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** **

 

** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D. C. 20549**

 

**FORM 10-Q**

 

**x****                              Quarterly report pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2008.**

** **

**OR**

** **

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

 

**Commission file number 001-11549**

 

**BLOUNTINTERNATIONAL, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**(503)653-8881**

(Registrant’s telephonenumber, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.  (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

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

 

Thenumber of shares outstanding of $0.01 par value common stock as of October 30,2008 was 47,608,570 shares.

 

 

 

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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, 2008 and 2007                    |       | 3        |
|       |                                                                                                |                                                                                                                      |       |     |
|       |                                                                                                | Unaudited  Consolidated Balance Sheets   September 30, 2008 and December 31, 2007                                         |       | 4        |
|       |                                                                                                |                                                                                                                      |       |     |
|       |                                                                                                | Unaudited Consolidated Statements of Cash Flows   Nine months ended September 30, 2008 and 2007                           |       | 5        |
|       |                                                                                                |                                                                                                                      |       |     |
|       |                                                                                                | Unaudited Consolidated Statement of Changes in  Stockholders’ Equity (Deficit)  Nine months ended September 30, 2008 |       | 6        |
|       |                                                                                                |                                                                                                                      |       |     |
|       |                                                                                                | Notes to Unaudited Consolidated Financial Statements                                                                      |       | 7        |
|       |                                                                                                |                                                                                                                      |       |     |
|       | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                                      | 22         |
|       |                                                                                                |                                                                                                                      |       |     |
|       | Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                 |                                                                                                                      | 34         |
|       |                                                                                                |                                                                                                                      |       |     |
|       | Item 4. Controls and Procedures                                                                     |                                                                                                                      | 34         |
|       |                                                                                                |                                                                                                                      |       |     |
| Part  II   | Other  Information                                                                                  |                                                                                                                      |       |
|       |                                                                                                |                                                                                                                      |       |     |
|       | Item 6. Exhibits                                                                                    |                                                                                                                      | 35         |
|       |                                                                                                |                                                                                                                      |       |     |
| Signatures |                                                                                                |                                                                                                                      |       | 36       |
|            |                                                                                                     |                                                                                                                           |            |          |  |  |  |

 

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**PART I       FINANCIALINFORMATION**

 

**ITEM 1.  CONSOLIDATEDFINANCIAL STATEMENTS**

 

**UNAUDITEDCONSOLIDATED STATEMENTS OF INCOME**

**BlountInternational, Inc. and Subsidiaries**

 
| ** **                                                                      | ** ** | **Three Months****  Ended September 30,** | ** ** | **Nine Months****Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(Amounts in thousands, except per share data)** | ** ** | **2008**                                                      | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | ** **                                                    | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales                                                                           |       | $                                                             | 175,006    |                                                  | $          | 129,853 |   | $ | 463,265 |   | $ | 383,749 |   |
| Cost of sales                                                                   |       | 118,470                                                       |       | 85,927                                                |       | 314,929 |   | 253,492 |   |
| Gross profit                                                                    |       | 56,536                                                        |       | 43,926                                                |       | 148,336 |   | 130,257 |   |
| Selling, general and administrative expenses                                    |       | 26,526                                                        |       | 23,327                                                |       | 80,037 |   | 70,800 |   |
| Operating income                                                                |       | 30,010                                                        |       | 20,599                                                |       | 68,299 |   | 59,457 |   |
| Interest income                                                                 |       | 301                                                           |       | 325                                                   |       | 1,032 |   | 819 |   |
| Interest expense                                                                |       | (6,873                                                        | )          | (8,454                                                | )          | (20,533 | ) | (25,259 | ) |
| Other income, net                                                               |       | 690                                                           |       | 651                                                   |       | 1,461 |   | 715 |   |
| Income from continuing operations before income taxes                           |       | 24,128                                                        |       | 13,121                                                |       | 50,259 |   | 35,732 |   |
| Provision for income taxes                                                      |       | 9,146                                                         |       | 4,940                                                 |       | 18,171 |   | 12,490 |   |
| Income from continuing operations                                               |       | 14,982                                                        |       | 8,181                                                 |       | 32,088 |   | 23,242 |   |
| Discontinued operations:                                                        |       |                                                          |       |                                                  |       |   |   |   |   |
| Income (loss) before taxes                                                      |       | (87                                                           | )          | 2,043                                                 |       | (367 | ) | 3,323 |   |
| Provision for income taxes                                                      |       | 145                                                           |       | 781                                                   |       | 39 |   | 1,274 |   |
| Income (loss) from discontinued operations                                      |       | (232                                                          | )          | 1,262                                                 |       | (406 | ) | 2,049 |   |
| Net income                                                                      |       | $                                                             | 14,750     |                                                  | $          | 9,443 |   | $ | 31,682 |   | $ | 25,291 |   |
|                                                                            |       |                                                          |       |                                                  |       |   |   |   |   |
| Basic income (loss) per share:                                                  |       |                                                          |       |                                                  |       |   |   |   |   |
| Continuing operations                                                           |       | $                                                             | 0.31       |                                                  | $          | 0.17 |   | $ | 0.68 |   | $ | 0.49 |   |
| Discontinued operations                                                         |       | 0.00                                                          |       | 0.03                                                  |       | (0.01 | ) | 0.04 |   |
| Net income                                                                      |       | $                                                             | 0.31       |                                                  | $          | 0.20 |   | $ | 0.67 |   | $ | 0.53 |   |
|                                                                            |       |                                                          |       |                                                  |       |   |   |   |   |
| Diluted income (loss) per share:                                                |       |                                                          |       |                                                  |       |   |   |   |   |
| Continuing operations                                                           |       | $                                                             | 0.31       |                                                  | $          | 0.17 |   | $ | 0.67 |   | $ | 0.48 |   |
| Discontinued operations                                                         |       | 0.00                                                          |       | 0.03                                                  |       | (0.01 | ) | 0.04 |   |
| Net income                                                                      |       | $                                                             | 0.31       |                                                  | $          | 0.20 |   | $ | 0.66 |   | $ | 0.52 |   |
|                                                                            |       |                                                          |       |                                                  |       |   |   |   |   |
| Weighted average shares used in per share calculations:                         |       |                                                          |       |                                                  |       |   |   |   |   |
| Basic                                                                           |       | 47,624                                                        |       | 47,288                                                |       | 47,440 |   | 47,276 |   |
| Diluted                                                                         |       | 48,248                                                        |       | 48,113                                                |       | 48,079 |   | 48,068 |   |
|                                                                            |       |                                                          |       |                                                  |       |   |   |   |   |

 

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

 

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**UNAUDITED CONSOLIDATEDBALANCE SHEETS**

**BlountInternational, Inc. and Subsidiaries**

** **
| **(Amounts in thousands, except share data)**                                                       | ** ** | **September 30, 2008** | ** ** | **December 31,   2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                         |       |                        |       |                         |       |
| **Assets**                                                                                                                   |       |                        |       |                         |       |
| Current assets:                                                                                                              |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                    |       | $                           | 53,577     |                         | $          | 57,589 |   |
| Accounts receivable, net of allowance for doubtful accounts of $3,740  and $2,181, respectively                              |       | 91,454                      |       | 67,818                       |       |
| Inventories, net                                                                                                             |       | 81,363                      |       | 70,273                       |       |
| Deferred income taxes                                                                                                        |       | 5,640                       |       | 5,536                        |       |
| Current intangible asset, net                                                                                                |       | 465                         |       | —                       |       |
| Other current assets                                                                                                         |       | 13,176                      |       | 16,393                       |       |
| Total current assets                                                                                                         |       | 245,675                     |       | 217,609                      |       |
| Property, plant and equipment, net                                                                                           |       | 116,582                     |       | 89,729                       |       |
| Deferred financing costs                                                                                                     |       | 7,684                       |       | 10,698                       |       |
| Deferred income taxes                                                                                                        |       | 3,380                       |       | 14,849                       |       |
| Goodwill and noncurrent intangible assets, net                                                                               |       | 80,053                      |       | 48,984                       |       |
| Assets held for sale                                                                                                         |       | 1,476                       |       | —                       |       |
| Other assets                                                                                                                 |       | 30,430                      |       | 30,080                       |       |
| Total Assets                                                                                                                 |       | $                           | 485,280    |                         | $          | 411,949 |   |
|                                                                                                                         |       |                        |       |                         |       |
| **Liabilities and Stockholders’ Deficit**                                                                               |       |                        |       |                         |       |
| Current liabilities:                                                                                                         |       |                        |       |                         |       |
| Current maturities of long-term debt                                                                                         |       | $                           | 38,232     |                         | $          | 1,242 |   |
| Accounts payable                                                                                                             |       | 34,084                      |       | 29,799                       |       |
| Accrued expenses                                                                                                             |       | 53,779                      |       | 57,447                       |       |
| Deferred income taxes                                                                                                        |       | 505                         |       | 533                          |       |
| Total current liabilities                                                                                                    |       | 126,600                     |       | 89,021                       |       |
| Long-term debt, excluding current maturities                                                                                 |       | 293,847                     |       | 295,758                      |       |
| Employee benefit obligations                                                                                                 |       | 48,429                      |       | 48,948                       |       |
| Other liabilities                                                                                                            |       | 36,491                      |       | 32,368                       |       |
| Total liabilities                                                                                                            |       | 505,367                     |       | 466,095                      |       |
| Commitments and contingent liabilities                                                                                       |       |                        |       |                         |       |
| Stockholders’ equity (deficit):                                                                                         |       |                        |       |                         |       |
| Common stock: par value $0.01 per share, 100,000,000 shares authorized,  47,607,570 and 47,291,647 outstanding, respectively |       | 476                         |       | 473                          |       |
| Capital in excess of par value of stock                                                                                      |       | 579,468                     |       | 575,595                      |       |
| Accumulated deficit                                                                                                          |       | (586,465                    | )          | (618,147                     | )          |
| Accumulated other comprehensive loss                                                                                         |       | (13,566                     | )          | (12,067                      | )          |
| Total stockholders’ deficit                                                                                             |       | (20,087                     | )          | (54,146                      | )          |
| Total Liabilities and Stockholders’ Deficit                                                                             |       | $                           | 485,280    |                         | $          | 411,949 |   |

 

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

 

