivetax rate also differs from the federal statutory rate due to increasedestimated tax credits for research and experimentation, positive effects fromsettlement of our IRS audit, and the impact of lower taxes on our foreignoperations.  These reductions werepartially offset by the $1.7 million impact of the change in tax deductibilityrelated to the Medicare Part D prescription drug benefit we provide to certainof our U.S. retirees as well as state income taxes.

 

TheCompany sponsors various post-employment retiree medical benefit plans forcertain employees in the U.S.  TheCompany receives a Medicare Part D subsidy for a portion of the cost ofproviding prescription drug benefits under its retiree medical benefit plan.  In March of 2010, new legislation was signedinto law in the U.S. that makes this subsidy fully subject to federal incometax beginning in 2013.  Previously, thissubsidy was essentially exempt from federal income tax.  Accordingly, the Company recognized a chargeof $1.7 million to income tax expense in the nine months ended September 30,2010, reflecting the write-off of the deferred tax asset related to thissubsidy.

 

Theeffective tax rate for the first nine months of 2009 was reduced from the federalstatutory rate by the impact of lower taxes on our foreign operations and thepositive effect from finalization 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.

 

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Incomefrom continuing operations in the first nine months of 2010 was $29.0 million,or $0.60 per diluted share, compared to $15.7 million, or $0.32 per diluted share,in the first nine months of 2009.

 

***Operating Results by Segment.***** **The following table reflectsoperating results by segment:

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2010**                                                | ** ** | **2009** | ** ** | **Percent   Change** | ** ** |
| Operating income:                    |       |                                                    |       |   |   |   |   |
| Outdoor Products segment             |       | $                                                       | 82,952     |   | $ | 56,020 |   | 48.1 | % |
| Other                                |       | (18,914                                                 | )          | (17,072 | ) | 10.8 |   |
| Operating income                     |       | $                                                       | 64,038     |   | $ | 38,948 |   | 64.4 | % |

 

***Outdoor Products Segment.***  The discussion above concerning sales, grossprofit, and SG&A expenses is applicable to the Company’s Outdoor Productssegment.

 

***Other.***  Net expenses in the other category increasedby $1.8 million for the comparable period, primarily due to higher compensationexpense reflecting increased staffing levels, annual merit increasesimplemented in the first quarter of 2010, increased incentive compensationexpense driven by improved operating performance, and increased stockcompensation expense from equity awards granted in March 2010 compared tono awards granted in the first nine months of 2009.  In addition, the gain on sale of our land andbuilding in Belgium, which occurred in the first nine months of 2009, was notrepeated in 2010.  Partially offsettingthese increases from 2009 to 2010 was the non-recurrence of plant closure andseverance costs incurred in 2009.

 

 

**Financial Condition, Liquidity and Capital Resources**

 

Long-termdebt consisted of the following:

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Amounts in thousands)**               | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Revolving credit facility                          |       | $                      | 24,700     |                  | $          | 3,400 |   |
| Term loan A                                        |       | 75,000                 |       | —                |       |
| Term loan B                                        |       | 275,000                |       | 107,465               |       |
| 8 7/8% senior subordinated notes                   |       | —                 |       | 175,000               |       |
| Total debt                                         |       | 374,700                |       | 285,865               |       |
| Less current maturities                            |       | (7,687                 | )          | (5,013                | )          |
| Long-term debt                                     |       | $                      | 367,013    |                  | $          | 280,852 |   |
| Weighted average interest rate on outstanding debt |       |                   | 5.17       | %                     |       | 7.54 | % |

 

***Senior Credit Facilities.******* The Company, through its wholly-ownedsubsidiary, Blount, Inc., first entered into a credit agreement withGeneral Electric Capital Corporation as agent on May 15, 2003.  The agreement has been amended and restated onseveral occasions, most recently on August 9, 2010.  As of September 30, 2010, the seniorcredit facilities consist of a revolving credit facility, a term loan A, and aterm loan B. 

 

***April 2009 Amendment to Revolving Credit Facility***.  On April 30, 2009, we entered into anamendment to the revolving credit facility that extended the maturity date to August 9,2010, reduced the availability to $90.0 million, and increased the interestrate and commitment fees.  This amendmentdid not affect the term loan B facility in place at that time.  The Company incurred fees and third partycosts of $2.0 million related to this amendment.