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** **

**UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Blount International, Inc. and Subsidiaries**

 
| ** **                                                                                                | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                                                                      | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                                                 |       |                                                    |       |   |   |
| Income from continuing operations                                                                         |       | $                                                       | 32,088     |   | $ | 23,242 |   |
| Adjustments to reconcile income from continuing  operations to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation of property, plant and  equipment                                                            |       | 15,974                                                  |       | 12,742 |   |
| Amortization, stock compensation and other  non-cash charges                                              |       | 8,563                                                   |       | 5,730 |   |
| Excess tax benefit from share-based  compensation                                                         |       | (459                                                    | )          | (106 | ) |
| Deferred income taxes                                                                                     |       | 285                                                     |       | 4,711 |   |
| Gain on disposal of assets                                                                                |       | (1,287                                                  | )          | (517 | ) |
| Changes in assets and liabilities, net of  impact of acquisitions:                                        |       |                                                    |       |   |   |
| (Increase) decrease in accounts receivable                                                                |       | (10,642                                                 | )          | (5,962 | ) |
| (Increase) decrease in inventories                                                                        |       | (2,798                                                  | )          | (10,126 | ) |
| (Increase) decrease in other assets                                                                       |       | 1,956                                                   |       | (3,494 | ) |
| Increase (decrease) in accounts payable                                                                   |       | (2,101                                                  | )          | 971 |   |
| Increase (decrease) in accrued expenses                                                                   |       | 1,580                                                   |       | 3,518 |   |
| Increase (decrease) in other liabilities                                                                  |       | (103                                                    | )          | (14,978 | ) |
| Discontinued operations                                                                                   |       | (4,199                                                  | )          | (1,572 | ) |
| Net cash provided by operating activities                                                                 |       | 38,857                                                  |       | 14,159 |   |
|                                                                                                      |       |                                                    |       |   |   |
| **Cash flows from investing activities:**                                                                 |       |                                                    |       |   |   |
| Proceeds from sale of assets                                                                              |       | 1,349                                                   |       | 184 |   |
| Purchases of property, plant and equipment                                                                |       | (17,675                                                 | )          | (13,760 | ) |
| Acquisition of Carlton Holdings, Inc.,  net of cash acquired                                         |       | (64,381                                                 | )          | — |   |
| Discontinued operations                                                                                   |       | 1,725                                                   |       | 968 |   |
| Net cash used in investing activities                                                                     |       | (78,982                                                 | )          | (12,608 | ) |
|                                                                                                      |       |                                                    |       |   |   |
| **Cash flows from financing activities:**                                                                 |       |                                                    |       |   |   |
| Net borrowings under revolving credit  facility                                                           |       | 37,000                                                  |       | 5,250 |   |
| Repayment of term loan principal                                                                          |       | (1,921                                                  | )          | (1,125 | ) |
| Excess tax benefit from share-based  compensation                                                         |       | 459                                                     |       | 106 |   |
| Proceeds from exercise of stock options                                                                   |       | 575                                                     |       | 205 |   |
| Net cash provided by financing activities                                                                 |       | 36,113                                                  |       | 4,436 |   |
|                                                                                                      |       |                                                    |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                     |       | (4,012                                                  | )          | 5,987 |   |
| Cash and cash equivalents at beginning of  period                                                         |       | 57,589                                                  |       | 27,636 |   |
| Cash and cash equivalents at end of period                                                                |       | $                                                       | 53,577     |   | $ | 33,623 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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** **

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

**Blount International, Inc. and Subsidiaries**

** **
| **(Amounts in thousands)**                           | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess  of Par** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------------|------------|------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                                                           |       |       |       |              |       |                                     |       |                     |       |                                        |       |      |       |
| Balance December 31, 2007                                 |       | 47,292     |       | $                 | 473        |                                     | $          | 575,595                  |       | $                                           | (618,147   | )         | $          | (12,067 | ) | $ | (54,146 | ) |
|                                                           |       |       |       |              |       |                                     |       |                     |       |                                        |       |      |       |
| Net income                                                     |       |       |       |              |       |                                     |       | 31,682                   |       |                                        |       | 31,682    |       |
| Other comprehensive income (loss):                             |       |       |       |              |       |                                     |       |                     |       |                                        |       |      |       |
| Foreign currency translation adjustment                        |       |       |       |              |       |                                     |       |                     |       | (495                                        | )     | (495      | )     |
| Unrealized losses                                              |       |       |       |              |       |                                     |       |                     |       | (1,004                                      | )          | (1,004    | )     |
| Comprehensive income, net                                      |       |       |       |              |       |                                     |       |                     |       |                                        |       | 30,183    |       |
| Stock options, stock appreciation rights  and restricted stock |       | 316        |       | 3                 |       | 1,031                                    |       |                     |       |                                        |       | 1,034     |       |
| Stock compensation expense                                     |       |       |       |              |       | 2,842                                    |       |                     |       |                                        |       | 2,842     |       |
| Balance September 30, 2008                                |       | 47,608     |       | $                 | 476        |                                     | $          | 579,468                  |       | $                                           | (586,465   | )         | $          | (13,566 | ) | $ | (20,087 | ) |

 

Othercomprehensive loss for the three and nine months ended September 30, 2008was $2.0 million and $1.5 million, respectively.  Other comprehensive income (loss) for thethree and nine months ended September 30, 2007 was $1.1 million and $(1.7)million, respectively.

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1:  BASIS OFPRESENTATION**

 

***Basis of Presentation.***  The unaudited consolidated financialstatements include the accounts of Blount International, Inc. and itssubsidiaries (“Blount” or the “Company”) and are prepared in conformity withaccounting principles generally accepted in the United States of America (“U.S.”).  All significant intercompanybalances and transactions have been eliminated. In the opinion of management, the consolidated financial statementscontain all adjustments (consisting of only normal recurring adjustments)necessary for a fair statement of the financial position, results ofoperations, cash flows and changes in stockholders’ deficit for the periodspresented.

 

Theaccompanying financial data as of September 30, 2008 and for the three andnine months ended September 30, 2008 and 2007 has been prepared by the Company, without audit, pursuant tothe rules and regulations of the U. S. Securities and Exchange Commission(“SEC”).  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the U. S. have beencondensed or omitted pursuant to such rules and regulations. The December 31,2007 consolidated balance sheet was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the U. S. These consolidated financial statements shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2007.

 

***Income Taxes.***  The effective tax rate differs from the U. S.federal statutory rate of 35% due to the inclusion of various state incometaxes incurred in the U. S. and the effect of various tax rates that apply toour foreign locations, which can differ significantly from our U. S. federaltax rate.

 

***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.  The Company bases its estimates on variousassumptions that are believed to be reasonable under the circumstances.  Management is continually evaluating andupdating these estimates and it is reasonably possible that these estimateswill change in the near term.

 

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

 

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

 

On May 2, 2008, theCompany acquired all of the outstanding stock of Carlton Holdings, Inc.and its subsidiaries (“Carlton”), a manufacturer of cutting chain for chainsawslocated near Portland, Oregon.  TheCompany paid a total of $66.2 million in cash for Carlton, including relatedacquisition costs of $1.5 million, and also assumed liabilities totaling $21.4million.  Carlton had $1.8 million incash on the date of acquisition, resulting in a net cash outflow of $64.4million for the acquisition.  The acquisitionwas financed with a combination of cash on hand and $58.5 million borrowedunder the Company’s revolving credit facility. The operating results of Carlton are included in the Company’sconsolidated financial statements from May 2, 2008 forward.

 

TheCompany accounted for the acquisition in accordance with Financial AccountingStandard (“FAS”) No. 141, “Business Combinations” (“FAS No. 141”).  Accordingly, Carlton’s assets and liabilitieswere recorded at their estimated fair values on the date of acquisition.  The Company estimated the fair value ofassets using various methods and considering, among other factors, projecteddiscounted cash flows, replacement cost less an allowance for depreciation,recent comparable transactions, and historical book values.  The Company estimated the fair value ofliabilities assumed considering the historical book values and projected futurecash flows. A summary of the preliminary purchase price allocation for the fairvalue of the assets acquired and the obligations assumed at the date

 

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ofthe acquisition is presented below. The purchase price allocation ispreliminary and is subject to the completion of certain items, including finaldetermination of post-closing purchase price adjustments, and for uncertain taxpositions under FIN 48 and deferred tax positions under FAS No. 109.

 

**Summary of Carlton Preliminary Purchase Price Allocation**

 
| **(Amounts in thousands)**                                   | ** ** | **May 2, 2008** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------|------------|
| Cash                                                                   |       | $                         | 1,801      |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,590 |       | 14,808                    |       |
| Inventories                                                            |       | 9,958                     |       |
| Current intangible asset subject to  amortization                      |       | 1,240                     |       |
| Other current assets                                                   |       | 413                       |       |
| Total current assets                                                   |       | 28,220                    |       |
| Property, plant and equipment, net                                     |       | 26,703                    |       |
| Noncurrent intangible assets subject to  amortization                  |       | 8,790                     |       |
| Goodwill and other intangible assets not  subject to amortization      |       | 22,545                    |       |
| Non-current deferred tax asset                                         |       | 1,283                     |       |
| Total assets                                                           |       | 87,541                    |       |
|                                                                   |       |                      |       |
| Current liabilities                                                    |       | 7,615                     |       |
| Non-current liabilities                                                |       | 3,430                     |       |
| Deferred income tax liability                                          |       | 10,315                    |       |
| Total liabilities assumed                                              |       | 21,360                    |       |
| Cash paid for acquisition, excluding cash  acquired                    |       | $                         | 66,181     |   |

 

Reflectedin the consolidated results of operations for the three and nine months ended September 30,2008 are non-cash charges totaling $0.9 million and $2.8 million, respectively,for amortization of intangible assets, depreciation of the step-up to fairvalue for property, plant and equipment and expensing of the step-up to fairvalue related to inventories.

 

Thefollowing table summarizes the Company’s intangible assets:

 
| ** **                    | ** ** | ** **         | **September 30, 2008** | ** **                  | **December 31, 2007** | ** **                    |
|-------------------------------|------------|--------------------|----------------------------------|-----------------------------|---------------------------------|-------------------------------|
| **(Amounts in thousands)**    | ** ** | **Life  In Years** | ** **                       | **Gross  Carrying  Amount** | ** **                      | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Goodwill, Carlton acquisition |       | Indefinite         |                             | $                           | 17,045                          |                          | $ | — |   | $ | — |   | $ | — |   |
| Goodwill, other               |       | Indefinite         |                             | 48,984                      |                            | —                        |   | 48,984 |   | — |   |
| Total goodwill                |       |               |                             | 66,029                      |                            | —                        |   | 48,984 |   |   |   |
|                          |       |               |                             |                        |                            |                          |   |   |   |   |   |
| Trademarks and trade names    |       | Indefinite         |                             | 5,500                       |                            | —                        |   | — |   | — |   |
| Backlog                       |       | 0.7                |                             | 1,240                       |                            | (775                          | ) | — |   | — |   |
| Covenant not to compete       |       | 3                  |                             | 590                         |                            | (82                           | ) | — |   | — |   |
| Customer relationships        |       | 10                 |                             | 8,200                       |                            | (184                          | ) | — |   | — |   |
| Total intangible assets       |       |               |                             | $                           | 81,559                          |                          | $ | (1,041 | ) | $ | 48,984 |   | $ | — |   |

 

Amortizationexpense was $0.6 million and $1.0 million, respectively, for the three and ninemonths ended September 30, 2008.  Noamortization expense was incurred for the three and nine months ended September 30,2007.  Amortization expense for theseintangible assets is expected to total $1.7 million in 2008; $1.5 million ineach of 2009 and 2010; $1.3 million in 2011; $1.1 million in 2012 and $1.0million in 2013.

 

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

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

 
| ** **                           | ** ** | **Three Months****Ended September 30,  2007** | ** **    | **Nine Months****Ended September 30,  2007** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------|---------------|-------------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **As  Reported**                                             | ** **    | **Pro-  Forma**                                             | ** ** | **As  Reported** | ** ** | **Pro-  Forma** | ** ** |
|                                 |       |                                                         |          |                                                        |       |   |   |   |   |   |   |   |   |
| Sales                                |       | $                                                            |  129,853 |                                                        | $          |  143.892 |   | $ |  383,749 |   | $ |  424,169 |   |
| Net income                           |       | 9,443                                                        |          | 8,860                                                       |       | 25,291 |   | 23,838 |   |
| Basic earnings per share             |       | 0.20                                                         |          | 0.19                                                        |       | 0.53 |   | 0.50 |   |
| Diluted earnings per share           |       | 0.20                                                         |          | 0.19                                                        |       | 0.52 |   | 0.49 |   |

 

**NOTE 3:  DISCONTINUEDOPERATIONS**

 

***Discontinued Forestry Division.***  On November 5,2007, the Company sold its Forestry Division, which constituted the majority ofits Industrial and Power Equipment segment, to Caterpillar Forest ProductsInc., a subsidiary of Caterpillar Inc., for gross proceeds of $79.1million.  Under the terms of the relatedpurchase agreement, $8.8 million of the gross proceeds were initially held inescrow for up to three years from the transaction date.  The Company recognized a pretax gain of $26.0million net of related transaction expenses on the sale in the fourth quarterof 2007.  Prior to its treatment asdiscontinued operations, this division accounted for 21% of the Company’sconsolidated sales for the first nine months of 2007.  The Forestry Division is reported asdiscontinued operations for all periods presented.  This division was headquartered in Zebulon,North Carolina, and manufactured and marketed timber harvesting and handlingequipment and industrial tractors and loaders. The division had manufacturing facilities in Owatonna, Minnesota;Prentice, Wisconsin; and Söderhamn, Sweden.  The sale included the disposition of theForestry Division’s recorded goodwill in the amount of $22.9 million.  The Company retained certain liabilitiesrelated to the business, as well as an idle manufacturing facility located inMenominee, Michigan.  In December 2007,the land and building in Menominee, Michigan were sold for net cash proceeds of$0.5 million.