 

***December 2009 Amendment and Restatement of Senior CreditFacilities.***  On December 4,2009, the senior credit facility was amended and restated to extend thematurity date for both the revolving credit facility and the term loan Bfacility to February 9, 2012, reduce the availability under the revolvingcredit facility to $60.0 million, increase the interest rate on the term loanB, and modify certain financial covenants. The Company incurred fees and third party costs of $3.3 million relatedto this amendment and restatement.  Existing term loans representing $3.9 million of the total of $107.5million term loan principal outstanding at the time were not affected by thisamendment and restatement, and the terms for this portion of the term loansremained unchanged, including interest at the prime rate and a maturity date ofAugust 9, 2010.  The principalamount of these unchanged term loans was included in current maturities oflong-term debt on the Consolidated Balance Sheet as of December 31, 2009,and was paid in full on August 9, 2010.

 

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

 

·                  Maximum borrowings under the revolving creditfacility were increased to $75.0 million and the maturity date was extended toAugust 2015.

·                  The term loan B facility was increased to$275.0 million and the maturity date was extended to August 2016.

·                  The interest rates on the revolving creditfacility and the term loan B facility were changed, as described below.

·                  A term loan A facility was established at$75.0 million and with a maturity date of August 2015.

·                  Certain financial and other covenants wereamended and revised.

·                  The Company paid $6.9 million in fees andtransaction costs in connection with these transactions.

 

TheCompany used the $350.0 million combined proceeds of the term loans and repaidthe principal outstanding under its previous term loan B facility and its 87/8% senior subordinated notes originally due August 1, 2012, followingthe expiration of the required redemption notification period. These 8 7/8%senior subordinated notes were redeemed in full on September 16,2010.  In conjunction with the redemptionof the 8 7/8% senior subordinated notes, and the repayment of principal on theprevious term loan B, the Company expensed $3.5 million in unamortized deferredfinancing costs.

 

Therevolving credit facility provides for total available borrowings up to $75.0million, reduced by outstanding letters of credit and further restricted by aspecific leverage ratio.  As of September 30,2010, the Company had the ability to borrow an additional $47.0 million underthe terms of the revolving credit agreement. On October 1, 2010, we applied the proceeds from the sale of GearProducts to the outstanding principal on the revolving credit facility andavailability under the revolving credit facility was increased to approximately$72 million. The revolving credit facility bears interest at the LIBOR Rateplus 3.50%, or the Index Rate plus 2.50%, and matures on August 9,2015.  Interest is payable on theindividual maturity dates for each LIBOR-based borrowing and monthly on IndexRate-based borrowings.  Any outstandingprincipal is due in its entirety on the maturity date.

 

Theterm loan A bears interest at the LIBOR Rate plus 3.50% or the Index Rate plus2.50% and matures on August 9, 2015. The term loan A facility requires quarterly principal payments of $1.9million commencing on January 1, 2011, with a final payment of $39.4 milliondue on the maturity date.  Once repaid,principal under the term loan A facility may not be re-borrowed.

 

Theterm loan B bears interest at the LIBOR Rate plus 4.00% or the Index Rate plus3.00% and matures on August 9, 2016. The term loan B facility requires quarterly principal payments of $0.7million commencing on January 1, 2011, with a final payment of $259.2 milliondue on the maturity date.  Once repaid,principal under the term loan B facility may not be re-borrowed.

 

Theamended and restated senior credit facilities contain financial covenantsrelating to:

 

·                  Maximum capital expenditures of $42.5 millionper calendar year.

·                  Minimum fixed charge coverage ratio of 1.15,defined as EBITDA divided by cash payments for interest, taxes, capitalexpenditures, scheduled debt principal payments, and certain other items,calculated on a trailing twelve-month basis.

·                  Maximum leverage ratio of 4.25, defined astotal debt divided by EBITDA, calculated on a trailing twelve-month basis.

 

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Year-to-date capital expenditures were $14.0million through September 30, 2010. The status of the other financial covenants was as follows:

 
| ** **                                         | ** ** | **As of September 30, 2010** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| **Financial Covenants**                       | ** ** | **Requirement**                                  | ** ** | **Actual** | ** ** |
| Minimum fixed charge coverage ratio last 12 months |       | > 1.15                                        |       | 2.06 |   |
| Maximum leverage ratio last 12 months              |       | < 4.25                                        |       | 3.06 |   |

 

Inaddition, there are covenants or restrictions relating to, among othercategories, acquisitions, investments, loans and advances, indebtedness,dividends on our stock, and the sale of stock or assets.  We were in compliance with all debt covenantsas of September 30, 2010. Non-compliance with these covenants, if it were to become an event ofdefault under the terms of the credit agreement, could result in severelimitations to our overall liquidity, and the term loan lenders could requireimmediate repayment of outstanding amounts, potentially requiring sale of ourassets.  Our debt is not subject to anytriggers that would require early payment due to any adverse change in ourcredit rating.