 

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Discontinuedoperations are summarized as follows:

 
| ** **                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                               | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Sales                                                              |       | $                                                       | —     |   | $ | 99,761 |   |
| Operating income (loss) before taxes from  discontinued operations |       | (367                                                    | )          | 3,323 |   |
| Income tax provision                                               |       | 39                                                      |       | 1,274 |   |
| Income (loss) from discontinued operations                         |       | $                                                       | (406       | ) | $ | 2,049 |   |

 

**NOTE 4:  INVENTORIES,NET**

 

Inventoriesconsisted of the following:

 
| **(Amounts in thousands)** | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Raw materials and supplies           |       | $                       | 15,301     |                   | $          | 9,297 |   |
| Work in progress                     |       | 14,612                  |       | 14,701                 |       |
| Finished goods                       |       | 51,450                  |       | 46,275                 |       |
| Total inventories                    |       | $                       | 81,363     |                   | $          | 70,273 |   |

 

**NOTE 5:  PROPERTY, PLANTAND EQUIPMENT, NET**

 

Property,plant and equipment consisted of the following:

 
| **(Amounts in thousands)**     | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Land                                     |       | $                       | 7,469      |                   | $          | 4,882 |   |
| Buildings and improvements               |       | 56,830                  |       | 51,251                 |       |
| Machinery and equipment                  |       | 206,913                 |       | 186,076                |       |
| Furniture, fixtures and office equipment |       | 29,679                  |       | 28,419                 |       |
| Transportation equipment                 |       | 832                     |       | 662                    |       |
| Construction in progress                 |       | 12,477                  |       | 5,491                  |       |
| Accumulated depreciation                 |       | (197,618                | )          | (187,052               | )          |
| Total property, plant and equipment, net |       | $                       | 116,582    |                   | $          | 89,729 |   |

 

**NOTE 6:  LONG TERM DEBT**

 

Long-termdebt consisted of the following:

 
| **(Amounts in thousands)** | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Revolving credit facility            |       | $                       | 37,000     |                   | $          | — |   |
| Term loans                           |       | 120,079                 |       | 122,000                |       |
| 8 7/8% senior subordinated notes     |       | 175,000                 |       | 175,000                |       |
| Total debt                           |       | 332,079                 |       | 297,000                |       |
| Less current maturities              |       | (38,232                 | )          | (1,242                 | )          |
| Long-term debt                       |       | $                       | 293,847    |                   | $          | 295,758 |   |

 

Theweighted average interest rate on outstanding debt as of September 30, 2008 was 6.69%.

 

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**8 7/8% Senior Subordinated Notes.**  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at any time after August 1, 2008 at the option of the Company,in whole or in part, at redemption prices of 104.438% through July 31,2009; 102.219% from August 1, 2009 through July 31, 2010; and at100.000% on August 1, 2010 and thereafter. These notes are issued by the Company’s wholly-owned subsidiary, Blount, Inc.,and are fully and unconditionally, jointly and severally, guaranteed by theCompany and all of its domestic subsidiaries (“guarantor subsidiaries”) otherthan Blount, Inc.  All guarantorsubsidiaries of these 8 7/8% senior subordinated notes are 100% owned,directly or indirectly, by the Company. While the Company and all of its domestic subsidiaries guarantee these 87/8% senior subordinated notes, none of Blount’s existing foreign subsidiaries(“non-guarantor subsidiaries”) guarantee these notes.  See also Note 15.

 

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

 

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of September 30, 2008, the Company hadthe ability to borrow an additional $108.2 million under the terms of therevolving credit agreement. The revolving credit facility bears interest at theLIBOR rate plus 1.75%, or at the prime rate, depending on the type of loan, andmatures on August 9, 2009.  Interestis payable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. Any outstanding principal is due in its entirety on the maturitydate.  The entire balance outstandingunder the revolving credit facility is classified as a current liability on theSeptember 30, 2008 balance sheet.

 

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

 

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

 

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

 

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

 

**NOTE 7:  PENSION ANDOTHER POST-EMPLOYMENT BENEFIT PLANS**

 

TheCompany sponsors defined benefit pension plans covering substantially all ofits employees in the U. S., Canada and Belgium. The Company also sponsors various other post-employment medical andbenefit plans covering many of its current and former employees.  The components of net periodic benefit costfor these plans, including amounts recognized both in continuing anddiscontinued operations are as follows:

 

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| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                                | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                         |       | $                                                        | 987        |   | $ | 907 |   | $ | 63 |   | $ | 95 |   |
| Interest cost                        |       | 2,765                                                    |       | 2,572 |   | 538 |   | 526 |   |
| Expected return on plan assets       |       | (3,565                                                   | )          | (3,287 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (2                                                       | )          | (2 | ) | 2 |   | 2 |   |
| Amortization of net actuarial losses |       | 288                                                      |       | 371 |   | 208 |   | 243 |   |
| Total net periodic benefit cost      |       | $                                                        | 473        |   | $ | 561 |   | $ | 811 |   | $ | 866 |   |

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                               | ** ** | **Other Post-Employment  Benefits** | ** ** |
| **(Amounts in thousands)** | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                         |       | $                                                       | 2,961      |   | $ | 2,721 |   | $ | 189 |   | $ | 285 |   |
| Interest cost                        |       | 8,295                                                   |       | 7,715 |   | 1,614 |   | 1,577 |   |
| Expected return on plan assets       |       | (10,695                                                 | )          | (9,861 | ) | — |   | — |   |
| Amortization of prior service cost   |       | (6                                                      | )          | (6 | ) | 6 |   | 6 |   |
| Amortization of net actuarial losses |       | 864                                                     |       | 1,113 |   | 624 |   | 729 |   |
| Total net periodic benefit cost      |       | $                                                       | 1,419      |   | $ | 1,682 |   | $ | 2,433 |   | $ | 2,597 |   |

 

Asof December 31, 2006, the Company implemented a redesign of its domesticretirement plans, includinga freeze of its defined benefit pension plan and the associated nonqualifiedplan.  Effective January 1, 2007,employees who were active participants in the plans ceased accruing benefitsand new employees are not eligible to participate.  All retirement benefits accrued up to thetime of the freeze were preserved.  TheCompany expects to contribute a total of approximately $3 million to $4 millionto its funded pension plans during 2008.

 

TheCompany also sponsors a defined contribution 401(k) plan covering mostemployees in the U. S.  In conjunctionwith the redesign of its domestic retirement plans, the defined contribution401 (k) plan was amended to provide for an additional annual Companycontribution of 3%, 4% or 5% of base compensation, depending upon theparticipant’s years of service.  The newcontribution is made whether or not the employee contributes to the plan.

 

At September 30,2008, the fair value of the assets of the Company’s pension plans was estimatedat $142.1 million, down from $176.8 million at December 31, 2007.  The significant decline was mainly due to thedrop in global stock prices.  Based onthe decline in fair value of the assets as of September 30, 2008, the netpension expense in 2009 would be approximately $4.5 million to $5.5 millionhigher than in 2008.  Any change in thefair value of pension assets during the three month period ending December 31,2008 will further affect this estimated effect. This decline is not expected to significantly impact 2009 fundingrequirements but may increase the required contributions to the plans in futureyears.

 

**NOTE 8:  COMMITMENTSAND CONTINGENT LIABILITIES**

 

Guaranteesand other commercial commitments are summarized in the following table:

 
| **(Amounts in thousands)**                                  | ** ** | **September 30,  2008** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|
| Letters of credit outstanding                                         |       | 4,800                        |       |
| Contingent guarantees under various third  party financing agreements |       | 821                          |       |

 

Inaddition to these amounts, the Company also guarantees certain debt of itssubsidiaries (see Notes 6 and 15).

 

TheCompany is a defendant in a number of product liability lawsuits involving bothcontinuing operations and certain discontinued operations, some of which seeksignificant or unspecified damages, involving serious personal

 

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injuriesfor which there are retentions or deductible amounts under the Company’sinsurance policies. In addition, the Company is a party to a number of othersuits arising out of the normal course of its business, including suitsconcerning commercial contracts, employee matters and intellectual propertyrights.  In some instances, the Companyis the plaintiff and is seeking recovery of damages. In others, the Company isa defendant against whom damages are being sought.  While there can be no assurance as to theirultimate outcome, management does not believe these lawsuits will have amaterial adverse effect on the Company’s consolidated financial position,operating results or cash flows.

 

On September 12,2003, the Company received a General Notice Letter as a Potentially ResponsibleDe Minimis Party from Region IX of the EPA regarding the OperatingIndustries, Inc. Superfund Site (“OII Site”) in Monterey Park, California.The notice stated that the EPA would submit an offer to settle and anexplanation as to why it believes the Company or a predecessor unit is a deminimis participant at the site.  TheCompany was subsequently informed by the EPA that its report would be delayed,and on September 17, 2004, was notified that there would be furtherdelays.  On July 21, 2008, theCompany received a request from the OII Site Steering Committee to extend theCompany’s tolling agreement with the companies participating in the clean-up onthe understanding that the EPA’s offer to settle would be forthcoming in late2008.  The Company agreed to maintain theparties’ status quo for an additional period.

 

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

 

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

 

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

 

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**NOTE 9:  EARNINGS PERSHARE DATA**

 

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

 
| ** **                                                                                                          | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| **(Shares in thousands)**                                                                                 | ** ** | **2008**                                        | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Shares for basic per share computation –  weighted average common shares outstanding                           |       | 47,624                                          |       | 47,288                                         |       | 47,440 |   | 47,276 |   |
| Dilutive effect of common stock equivalents                                                                         |       | 624                                             |       | 825                                            |       | 639 |   | 792 |   |
| Shares for diluted per share computation                                                                            |       | 48,248                                          |       | 48,113                                         |       | 48,079 |   | 48,068 |   |
| Options and stock appreciation rights  excluded from computation as anti-dilutive because they are out-of-the-money |       | 2,299                                           |       | 1,727                                          |       | 1,677 |   | 1,727 |   |

 

**NOTE 10:  STOCK-BASEDCOMPENSATION**

 

The Company made thefollowing stock-based compensation awards:

 
| ** **                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)**                                                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Stock appreciation rights (“SARs”) granted                                 |       | 305                                                 |       | 380 |   |
| Restricted stock (“RS”) shares granted                                     |       | 54                                                  |       | 45 |   |
| Restricted stock units (“RSUs”) granted                                    |       | 125                                                 |       | 136 |   |
|                                                                                 |       |                                                |       |   |   |
| Aggregate fair value, SARs granted                                                   |       | $                                                   | 1,259      |   | $ | 1,617 |   |
| Aggregate fair value, RS & RSUs  granted                                    |       | $                                                   | 2,148      |   | $ | 2,138 |   |
| Effect of accelerated expense recognition  due to grantee retirement-eligible status |       | $                                                   | 491        |   | $ | 609 |   |

 

The followingassumptions were used to estimate the fair value of SARs:

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

 

Asof September 30, 2008, the total unrecognized stock-based compensationexpense related to previously granted awards was $2.3 million. Theweighted-average period over which this expense is expected to be recognized is1.2 years.  The Company’s policy upon theexercise of options, RS awards, RSUs or SARs has been to issue new shares intothe market place.

 

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**NOTE 11:  SEGMENTINFORMATION**

 

TheCompany identifies operating segments primarily based on managementresponsibility. The Company has one operating and reportable segment: OutdoorProducts.  The corporate and othercategory includes centralized administrative functions and a gear componentsmanufacturing business.  Outdoor Productsmanufactures and markets cutting chain, bars, sprockets and accessories forchainsaw use, concrete-cutting equipment, lawnmower blades and accessories foryard care equipment.  The accountingpolicies of the segment are the same as those described in the summary ofsignificant accounting policies.

 

Certainfinancial information by segment is presented in the tables below:

** **
| **(Amounts in thousands)** | ** ** | **September 30,****2008** | ** ** | **December 31,****2007** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| **Assets:**                          |       |                           |       |                          |       |
| Outdoor Products                     |       | $                              | 416,363    |                          | $          | 316,834 |   |
| Other and corporate                  |       | 68,917                         |       | 95,115                        |       |
|                                      |            |                                |            |                               |            |  |  |

 
| ** **                           | ** ** | **Three months ended****September 30,** | ** ** | **Nine months ended****September 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                               | ** ** | **2007**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Sales:**                           |       |                                                   |       |                                                  |       |   |   |   |   |
| Outdoor Products                     |       | $                                                      | 166,217    |                                                  | $          | 122,112 |   | $ | 438,800 |   | $ | 361,085 |   |
| Other                                |       | 8,789                                                  |       | 7,741                                                 |       | 24,465 |   | 22,664 |   |
| Total sales                          |       | $                                                      | 175,006    |                                                  | $          | 129,853 |   | $ | 463,265 |   | $ | 383,749 |   |
|                                 |       |                                                   |       |                                                  |       |   |   |   |   |
| **Operating income:**                |       |                                                   |       |                                                  |       |   |   |   |   |
| Outdoor Products                     |       | $                                                      | 34,131     |                                                  | $          | 23,667 |   | $ | 80,482 |   | $ | 71,401 |   |
| Other and corporate expenses         |       | (4,121                                                 | )          | (3,068                                                | )          | (12,183 | ) | (11,944 | ) |
| Operating income                     |       | $                                                      | 30,010     |                                                  | $          | 20,599 |   | $ | 68,299 |   | $ | 59,457 |   |

 

**NOTE 12:  SUPPLEMENTALCASH FLOWS INFORMATION**

 
| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash paid for interest               |       | $                                                   | 21,654     |   | $ | 27,145 |   |
| Cash paid for income taxes           |       | 11,846                                              |       | 10,544 |   |
|                                      |            |                                                     |            |  |  |  |  |

 

**NOTE 13:  RECENTACCOUNTING PRONOUNCEMENTS**

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued FAS No. 157, “FairValue Measurements” (“FAS No. 157”). FAS No. 157 defines fair value, establishes a framework formeasuring fair value in accordance with accounting principles generally acceptedin the U. S., and expands disclosures about fair value measurements.  TheCompany adopted FAS No. 157 for financial assets and liabilities on January 1,2008, with no immediate effect on the consolidated financial statements.  As permitted by FASB Staff Position No. FAS157-2, “Effective Date of FASB Statement No. 157,” the Company elected todefer the adoption of SFAS No. 157 for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis.  In February 2008, the FASB issued StaffPosition No. FAS 157-1, “Application of FASB Statement No. 157 toFASB Statement No. 13 and Other Accounting Pronouncements That AddressFair Value Measurements for Purposes of Lease Classification or Measurementunder Statement 13” (“FSP No. 157-1”). The Company also adopted FSP No. 157-1 on January 1, 2008,with no immediate effect on the consolidated financial statements.  In October 2008, the FASB issued StaffPosition No. FAS 157-3, “Determining 

 

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the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active” (“FSP No. 157-3”).  The Company adopted FSP No. 157-3 on October 1,2008, with no immediate effect on the consolidated financial statements.

 

In February 2007,the FASB issued FAS No. 159, “Fair Value Option for Financial Assets andFinancial Liabilities-Including an amendment of FASB Statement No. 115” (“FASNo. 159”).  FAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value.  TheCompany chose not to elect the fair value option for its financial assets andliabilities existing at January 1, 2008 and did not elect the fair valueoption on financial assets and liabilities transacted subsequent to thatdate.  Therefore, the adoption of FAS No. 159on January 1, 2008 had no immediate effect on the Company’s consolidatedfinancial statements.

 

In December 2007, theFASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”).  FAS No. 141(R) replaces FAS No. 141,Business Combinations.  The provisions ofFAS No. 141(R) are effective for the Company beginning January 1,2009.  The impact of adopting FAS No. 141(R) willdepend on the nature, terms and size of any business combinations completedafter the effective date.

 

In December 2007, theFASB issued FAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements” (“FAS No. 160”). FAS No. 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements.  Theprovisions of FAS No. 160 are effective for the Company on January 1,2009.    Earlier adoption is prohibited.  The adoption of FAS No. 160 is notanticipated to have a material impact on the financial position and results ofoperations of the Company.

 

In March 2008, the FASBissued FAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities, an amendment of FASB Statement No. 133” (“FAS No. 161”). FAS No. 161 requires enhanced disclosures about an entity’s derivative andhedging activities.  The provisions of FAS No. 161 are effective forthe Company on January 1, 2009.

 

In April 2008, the FASBissued FASB Staff Position No. FAS 142-3, “Determination of the UsefulLife of Intangible Assets” (“FSP No. 142-3”).  This FASB Staff Position amends the factorsthat should be considered in developing assumptions used to determine usefullives of recognized intangible assets under FAS 142, “Goodwill and OtherIntangible Assets”. The provisions of FSP No. 142-3 are effective for theCompany on January 1, 2009 and early adoption is prohibited.  The impact of adopting FSP No. 142-3will depend on the nature, terms and size of any business combinationscompleted after the effective date.

 

**NOTE 14:  EUROPEANDISTRIBUTION CENTER**

 

Blount Europe S.A. (“BlountEurope”), a subsidiary of Blount Inc., has entered into contracts to lease newoffice and warehouse space and will relocate its administrative offices anddistribution center to the new locations in the first half of 2009. The newEuropean office will be located in Mont-Saint-Guibert, Belgium, and the newEuropean distribution center will be in Courcelles, Belgium.  Blount Europe has also entered into acontract to sell its current facility in Nivelles, Belgium, subject tosatisfactory completion of various contingent items.  The leases for the two new facilities requireaggregate annual payments of $1.1 million and have lease terms of fifteenyears.  The existing facilities inBelgium are classified as assets held for sale in the September 30, 2008consolidated balance sheet.

 

**NOTE 15:  CONSOLIDATINGFINANCIAL INFORMATION**

 

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

 

16

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**Condensed Consolidating Statement of Operations Information**

 
| **(Amounts in thousands)**                          | ** ** | **Blount  International, Inc.** | ** ** | **Blount,****Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                                 |       |                |       |                        |       |                            |       |             |       |             |       |
| **Three  Months Ended September 30, 2008**               |       |                                 |       |                |       |                        |       |                            |       |             |       |             |       |
| Sales                                                         |       | $                                    | —     |                | $          | 125,855                     |       | $                               | 12,979     |             | $          | 96,446           |       | $ | (60,274 | ) | $ | 175,006 |   |
| Cost of sales                                                 |       | —                               |       | 91,113              |       | 10,561                      |       | 79,273                          |       | (62,477          | )          | 118,470          |       |
| Gross profit                                                  |       | —                               |       | 34,742              |       | 2,418                       |       | 17,173                          |       | 2,203            |       | 56,536           |       |
| Selling, general  and administrative expenses                 |       | —                               |       | 16,560              |       | 1,039                       |       | 8,927                           |       | —           |       | 26,526           |       |
| Operating income                                              |       | —                               |       | 18,182              |       | 1,379                       |       | 8,246                           |       | 2,203            |       | 30,010           |       |
| Other, net                                                    |       | (4,093                               | )          | (1,578              | )          | 141                         |       | (352                            | )          | —           |       | (5,882           | )          |
| Income (loss)  from continuing operations before income taxes |       | (4,093                               | )          | 16,604              |       | 1,520                       |       | 7,894                           |       | 2,203            |       | 24,128           |       |
| Provision  (benefit) for income taxes                         |       | (1,431                               | )          | 7,066               |       | 637                         |       | 2,874                           |       | —           |       | 9,146            |       |
| Income (loss) from continuing operations                      |       | (2,662                               | )          | 9,538               |       | 883                         |       | 5,020                           |       | 2,203            |       | 14,982           |       |
| Loss from discontinued operations                             |       | —                               |       | (196                | )          | (36                         | )          | —                          |       | —           |       | (232             | )          |
| Equity in earnings of affiliated companies                    |       | 17,412                               |       | 8,070               |       | 50                          |       | —                          |       | (25,532          | )          | —           |       |
| Net income                                                    |       | $                                    | 14,750     |                | $          | 17,412                      |       | $                               | 897        |             | $          | 5,020            |       | $ | (23,329 | ) | $ | 14,750 |   |

 
| **(Amounts  in thousands)**                                   | ** ** | **Blount   International, Inc.** | ** ** | **Blount,****Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|---------------------|------------|------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                                  |       |                |       |                         |       |                             |       |             |       |             |       |
| **Nine  Months Ended September 30, 2008**                |       |                                  |       |                |       |                         |       |                             |       |             |       |             |       |
| Sales                                                         |       | $                                     | —     |                | $          | 330,653                      |       | $                                | 36,505     |             | $          | 275,271          |       | $ | (179,164 | ) | $ | 463,265 |   |
| Cost of sales                                                 |       | —                                |       | 238,244             |       | 30,183                       |       | 226,568                          |       | (180,066         | )          | 314,929          |       |
| Gross profit                                                  |       | —                                |       | 92,409              |       | 6,322                        |       | 48,703                           |       | 902              |       | 148,336          |       |
| Selling, general  and administrative expenses                 |       | —                                |       | 49,166              |       | 3,142                        |       | 27,729                           |       | —           |       | 80,037           |       |
| Operating income                                              |       | —                                |       | 43,243              |       | 3,180                        |       | 20,974                           |       | 902              |       | 68,299           |       |
| Other, net                                                    |       | (12,893                               | )          | (5,747              | )          | 431                          |       | 169                              |       | —           |       | (18,040          | )          |
| Income (loss)  from continuing operations before income taxes |       | (12,893                               | )          | 37,496              |       | 3,611                        |       | 21,143                           |       | 902              |       | 50,259           |       |
| Provision  (benefit) for income taxes                         |       | (5,347                                | )          | 16,016              |       | 1,568                        |       | 5,934                            |       | —           |       | 18,171           |       |
| Income (loss) from continuing operations                      |       | (7,546                                | )          | 21,480              |       | 2,043                        |       | 15,209                           |       | 902              |       | 32,088           |       |
| Loss from discontinued operations                             |       | —                                |       | (370                | )          | (36                          | )          | —                           |       | —           |       | (406             | )          |
| Equity in earnings of affiliated companies                    |       | 39,228                                |       | 18,118              |       | 128                          |       | —                           |       | (57,474          | )          | —           |       |
| Net income                                                    |       | $                                     | 31,682     |                | $          | 39,228                       |       | $                                | 2,135      |             | $          | 15,209           |       | $ | (56,572 | ) | $ | 31,682 |   |

 

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**Condensed Consolidating Statement of Operations Information**