 

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

 

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

 

Our debt instruments andgeneral credit are rated by both Standard & Poor’s and Moody’s.  During the three months ended September 30,2010, in conjunction with the amendment and restatement of our senior creditfacility and the elimination of our senior subordinated debt, the ratings onthe senior credit facility were lowered by Standard & Poor’s from BB+to BB- and by Moody’s from Ba1 to Ba3. As of September 30, 2010, the credit ratings for the Company wereas follows:

 
| ** **             | ** ** | **Standard &  Poor’s** | ** ** | **Moody’s** | ** ** |
|------------------------|------------|--------------------------------------|------------|------------------|------------|
| Senior credit facility |       | BB-                                  |       | Ba3              |       |
| General credit rating  |       | BB- /Stable                          |       | Ba3              |       |

 

Weintend to fund working capital, acquisitions, capital expenditures, debtservice requirements, and obligations under our post-employment benefit plansfor the next twelve months through cash on hand, cash flows generated fromoperations and the amounts available under our revolving credit facility.  We expect our financial resources will besufficient to cover any additional increases in working capital, acquisitions,and capital expenditures.  There can beno assurance, however, that these resources will be sufficient to meet ourneeds.  We may also consider otheroptions available to us in connection with future liquidity needs, including,but not limited to, the postponement of discretionary contributions topost-employment benefit plans, the postponement of capital expenditures,restructuring of our credit facilities, and issuance of new debt or equitysecurities.

 

Ourinterest expense may vary in the future because the interest rates on therevolving credit facility and term loans are variable.  We are required under the terms of the August 9,2010 amendment and restatement of our credit facilities to hedge 35% of the combinedterm loan principal outstanding with fixed or maximum interest ratederivatives.  Management is currentlyevaluating alternatives for this interest rate hedging program.  Our weighted average interest rate on alldebt was 5.17% as of September 30, 2010, compared to 7.54% as of December 31,2009.

 

Cashand cash equivalents at September 30, 2010 were $91.0 million, compared to$55.1 million at December 31, 2009. As of September 30, 2010, the proceeds of approximately $25 millionfrom the sale of Gear Products were included in our domestic cash balance.  On October 1, 2010, $24.7 million ofthis cash was applied to the balance outstanding under our revolving creditfacility. The majority of our remaining cash balance was held at our foreignoperations as of September 30, 2010.

 

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Cashprovided by operating activities is summarized in the following table:

 
| ** **                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Net income                             |       | $                                                       | 34,838     |   | $ | 16,531 |   |
| Non-cash items                         |       | 23,938                                                  |       | 17,465 |   |
| Subtotal                               |       | 58,776                                                  |       | 33,996 |   |
| Changes in assets and liabilities, net |       | (27,184                                                 | )          | (7,915 | ) |
| Discontinued operations, net           |       | 1,106                                                   |       | 2,774 |   |
| Cash provided by operating activities  |       | $                                                       | 32,698     |   | $ | 28,855 |   |

 

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

 

Duringthe first nine months of 2010, operating activities provided $32.7 million ofcash.  Income from continuing operationsplus non-cash items totaled $58.8 million in the first nine months of 2010,reflecting increased income and non-cash items compared with the first ninemonths of 2009. The increased amount of non-cash items in 2010 is primarily dueto the gain on the sale of Gear Products, costs associated with our refinancingactivities, higher levels of depreciation of property, plant, and equipment,increased stock compensation expenses, lower asset impairment charges,fluctuations in deferred income taxes, and the non-recurring gain on the saleof land and building recognized in 2009. The net change in working capital components and other assets andliabilities during the first nine months of 2010 used $27.2 million incash.  An increase in accounts receivableof $4.8 million, reflecting increased sales levels in the third quarter of2010, an increase of $9.3 million in inventories to support higher shipmentlevels, a decrease in accounts payable of $2.2 million, and a decrease in otherliabilities of $30.6 million, all used cash during the period.  These uses were partially offset by adecrease in other assets of $14.9 million, including the collection of incometaxes receivable in certain jurisdictions, and an increase in accrued expensesof $4.8 million.

 

Discontinuedoperations provided $1.1 million in cash during the first nine months of 2010as cash was generated by Gear Products prior to the disposition on September 30,2010.  Cash payments during the firstnine months of 2010 also included $24.1 million for interest, $9.1 million forincome taxes, and a cash contribution to the U.S. pension plan of $10.0million. The Company expects to contribute a total of $15 million to $17million to its defined benefit pension plans during 2010.