** **
| **(Amounts in thousands)**                          | ** ** | **Blount  International, Inc.** | ** ** | **Blount,****Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                                 |       |                |       |                        |       |                            |       |             |       |             |       |
| **Three  Months Ended September 30, 2007**               |       |                                 |       |                |       |                        |       |                            |       |             |       |             |       |
| Sales                                                         |       | $                                    | —     |                | $          | 92,252                      |       | $                               | 12,145     |             | $          | 78,518           |       | $ | (53,062 | ) | $ | 129,853 |   |
| Cost of sales                                                 |       | —                               |       | 60,459              |       | 9,921                       |       | 69,534                          |       | (53,987          | )          | 85,927           |       |
| Gross profit                                                  |       | —                               |       | 31,793              |       | 2,224                       |       | 8,984                           |       | 925              |       | 43,926           |       |
| Selling, general  and administrative expenses                 |       | —                               |       | 14,600              |       | 878                         |       | 7,839                           |       | (10              | )          | 23,327           |       |
| Operating income                                              |       | —                               |       | 17,193              |       | 1,346                       |       | 1,145                           |       | 915              |       | 20,599           |       |
| Other, net                                                    |       | (5,782                               | )          | (1,893              | )          | 506                         |       | (309                            | )          | —           |       | (7,478           | )          |
| Income (loss)  from continuing operations before income taxes |       | (5,782                               | )          | 15,300              |       | 1,852                       |       | 836                             |       | 915              |       | 13,121           |       |
| Provision  (benefit) for income taxes                         |       | (2,224                               | )          | 7,070               |       | 602                         |       | (508                            | )          | —           |       | 4,940            |       |
| Income (loss) from continuing operations                      |       | (3,558                               | )          | 8,230               |       | 1,250                       |       | 1,344                           |       | 915              |       | 8,181            |       |
| Income (loss) from discontinued operations                    |       | —                               |       | 1,783               |       | —                      |       | (521                            | )          | —           |       | 1,262            |       |
| Equity in earnings of affiliated companies                    |       | 13,001                               |       | 2,988               |       | (99                         | )          | —                          |       | (15,890          | )          | —           |       |
| Net income                                                    |       | $                                    | 9,443      |                | $          | 13,001                      |       | $                               | 1,151      |             | $          | 823              |       | $ | (14,975 | ) | $ | 9,443 |   |

 
| **(Amounts  in thousands)**                                   | ** ** | **Blount   International, Inc.** | ** ** | **Blount,****Inc.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|---------------------|------------|------------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                    |       |                                  |       |                |       |                         |       |                             |       |             |       |             |       |
| **Nine Months  Ended September 30, 2007**                |       |                                  |       |                |       |                         |       |                             |       |             |       |             |       |
| Sales                                                         |       | $                                     | —     |                | $          | 275,613                      |       | $                                | 35,766     |             | $          | 232,930          |       | $ | (160,560 | ) | $ | 383,749 |   |
| Cost of sales                                                 |       | —                                |       | 191,300             |       | 29,460                       |       | 192,358                          |       | (159,626         | )          | 253,492          |       |
| Gross profit                                                  |       | —                                |       | 84,313              |       | 6,306                        |       | 40,572                           |       | (934             | )          | 130,257          |       |
| Selling, general  and administrative expenses                 |       | —                                |       | 44,470              |       | 3,069                        |       | 23,261                           |       | —           |       | 70,800           |       |
| Operating income                                              |       | —                                |       | 39,843              |       | 3,237                        |       | 17,311                           |       | (934             | )          | 59,457           |       |
| Other, net                                                    |       | (17,566                               | )          | (5,556              | )          | 782                          |       | (1,385                           | )          | —           |       | (23,725          | )          |
| Income (loss)  from continuing operations before income taxes |       | (17,566                               | )          | 34,287              |       | 4,019                        |       | 15,926                           |       | (934             | )          | 35,732           |       |
| Provision  (benefit) for income taxes                         |       | (6,192                                | )          | 15,770              |       | 1,417                        |       | 1,495                            |       | —           |       | 12,490           |       |
| Income (loss) from continuing operations                      |       | (11,374                               | )          | 18,517              |       | 2,602                        |       | 14,431                           |       | (934             | )          | 23,242           |       |
| Income (loss) from discontinued operations                    |       | —                                |       | 2,656               |       | (53                          | )          | (554                             | )          | —           |       | 2,049            |       |
| Equity in earnings of affiliated companies                    |       | 36,665                                |       | 15,492              |       | 141                          |       | —                           |       | (52,298          | )          | —           |       |
| Net income                                                    |       | $                                     | 25,291     |                | $          | 36,665                       |       | $                                | 2,690      |             | $          | 13,877           |       | $ | (53,232 | ) | $ | 25,291 |   |

 

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**Condensed Consolidating Balance Sheet Information**

** **
| **(Amounts in thousands)**                       | ** ** | **Blount  International, Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| **September 30,  2008**                               | ** ** | ** **                           | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                       |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| **Assets**                                                 |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                       |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Cash and cash  equivalents                                 |       | $                                    | —     |              | $          | 3,177                       |       | $                               | —     |             | $          | 50,400           |       | $ | — |   | $ | 53,577 |   |
| Accounts  receivable, net                                  |       | —                               |       | 50,476            |       | 5,583                       |       | 35,389                          |       | 6                |       | 91,454           |       |
| Intercompany  receivables                                  |       | —                               |       | 181,859           |       | 77,953                      |       | 10,814                          |       | (270,626         | )          | —           |       |
| Inventories                                                |       | —                               |       | 52,789            |       | 5,945                       |       | 22,075                          |       | 554              |       | 81,363           |       |
| Other current  assets                                      |       | —                               |       | 11,098            |       | 43                          |       | 8,140                           |       | —           |       | 19,281           |       |
| Total current  assets                                      |       | —                               |       | 299,399           |       | 89,524                      |       | 126,818                         |       | (270,066         | )          | 245,675          |       |
| Investments in  affiliated companies                       |       | 251,678                              |       | 252,365           |       | 980                         |       | —                          |       | (505,023         | )          | —           |       |
| Property, plant  and equipment, net                        |       | —                               |       | 58,242            |       | 11,546                      |       | 46,794                          |       | —           |       | 116,582          |       |
| Goodwill and  other assets                                 |       | —                               |       | 99,569            |       | 11,884                      |       | 13,544                          |       | (1,974           | )          | 123,023          |       |
| Total Assets                                               |       | $                                    | 251,678    |              | $          | 709,575                     |       | $                               | 113,934    |             | $          | 187,156          |       | $ | (777,063 | ) | $ | 485,280 |   |
|                                                       |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| **Liabilities  and Stockholders’ Equity  (Deficit)**  |       |                                 |       |              |       |                        |       |                            |       |             |       |
|                                                       |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Current  maturities of long-term debt                      |       | $                                    | —     |              | $          | 38,232                      |       | $                               | —     |             | $          | —           |       | $ | — |   | $ | 38,232 |   |
| Accounts payable                                           |       | —                               |       | 17,932            |       | 4,514                       |       | 11,638                          |       | —           |       | 34,084           |       |
| Intercompany  payables                                     |       | 270,620                              |       | —            |       | —                      |       | —                          |       | (270,620         | )          | —           |       |
| Other current  liabilities                                 |       | —                               |       | 32,906            |       | 3,256                       |       | 18,122                          |       | —           |       | 54,284           |       |
| Total current  liabilities                                 |       | 270,620                              |       | 89,070            |       | 7,770                       |       | 29,760                          |       | (270,620         | )          | 126,600          |       |
| Long-term debt,  excluding current maturities              |       | —                               |       | 293,847           |       | —                      |       | —                          |       | —           |       | 293,847          |       |
| Other liabilities                                          |       | 1,145                                |       | 74,980            |       | —                      |       | 10,769                          |       | (1,974           | )          | 84,920           |       |
| Total liabilities                                          |       | 271,765                              |       | 457,897           |       | 7,770                       |       | 40,529                          |       | (272,594         | )          | 505,367          |       |
| Stockholders’  equity (deficit)                       |       | (20,087                              | )          | 251,678           |       | 106,164                     |       | 146,627                         |       | (504,469         | )          | (20,087          | )          |
| Total Liabilities  and Stockholders’ Equity (Deficit) |       | $                                    | 251,678    |              | $          | 709,575                     |       | $                               | 113,934    |             | $          | 187,156          |       | $ | (777,063 | ) | $ | 485,280 |   |

 

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**Condensed Consolidating Balance Sheet Information**

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

 

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**Condensed Consolidating Cash Flows Information**

 
| **(Amounts in thousands)**                  | ** ** | **Blount  International, Inc.** | ** ** | **Blount,  Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|-------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| **Nine  Months Ended September 30, 2008**        |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net cash provided  by (used in) operating activities  |       | $                                    | 5,304      |              | $          | 20,605                      |       | $                               | (3,084     | )                | $          | 16,032           |       | $ | — |   | $ | 38,857 |   |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Proceeds from  sale of assets                         |       | —                               |       | 1,333             |       | 16                          |       | —                          |       | —           |       | 1,349            |       |
| Purchase of  property, plant and equipment            |       | —                               |       | (9,777            | )          | (2,110                      | )          | (5,788                          | )          | —           |       | (17,675          | )          |
| Acquisition of  Carlton Holdings, Inc.           |       | —                               |       | (64,381           | )          | —                      |       | —                          |       | —           |       | (64,381          | )          |
| Discontinued  operations                              |       | —                               |       | 1,725             |       | —                      |       | —                          |       | —           |       | 1,725            |       |
| Net cash used in  investing activities                |       | —                               |       | (71,100           | )          | (2,094                      | )          | (5,788                          | )          | —           |       | (78,982          | )          |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       | —                               |       | 37,000            |       | —                      |       | —                          |       | —           |       | 37,000           |       |
| Repayment of term  loan principal                     |       | —                               |       | (1,921            | )          | —                      |       | —                          |       | —           |       | (1,921           | )          |
| Advances from  (to) affiliates                        |       | (6,338                               | )          | 8,081             |       | 5,057                       |       | (6,800                          | )          | —           |       | —           |       |
| Other                                                 |       | 1,034                                |       | —            |       | —                      |       | —                          |       | —           |       | 1,034            |       |
| Net cash provided  by (used in) financing activities  |       | (5,304                               | )          | 43,160            |       | 5,057                       |       | (6,800                          | )          | —           |       | 36,113           |       |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       | —                               |       | (7,335            | )          | (121                        | )          | 3,444                           |       | —           |       | (4,012           | )          |
| Cash and cash  equivalents at beginning of period     |       | —                               |       | 10,512            |       | 121                         |       | 46,956                          |       | —           |       | 57,589           |       |
| Cash and cash  equivalents at end of period           |       | $                                    | —     |              | $          | 3,177                       |       | $                               | —     |             | $          | 50,400           |       | $ | — |   | $ | 53,577 |   |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| **Nine  Months Ended September 30, 2007**        |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net cash provided  by (used in) operating activities  |       | $                                    | 3,920      |              | $          | (936                        | )          | $                               | 590        |             | $          | 13,330           |       | $ | (2,745 | ) | $ | 14,159 |   |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Purchase of  property, plant and equipment            |       | —                               |       | (7,816            | )          | (1,397                      | )          | (4,547                          | )          | —           |       | (13,760          | )          |
| Other                                                 |       | —                               |       | 147               |       | 1                           |       | 36                              |       | —           |       | 184              |       |
| Discontinued  operations                              |       |                                 |       | (556              | )          | 1,561                       |       | (37                             | )          |             |       | 968              |       |
| Net cash provided  by (used) in investing activities  |       | —                               |       | (8,225            | )          | 165                         |       | (4,548                          | )          | —           |       | (12,608          | )          |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net borrowings  under revolving credit facility       |       | —                               |       | 5,250             |       | —                      |       | —                          |       | —           |       | 5,250            |       |
| Repayment of term  loan principal                     |       | —                               |       | (1,125            | )          | —                      |       | —                          |       | —           |       | (1,125           | )          |
| Advances from  (to) affiliates                        |       | (4,231                               | )          | 5,036             |       | (805                        | )          | —                          |       | —           |       | —           |       |
| Other                                                 |       | 311                                  |       | —            |       | —                      |       | —                          |       | —           |       | 311              |       |
| Net cash provided  by (used in) financing activities  |       | (3,920                               | )          | 9,161             |       | (805                        | )          | —                          |       | —           |       | 4,436            |       |
|                                                  |       |                                 |       |              |       |                        |       |                            |       |             |       |             |       |
| Net increase  (decrease) in cash and cash equivalents |       | —                               |       | —            |       | (50                         | )          | 8,782                           |       | (2,745           | )          | 5,987            |       |
| Cash and cash  equivalents at beginning of period     |       | —                               |       | —            |       | 90                          |       | 29,398                          |       | (1,852           | )          | 27,636           |       |
| Cash and cash  equivalents at end of period           |       | $                                    | —     |              | $          | —                      |       | $                               | 40         |             | $          | 38,180           |       | $ | (4,597 | ) | $ | 33,623 |   |

 

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

 

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

 

**Acquisition of Carlton**

 

On May 2, 2008, we acquired all of theoutstanding stock of Carlton, a manufacturer of cutting chain for chainsawslocated near Portland, Oregon.  We paid atotal of $66.2 million in cash for Carlton, including related acquisition costsof $1.5 million, and we also assumed liabilities totaling $21.4 million.  Carlton had $1.8 million in cash on the dateof acquisition, resulting in a net cash outflow of $64.4 million for theacquisition.  The acquisition wasfinanced with a combination of cash on hand and $58.5 million borrowed underour revolving credit facility.  Theoperating results of Carlton are included in our consolidated financialstatements from May 2, 2008 forward.

 

We accounted for theacquisition in accordance with FAS No. 141.  Accordingly, Carlton’s assets and liabilitieswere recorded at their estimated fair values on the date of acquisition.  We estimated the fair value of assets usingvarious methods and considering, among other factors, projected discounted cashflows, replacement cost less an allowance for depreciation, recent comparabletransactions, and historical book values. We estimated the fair value of liabilities assumed considering thehistorical book values and projected future cash flows.  A summary of the preliminary purchase priceallocation for the fair value of the assets acquired and the obligationsassumed at the date of acquisition is presented below.  The purchase price allocation is preliminaryand is subject to the completion of certain items, including finaldetermination of post-closing purchase price adjustments, and for uncertain taxpositions under FIN 48 and deferred tax positions under FAS No. 109.

 
| **(Amounts in thousands)**                                  | ** ** | **May 2, 2008** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|
| Cash                                                                  |       | $                         | 1,801      |   |
| Accounts receivable, net of allowance for doubtful accounts of $1,590 |       | 14,808                    |       |
| Inventories                                                           |       | 9,958                     |       |
| Current intangible asset subject to amortization                      |       | 1,240                     |       |
| Other current assets                                                  |       | 413                       |       |
| Total current assets                                                  |       | 28,220                    |       |
| Property, plant and equipment, net                                    |       | 26,703                    |       |
| Noncurrent intangible assets subject to amortization                  |       | 8,790                     |       |
| Goodwill and other intangible assets not subject to amortization      |       | 22,545                    |       |
| Non-current deferred tax asset                                        |       | 1,283                     |       |
| Total assets                                                          |       | 87,541                    |       |
|                                                                  |       |                      |       |
| Current liabilities                                                   |       | 7,615                     |       |
| Non-current liabilities                                               |       | 3,430                     |       |
| Deferred income tax liability                                         |       | 10,315                    |       |
| Total liabilities assumed                                             |       | 21,360                    |       |
| Cash paid for acquisition, excluding cash acquired                    |       | $                         | 66,181     |   |

 

Reflected in the consolidatedresults of operations for the three and nine months ended September 30,2008 are non-cash charges totaling $0.9 million and $2.8 million, respectively,for amortization of intangible assets, depreciation of the step-up to fairvalue for property, plant and equipment and expensing of the step-up to fairvalue related to inventories.  Inaddition, a charge of $0.1 million was recognized for severance costs relatedto positions eliminated after the transaction.

 

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**OperatingResults**

 

**Three monthsended September 30, 2008 (unaudited) compared to three months ended September 30,2007 (unaudited).**

 

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

 
| ** **                                                          | ** ** | **Three Months Ended   September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                          |
| **(Amounts in millions)***                                | ** ** | **2008**                                              | ** ** | **2007**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
|                                                                | ** ** | ** **                                            | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |
| Sales                                                               |       | $                                                     | 175.0      |       | $          | 129.9      |       | $          | 45.1       |   |   |   |   |   |
|                                                                |       |                                                  |       |       |       |       |       | $          | 22.9       |   | Sales  volume |   |
|                                                                |       |                                                  |       |       |       |       |       | 3.5        |       | Selling  price and mix |   |
|                                                                |       |                                                  |       |       |       |       |       | 2.8        |       | Foreign  currency translation |   |
|                                                                |       |                                                  |       |       |       |       |       | 15.9       |       | Carlton  operations |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Gross profit                                                        |       | 56.5                                                  |       | 43.9       |       | 12.6       |       |       |       |   |   |
| *Gross margin*                                                      | * *   | *32.3*                                                | *%*        | *33.8*     | %          |       |       | 8.0        |       | Sales  volume |   |
|                                                                |       |                                                  |       |       |       |       |       | 3.5        |       | Selling  price and mix |   |
|                                                                |       |                                                  |       |       |       |       |       | 0.9        |       | Product  cost and mix |   |
|                                                                |       |                                                  |       |       |       |       |       | (1.9       | )          | Foreign  currency translation |   |
|                                                                |       |                                                  |       |       |       |       |       | 2.1        |       | Carlton  operations |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Selling, general and administrative expenses (“SG&A”) |       | 26.5                                                  |       | 23.3       |       | 3.2        |       |       |       |   |   |
| *As a percent of sales*                                             | * *   | *15.2*                                                | *%*        | *18.0*     | %          |       |       | 1.6        |       | Compensation  and other benefits |   |
|                                                                |       |                                                  |       |       |       |       |       | 0.9        |       | Foreign  currency translation |   |
|                                                                |       |                                                  |       |       |       |       |       | 0.7        |       | Carlton  operations |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Operating income                                                    |       | 30.0                                                  |       | 20.6       |       | 9.4        |       |       |       |   |   |
| *Operating margin*                                                  | * *   | *17.1*                                                | *%*        | *15.9*     | %          |       |       | 12.6       |       | Increase  in gross profit |   |
|                                                                |       |                                                  |       |       |       |       |       | (3.2       | )          | Increase  in SG&A |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Income from continuing operations                                   |       | 15.0                                                  |       | 8.2        |       | 6.8        |       |       |       |   |   |
|                                                                |       |                                                  |       |       |       |       |       | 9.4        |       | Increase  in operating income |   |
|                                                                |       |                                                  |       |       |       |       |       | 1.6        |       | Decrease  in net interest expense |   |
|                                                                |       |                                                  |       |       |       |       |       | (4.2       | )          | Increase  in income tax provision |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Discontinued operations                                             |       | (0.2                                                  | )          | 1.3        |       | (1.5       | )          |       |       |   |   |
|                                                                |       |                                                  |       |       |       |       |       | (2.1       | )          | Change  in operating results |   |
|                                                                |       |                                                  |       |       |       |       |       | 0.6        |       | Change  in income tax provision |   |
|                                                                |       |                                                  |       |       |       |       |       |       |       |   |   |
| Net income                                                          |       | $                                                     | 14.8       |       | $          | 9.4        |       | $          | 5.3        |   |   |   |   |   |
|                                                                     |            |                                                       |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

----

***Amounts may not foot due to rounding.**

 

Sales in the three monthsended September 30, 2008 increased by $45.1 million (35%) from the sameperiod in 2007.  This sales increase wasprimarily due to a $22.9 million increase in sales volume and $15.9 million ofsales from Carlton (acquired on May 2, 2008).  Additional factors included price increasesand the favorable effect of translation of foreign currency denominated salestransactions, given the weaker U. S. dollar in comparison to 2007.  The Outdoor Products segment, including theresults of Carlton, experienced a $44.1 million (36%) increase in sales duringthe three months ended September 30, 2008 compared to the same period in2007.  Sales of gear components increased$1.0 million (14%) during the same period. International sales increased $30.5 million (36%) and domestic salesincreased $14.6 million (33%).  Theincrease in international sales is attributed to the Carlton acquisition andcontinued strength in international markets, as well as the $2.8 millionfavorable impact from movement in foreign currency exchange rates compared to2007.  The increase in U. S. sales is aresult of higher 

 

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domestic sales volume forchainsaw components and outdoor care products and increased sales ofgear-related products, partially offset by slightly lower domestic sales ofconcrete cutting products.

 

Consolidated order backlog at September 30,2008 was $104.3 million compared to $69.3 million at December 31, 2007 and$72.7 million at September 30, 2007. Backlog in the Outdoor Products segment increased $34.4 million from December 31,2007, of which $23.5 million relates to Carlton.  The backlog for gear components increased by$0.5 million during the nine months ended September 30, 2008.

 

Gross profit increased $12.6million (29%) in the third quarter of 2008 compared to the third quarter of2007.  Gross margin for the three monthsended September 30, 2008 was 32.3% of sales compared to 33.8% for the sameperiod in 2007.  Higher sales volume andimproved pricing were partially offset by the unfavorable net effects ofmovement in foreign currency exchange rates estimated at $1.9 million, andhigher product costs, including steel costs estimated at $2.2 million.  Gross profit from Carlton of $2.1 millionreflects charges of $0.9 million in purchase accounting effects.

 

Fluctuations in currencyexchange rates decreased our gross profit in the third quarter of 2008 comparedto 2007 by an estimated $1.9 million on a consolidated basis.  Translation of stronger foreign currenciesinto a weaker U. S. dollar resulted in higher manufacturing costs, as well asother cost of sales elements, with our Brazil operations being the largestcomponent.  Increases in these highermanufacturing costs were only partially offset by higher translated sales inEurope.

 

SG&A was $26.5 million forthe three month period ending September 30, 2008, compared to $23.3million for the same period in 2007, representing an increase of $3.2 million(14%).  As a percentage of sales,SG&A decreased from 18.0% in the third quarter of 2007 to 15.2% in the sameperiod of 2008, reflecting improved leverage on higher sales revenue.  The SG&A increase included $0.7 millionfrom the addition of Carlton operations and $0.9 million from the effect ofcurrency exchange rates on international-based expenses.  In addition, compensation expense increasedby $1.6 million year-over-year, reflecting annual merit increases for ouremployees, as well as increased accruals for incentive compensation expensesbased on improved operating performance.

 

Operating income increased by$9.4 million from the third quarter of 2007 to the third quarter of 2008,resulting in an operating margin for 2008 of 17.1% of sales compared to 15.9%for 2007. The increase in operating income was due to higher sales and therelated gross profit, partially offset by the increase in SG&A expenses.

 

Interest expense was $6.9million for the three months ended September 30, 2008 compared to $8.5million for the same period in 2007.  Thedecrease in interest expense was due to lower average outstanding debt balancesand lower average interest rates.

 

The following table summarizesour income tax provision for continuing operations in 2008 and 2007:

 
| ** **                                            | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                                                  |       |                                                     |       |   |   |
| Income from continuing operations before income taxes |       | $                                                        | 24,128     |   | $ | 13,121 |   |
| Provision for income taxes                            |       | 9,146                                                    |       | 4,940 |   |
| Income from continuing operations                     |       | $                                                        | 14,982     |   | $ | 8,181 |   |
| Effective tax rate                                    |       | 37.9                                                     | %          | 37.6 | % |

 

The effective tax rate for thetwo periods has remained consistent.  Theeffective tax rate differs from the U. S. federal statutory rate of 35% due tothe inclusion of various state income taxes incurred in the U. S. and theeffect of various tax rates that apply to our foreign locations, which candiffer significantly from our U. S. federal tax rate.