 

Duringthe first nine months of 2009, operating activities provided $28.9 million ofcash.  Income from continuing operations,plus non-cash items, totaled $34.0 million in the first nine months of2009.  Included within non-cash items isthe $2.7 million gain on sale of our land and building in Belgium.  The net change in working capital componentsand other assets and liabilities during the period used $7.9 million in cashflow from operating activities. Decreases in accounts receivable of $3.6 million, inventories of $9.7million, and other assets of $0.7 million all positively affected cash flowsfrom operating activities.  Thesepositive effects were offset by reductions in accounts payable and accruedexpenses of $16.2 million and a reduction in other liabilities of $5.8 million.  Discontinued operations provided $2.8 millionin cash during the first nine months of 2009, reflecting the positive cash flowgenerated by the operations of Gear Products. Cash payments during the first nine months of 2009 also included $19.7million for interest, $9.9 million for income taxes, and a $10 million cashcontribution to our U.S. defined benefit pension plan.

 

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Cashused in investing activities is summarized as follows:

 
| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**        | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Purchases of property, plant, and equipment |       | $                                                       | (14,017    | ) | $ | (12,737 | ) |
| Proceeds from sale of assets                |       | 126                                                     |       | 3,282 |   |
| Acquisition of SpeeCo                       |       | (90,854                                                 | )          | — |   |
| Discontinued operations                     |       | 25,176                                                  |       | (332 | ) |
| Net cash used in investing activities       |       | $                                                       | (79,569    | ) | $ | (9,787 | ) |

 

InAugust 2010 we paid net cash of $90.9 million to acquire SpeeCo, exclusiveof transaction expenses.  On September 30,2010 we sold Gear Products and received initial cash proceeds of $25.2 million,based on a preliminary purchase price. We expect the cash proceeds from the sale of Gear Products to be $24.8million after settlement of the final purchase price.  Purchases of property, plant, and equipmentare primarily for productivity improvements, expanded manufacturing capacity,and replacement of consumable tooling and equipment. Generally, about one-thirdof our capital spending represents replacement of consumable tooling, dies and existingequipment, with the remainder devoted to capacity and productivityimprovements.  During 2010, we expect toinvest $19 million to $22 million for capital expenditures, compared to $17.3million for the full year in 2009.

 

Cashused in financing activities is summarized as follows:

 
| ** **                                               | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                     | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Net change in principal under revolving credit  facility |       | $                                                       | 21,300     |   | $ | (3,250 | ) |
| Proceeds from term loan A and term loan B                |       | 350,000                                                 |       | — |   |
| Repayment of term loan principal                         |       | (107,465                                                | )          | (12,026 | ) |
| Repayment of 8 7/8% senior subordinated notes            |       | (175,000                                                | )          | — |   |
| Issuance costs related to debt                           |       | (6,863                                                  | )          | (1,900 | ) |
| Proceeds and tax effects of stock-based  compensation    |       | 1,333                                                   |       | (165 | ) |
| Net cash provided by (used in) financing  activities     |       | $                                                       | 83,305     |   | $ | (17,341 | ) |

 

OnAugust 9, 2010 we amended and restated our senior credit facilities,increasing the available borrowings, extending the maturity dates, andmodifying the interest rates and financial covenants.  We borrowed $350.0 million under two new termloan instruments, and used the majority of the proceeds to repay our existingterm loan and 8 7/8% senior subordinated notes. We also borrowed additional funds to acquire SpeeCo on August 10,2010.  We incurred fees and costs of $6.9million for these financing transactions. Cash used in financing activities in the first nine months of 2009included $15.3 million in net repayments of principal on our revolving creditand term debt facilities.  We alsoincurred $1.9 million in costs to amend and extend the maturity date of ourrevolving credit facility in April 2009.

 

**Critical Accounting Policies**

 

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

 

**Recent Accounting Pronouncements**

 

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

 

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** **

**Forward Looking Statements**

 

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

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

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

 

Wemanage our ratio of fixed to variable rate debt with the objective of achievinga mix that management believes is appropriate. The interest rates are variable on our term and revolver loans and weare subject to market risk from movement in benchmark rates.  We are required under the terms of the August 9,2010 amendment and restatement of our credit facilities to hedge 35% of the combinedterm loan principal outstanding with fixed or maximum interest ratederivatives.  Management is currentlyevaluating alternatives for this interest rate hedging program.

 

Seealso, the Market Risk section of Management’s Discussion and Analysis of FinancialCondition and Results of Operations in our most recent Form 10-K, filedwith the SEC on March 9, 2010, for further discussion of market risk.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

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

 

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

 

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

 

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**PART II     OTHER INFORMATION**

** **

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

**10.1 Stock PurchaseAgreement by and among Tulsa Winch, Inc., Blount, Inc. and DoverIndustrial Products, Inc. dated September 30, 2010.

 

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

 

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

 

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

 

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

 

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

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

 

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**SIGNATURES**

 

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

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

 

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