 

Income from continuingoperations in the three months ended September 30, 2008 was $15.0 million,or $0.31 per diluted share, compared to $8.2 million, or $0.17 per dilutedshare, for the same period in 2007.

 

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Loss from discontinuedoperations in the three months ended September 30, 2008 was $0.2 millioncompared to income from discontinued operations of $1.3 million, or $0.03 perdiluted share, for the same period in 2007. Results for the third quarter of 2008 consisted of wind-down and exitactivities related to our discontinued Forestry Division, which was sold on November 5,2007, as well as an adjustment to the tax provision related to the finalizationof the 2007 tax return.  Results for thethird quarter of 2007 reflect the operations of our Forestry Division prior tothe sale, as well as wind-down and exit activities related to our discontinuedLawnmower segment, which was sold in 2006.

 

Discontinued operations aresummarized as follows:

 
| ** **                                              | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(Amounts in thousands)**                    | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| Sales                                                   |       | $                                                        | —     |   | $ | 37,851 |   |
| Income (loss) before taxes from discontinued operations |       | (87                                                      | )          | 2,043 |   |
| Income tax provision                                    |       | 145                                                      |       | 781 |   |
| Income (loss) from discontinued operations              |       | $                                                        | (232       | ) | $ | 1,262 |   |

 

***Segment Results. ***The followingtable reflects segment sales and operating results for 2008 and 2007:

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2008 as a   % of 2007** | ** ** |
| Sales:                               |       |                                                     |       |   |   |   |   |
| Outdoor Products                     |       | $                                                        | 166,217    |   | $ | 122,112 |   | 136 | % |
| Other                                |       | 8,789                                                    |       | 7,741 |   | 114 | % |
| Total sales                          |       | $                                                        | 175,006    |   | $ | 129,853 |   | 135 | % |
| Operating income:                    |       |                                                     |       |   |   |   |   |
| Outdoor Products                     |       | $                                                        | 34,131     |   | $ | 23,667 |   | 144 | % |
| Other and corporate expenses         |       | (4,121                                                   | )          | (3,068 | ) | 134 | % |
| Operating income                     |       | $                                                        | 30,010     |   | $ | 20,599 |   | 146 | % |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Productssegment increased $44.1 million (36%) in the three months ended September 30,2008 compared to the same period in 2007. Of this increase, Carlton sales contributed $15.9 million, and $23.3million was due to additional sales volume, primarily from an increase in salesof wood-cutting saw chain and outdoor equipment parts that was partially offsetby slightly lower sales of concrete-cutting products.  Fluctuations in foreign currency exchange ratesadded $2.8 million to segment sales in the third quarter of 2008 compared to2007.  Excluding the effects of Carlton,international sales grew 20% for the three month comparable periods anddomestic sales increased 30%.  Domesticsales were stimulated, in part, by hurricane activity along the U. S. GulfCoast.  Sales to OEM customers increased18% and replacement sales increased 25% in the comparable periods, excludingthe effects of Carlton.  Order backlogincreased by $34.4 million from December 31, 2007 to $97.7 million at September 30,2008, of which $23.5 million relates to Carlton.

 

Segment contribution tooperating income increased $10.5 million (44%) in the third quarter of 2008compared to the third quarter of 2007. The favorable effects of increased sales volume of $10.1 million (includingCarlton), favorable selling price and mix of $2.2 million and improved productcost and mix of $1.9 million, were partially offset by higher SG&A expensesof $1.0 million and the net unfavorable effect of fluctuations in foreigncurrency translation rates of $2.8 million. The improved product cost and mix, excluding the foreign currencyexchange effect, includes increased leverage on our factories from higherproduction volumes, partially offset by $1.1 million in higher steelcosts.  The operating margin of 20.5% in2008 compares to 19.4% in 2007.

 

***Other and Corporate Expenses.***  The other and corporate expense categoryincludes the activity of our gear components business, as well as the costs ofcertain centralized management and administrative functions.  Sales of 

 

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gear-related productsincreased 14% from the third quarter of 2007 to the third quarter of 2008.  This increase was a result of $1.3 millionfavorable effect of price increases and product mix partially offset bydecreased volume of $0.3 million.  Thecontribution to operating income from our gear components business increased$0.1 million (16%) year-over-year due to the higher revenue, partially offsetby higher product cost and mix. Corporate expenses increased $1.2 million (33%), reflecting increasedaccruals for incentive compensation expenses based on improved operatingperformance.

 

**Nine monthsended September 30, 2008 (unaudited) compared to nine months ended September 30,2007 (unaudited).**

 

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

** **
| ** **                           | ** ** | **Nine months ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                           |
| **(Amounts in millions)*** | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Change** | ** ** | ** ** | ** ** | **Contributing Factor** | ** ** |
|                                 | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** |       |       |       |   |   |
| Sales                                |       | $                                                   | 463.3      |       | $          | 383.7      |       | $          | 79.5       |   |   |   |   |   |
|                                 |       |                                                |       |       |       |       |       | $          | 37.6       |   | Sales  volume |   |
|                                 |       |                                                |       |       |       |       |       | 6.9        |       | Selling  price and mix |   |
|                                 |       |                                                |       |       |       |       |       | 8.8        |       | Foreign  currency translation |   |
|                                 |       |                                                |       |       |       |       |       | 26.2       |       | Carlton  operations |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| Gross profit                         |       | 148.3                                               |       | 130.3      |       | 18.1       |       |       |       |   |   |
| *Gross margin*                       | * *   | *32.0*                                              | *%*        | *33.9*     | %          |       |       | 15.7       |       | Sales  volume |   |
|                                 |       |                                                |       |       |       |       |       | 6.9        |       | Selling  price and mix |   |
|                                 |       |                                                |       |       |       |       |       | (3.5       | )          | Product  cost and mix |   |
|                                 |       |                                                |       |       |       |       |       | (4.1       | )          | Foreign  currency translation |   |
|                                 |       |                                                |       |       |       |       |       | 3.1        |       | Carlton  operations |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| SG&A                             |       | 80.0                                                |       | 70.8       |       | 9.2        |       |       |       |   |   |
| *As a percent of sales*              | * *   | *17.3*                                              | *%*        | *18.4*     | %          |       |       | 3.5        |       | Compensation  and other benefits |   |
|                                 |       |                                                |       |       |       |       |       | 0.9        |       | Severance  costs |   |
|                                 |       |                                                |       |       |       |       |       | (1.8       | )          | Professional  services |   |
|                                 |       |                                                |       |       |       |       |       | 2.5        |       | Carlton  operations |   |
|                                 |       |                                                |       |       |       |       |       | 3.3        |       | Foreign  currency translation |   |
|                                 |       |                                                |       |       |       |       |       | 0.9        |       | Other |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| Operating income                     |       | 68.3                                                |       | 59.5       |       | 8.8        |       |       |       |   |   |
| *Operating margin*                   | * *   | *14.7*                                              | *%*        | *15.5*     | %          |       |       | 18.1       |       | Increase  in gross profit |   |
|                                 |       |                                                |       |       |       |       |       | (9.2       | )          | Increase  in SG&A |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| Income from continuing operations    |       | 32.1                                                |       | 23.2       |       | 8.8        |       |       |       |   |   |
|                                 |       |                                                |       |       |       |       |       | 8.8        |       | Increase  in operating income |   |
|                                 |       |                                                |       |       |       |       |       | 4.9        |       | Decrease  in net interest expense |   |
|                                 |       |                                                |       |       |       |       |       | (5.7       | )          | Increase  in income tax provision |   |
|                                 |       |                                                |       |       |       |       |       | 0.8        |       | Increase  in other income |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| Discontinued operations              |       | (0.4                                                | )          | 2.0        |       | (2.5       | )          |       |       |   |   |
|                                 |       |                                                |       |       |       |       |       | (3.7       | )          | Change  in operating results |   |
|                                 |       |                                                |       |       |       |       |       | 1.2        |       | Change  in income tax provision |   |
|                                 |       |                                                |       |       |       |       |       |       |       |   |   |
| Net income                           |       | $                                                   | 31.7       |       | $          | 25.3       |       | $          | 6.4        |   |   |   |   |   |
|                                      |            |                                                     |            |            |            |            |            |            |            |  |  |  |  |  |  |

 

----

***Amounts may not foot due to rounding.**

 

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Sales in the nine months endedSeptember 30, 2008 increased by $79.5 million (21%) from the same periodin 2007.  Increased sales volume ($37.6million), higher average selling prices and product mix ($6.9 million), and thefavorable effect of translation of foreign currency denominated salestransactions ($8.8 million), given the weaker U. S. dollar in comparison to2007, contributed to the increase.  Inaddition, the acquisition of Carlton on May 2, 2008 contributed $26.2million of the sales increase.  TheOutdoor Products segment experienced a $77.7 million (22%) increase in salesduring the nine months ended September 30, 2008 compared to the sameperiod in 2007, while sales of gear components increased $1.8 million (8%)during the same period.  Internationalsales increased $65.4 million (27%), while domestic sales increased $14.1million (10%).  The increase ininternational sales reflected Carlton international sales of $22.5 million,along with continued strength in international markets, as well as the $8.8million favorable impact from movement in foreign currency exchange ratescompared to 2007.  The increase in U. S.sales is attributed to increased sales volume for chainsaw components andoutdoor care products, as well as increased domestic sales of gear-relatedproducts, partially offset by slightly lower sales of concrete-cuttingproducts.

 

Gross profit increased $18.1million (14%) from the first nine months of 2007 to the same period in2008.  Gross margin for the nine monthsended September 30, 2008 was 32.0% of sales compared to 33.9% for the sameperiod in 2007.  Higher sales volume andimproved pricing were partially offset by increases in product costs and theunfavorable net effect of movement in foreign currency exchange rates.  The higher product costs were attributable tohigher steel costs, estimated at $3.8 million, as well as increased shippingand freight costs related to higher energy prices.  In addition, in the first nine months of 2007,we incurred $1.0 million in costs to consolidate certain North Americandistribution functions.  The nine monthsended September 30, 2008 also include charges to cost of sales totaling$2.8 million related to purchase accounting for the Carlton acquisition.

 

Fluctuations in currencyexchange rates decreased our gross profit in the nine months ended September 30,2008 compared to 2007 by $4.1 million on a consolidated basis.  The year to date trend of translation ofstronger foreign currencies into a weaker U. S. dollar continued, resulting inhigher manufacturing costs in Brazil and Canada, where local currenciesstrengthened compared to the U. S. dollar, partially offset by highertranslated sales in Europe.

 

SG&A was $80.0 million forthe nine month period ending September 30, 2008, compared to $70.8 millionfor the same period in 2007, representing an increase of $9.2 million(13%).  As a percentage of sales,SG&A decreased from 18.4% in 2007 to 17.3% in 2008, reflecting improved leverageon higher sales revenue.  Internationaloperating expenses increased $3.3 million from the prior year due to the weakerU. S. dollar and its effect on the translation of foreign expenses.  The effect of the Carlton acquisitionincreased SG&A by $2.5 million. Compensation and other benefits expense increased by $3.5 millionyear-over-year, reflecting annual merit increases, higher incentivecompensation expenses based on improved operating performance and increasedpost-employment benefit expenses. Severance costs and benefits related to a reorganization at our Portlandheadquarters, as well as similar actions taken in Europe, accounted for $0.9million of the increase.  Professionalservices expense decreased $1.8 million due to lower legal and audit costs.

 

Operating income increased by$8.8 million from the nine months ended September 30, 2007 to the sameperiod in 2008; however, the operating margin for 2008 was 14.7% of salescompared to 15.5% for 2007.  The decreasein operating margin was due to increased SG&A expenses and a total of $2.9million in purchase accounting charges related to the acquisition of Carlton,partially offset by higher gross profit.

 

Interest expense was $20.5million for the nine month period ending September 30, 2008 compared to$25.3 million for the same period in 2007. The decrease was due to lower average outstanding debt balances andlower average interest rates.

 

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The following table summarizesour income tax provision for continuing operations in 2008 and 2007:

 
| ** **                                            | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                  | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                  |       |                                                    |       |   |   |
| Income from continuing operations before income taxes |       | $                                                       | 50,259     |   | $ | 35,732 |   |
| Provision for income taxes                            |       | 18,171                                                  |       | 12,490 |   |
| Income from continuing operations                     |       | $                                                       | 32,088     |   | $ | 23,242 |   |
| Effective tax rate                                    |       | 36.2                                                    | %          | 35.0 | % |

 

The increase in our effectivetax rate from 2007 to 2008 is largely due to shifts in the relative proportionof pre-tax income earned in foreign versus domestic locations, and the varioustax rates that apply to our foreign locations, which can differ significantlyfrom our domestic income tax rate.

 

Our U. S. federal NetOperating Loss (“NOL”) carryforward was fully utilized during 2007.  We estimate our state NOL carryforwards were$30.3 million as of December 31, 2007. These carryforwards expire at various dates from 2008 through 2024.  Additionally, we have a foreign tax creditcarryforward of approximately $1.7 million as of December 31, 2007 thatexpires in 2010.  We also have state taxcredit carryforwards of approximately $0.2 million that expire at various datesfrom 2008 through 2021.  Our federalresearch credits and alternative minimum tax credits were fully utilized as of December 31,2007.  The state NOL and othercarryforwards are available to reduce cash taxes on future domestic taxableincome, although a portion of the state NOL carryforwards are reduced by avaluation allowance reflecting the expectation that the carryforward periodwill expire before they can be fully utilized.

 

Income from continuingoperations in the nine months ended September 30, 2008 was $32.1 million,or $0.67 per diluted share, compared to $23.2 million, or $0.48 per dilutedshare, for the same period in 2007.

 

Loss from discontinuedoperations in the nine months ended September 30, 2008 was $0.4 million or$0.01 per diluted share compared to income from discontinued operations of $2.0million, or $0.04 per diluted share, for the same period in 2007.  The 2008 results consisted solely ofwind-down and exit activities related to our discontinued Forestry Division,which was sold on November 5, 2007. Results for the nine month period ending September 30, 2007 reflectthe activities of the Forestry Division prior to the sale, as well as wind-downand exit activities related to our discontinued Lawnmower segment, which wassold in 2006.

 

Discontinued operations aresummarized as follows:

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                              | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Sales                                                             |       | $                                                       | —     |   | $ | 99,761 |   |
| Operating income (loss) before taxes from discontinued operations |       | (367                                                    | )          | 3,323 |   |
| Income tax provision                                              |       | 39                                                      |       | 1,274 |   |
| Income (loss) from discontinued operations                        |       | $                                                       | (406       | ) | $ | 2,049 |   |

 

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***Segment Results. ***The following table reflects segment sales andoperating results for 2008 and 2007:

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)** | ** ** | **2008**                                                | ** ** | **2007** | ** ** | **2008 as a  % of 2007** | ** ** |
| Sales:                               |       |                                                    |       |   |   |   |   |
| Outdoor Products                     |       | $                                                       | 438,800    |   | $ | 361,085 |   | 122 | % |
| Other                                |       | 24,465                                                  |       | 22,664 |   | 108 | % |
| Total sales                          |       | $                                                       | 463,265    |   | $ | 383,749 |   | 121 | % |
| Operating income:                    |       |                                                    |       |   |   |   |   |
| Outdoor Products                     |       | $                                                       | 80,482     |   | $ | 71,401 |   | 113 | % |
| Other and corporate expenses         |       | (12,183                                                 | )          | (11,944 | ) | 102 | % |
| Operating income                     |       | $                                                       | 68,299     |   | $ | 59,457 |   | 115 | % |

 

***Outdoor Products Segment.***** **Sales for the Outdoor Products segmentincreased $77.7 million (22%) in the nine months ended September 30, 2008compared to the same period in 2007.  Ofthis increase, Carlton sales contributed $26.2 million. Additional sales volumeprovided $38.4 million, primarily from an increase in sales of wood-cutting sawchain and outdoor equipment parts, which was partially offset by slightly lowersales of concrete-cutting products. Higher average selling prices and improved product mix also contributed$4.4 million to the year-over-year sales increase.  Fluctuations in foreign currency exchangerates added another $8.8 million to segment sales in the nine months ended September 30,2008 compared to 2007.  Excluding theeffects of Carlton, international sales grew 18% for the nine month comparableperiods, domestic sales increased 8%, sales to OEM customers increased 1% andreplacement sales increased 20%.

 

Segmentcontribution to operating income increased $9.1 million (13%) in the ninemonths ended September 30, 2008 compared to the corresponding period in2007.  Increased sales volume ($15.7million), improved price and mix ($4.4 million) and the inclusion of Carlton($0.5 million) were partially offset by higher product cost and mix ($1.6million), higher SG&A expenses ($2.5 million) and the net unfavorableeffect of fluctuations in foreign currency translation rates ($7.4 million).  Carlton’s results were negatively impacted bynon-cash charges of $2.8 million related to purchase accounting.  The higher product cost and mix, excludingthe foreign currency exchange effect, includes inflationary pressures of higherwages and other conversion costs, higher freight and shipping costs, increasedenergy costs and an estimated $2.2 million in higher steel costs.  The operating margin of 18.3% in 2008compares to 19.8% in 2007.

 

***Other and Corporate Expenses.***  The other and corporate expense categoryincludes the activity of our gear components business, as well as the costs ofcertain centralized management and administrative functions.  Sales of gear-related products increased 8%from the nine months ended September 30, 2007 to the same period in2008.  This increase was a result of a$2.6 million favorable effect of price and mix improvements, partially offsetby lower volume of $0.8 million.  Thecontribution to operating income from our gear components business increased$0.6 million (35%) year-over-year due to the higher sales, partially offset byhigher product cost and mix.  Corporateexpenses increased $0.9 million (6%), with severance costs and higher accruedvariable compensation expense partially offset by lower legal and auditexpenses.

 

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**Financial Condition, Liquidity and Capital Resources**

 

Totaldebt at September 30, 2008 was $332.1 million, compared to $297.0 millionat December 31, 2007.  The increasein debt during 2008 is attributable to borrowings of $58.5 million under therevolving credit facility to fund the acquisition of Carlton on May 2,2008, partially offset by repayment of $21.5 million of such borrowings fromnet cash flows.  As of September 30,2008, our debt consisted of the following:

 
| **(Amounts in thousands)** | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                           |
| Revolving credit facility            |       | $                            | 37,000     |                        | $          | — |   |
| Term loans                           |       | 120,079                      |       | 122,000                     |       |
| 8 7/8% senior subordinated notes     |       | 175,000                      |       | 175,000                     |       |
| Total debt                           |       | 332,079                      |       | 297,000                     |       |
| Less current maturities              |       | (38,232                      | )          | (1,242                      | )          |
| Long-term debt                       |       | $                            | 293,847    |                        | $          | 295,758 |   |

 

**8 7/8% Senior Subordinated Notes.**  The Company has one registered debt security,the 8 7/8% senior subordinated notes. The interest rate on these notes is fixed until their maturity on August 1,2012.  These notes are subject toredemption at any time after August 1, 2008 at the option of the Company,in whole or in part, at redemption prices of 104.438% through July 31,2009; 102.219% from August 1, 2009 through July 31, 2010; and at100.000% August 1, 2010 and thereafter. These notes are issued by the Company’s wholly-owned subsidiary, Blount, Inc.,and are fully and unconditionally, jointly and severally, guaranteed by theCompany and all of its domestic subsidiaries (“guarantor subsidiaries”) otherthan Blount, Inc.  All guarantorsubsidiaries of these 8 7/8% senior subordinated notes are 100% owned,directly or indirectly, by the Company. While the Company and all of its domestic subsidiaries guarantee these 87/8% senior subordinated notes, none of Blount’s existing foreign subsidiaries(“non-guarantor subsidiaries”) guarantee these notes.

 

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

 

The revolving creditfacility provides for total available borrowings up to $150.0 million, reducedby outstanding letters of credit and further restricted by a specific leverageratio and first lien credit facilities leverage ratio. As of September 30, 2008, the Company hadthe ability to borrow an additional $108.2 million under the terms of therevolving credit agreement. The revolving credit facility bears interest at theLIBOR rate plus 1.75%, or at the prime rate, depending on the type of loan, andmatures on August 9, 2009.  Interestis payable monthly in arrears on any prime rate borrowing and at the individualmaturity dates for any LIBOR-based borrowing. Any outstanding principal is due in its entirety on the maturitydate.  The entire balance outstanding at September 30,2008 is classified as a current liability because the facility matures in lessthan twelve months.

 

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

 

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

 

The amended and restatedsenior credit facilities may be prepaid at any time.  There can also be additional mandatoryrepayment requirements related to the sale of Company assets, the issuance ofstock under certain

 

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circumstances, or upon theCompany’s annual generation of excess cash flow, as determined under the creditagreement.

 

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 of domesticsubsidiaries held by Blount, Inc. Blount, Inc. has also pledged 65% of the stock of each of itsnon-domestic subsidiaries as additional collateral.

 

Interestexpense was $20.5 million in the nine months ended September 30, 2008, adecrease of $4.7 million compared to the nine months ended September 30,2007.  The decrease reflects thefavorable effects of lower average debt outstanding, as well as reducedinterest rates on our variable rate debt. Our interest expense may vary in the future because the revolving creditfacility and term loan interest rates are variable. The interest rate is fixedon the senior subordinated notes.  Ourweighted average interest rate on all debt was 6.69% as of September 30,2008 compared to 8.11% as of December 31, 2007.

 

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

 

Weintend to fund working capital, capital expenditures and debt servicerequirements for the next twelve months, including the August 2009maturity of the revolving credit facility, through expected cash flowsgenerated from operations.  We expect ourremaining resources will be sufficient to cover any additional increases inworking capital and capital expenditures for at least the next twelvemonths.  There can be no assurance,however, that these resources will be sufficient to meet our needs.  We may also consider other options availableto us in connection with future liquidity needs, including the potentialextension of the revolving credit facility beyond its maturity date.  However, any such extension may result inamendment fees, higher borrowing costs and other changes in terms andconditions, particularly in light of recent developments in the world-widecredit markets.

 

At September 30,2008, the fair value of the assets of our pension plans was estimated at $142.1million, down from $176.8 million at December 31, 2007.  The significant decline was mainly due to thedrop in global stock prices.  Based onthe decline in fair value of the assets as of September 30, 2008, the netpension expense in 2009 would be approximately $4.5 million to $5.5 millionhigher than in 2008.  Any change in thefair value of pension assets during the three month period ending December 31,2008 will further affect this estimated effect. This decline is not expected to significantly impact 2009 fundingrequirements but may increase the required contributions to the plans in futureyears.

 

Cashand cash equivalents at September 30, 2008 were $53.6 million compared to$57.6 million at December 31, 2007. At September 30, 2008, $50.4 million of the cash balance was heldat our foreign operations.

 

Cashprovided by operating activities is summarized in the following table:

 
| ** **                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**   | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Income from continuing operations      |       | $                                                       | 32,088     |   | $ | 23,242 |   |
| Non-cash items                         |       | 23,076                                                  |       | 22,560 |   |
| Subtotal                               |       | 55,164                                                  |       | 45,802 |   |
| Changes in assets and liabilities, net |       | (12,108                                                 | )          | (30,071 | ) |
| Discontinued operations, net           |       | (4,199                                                  | )          | (1,572 | ) |
| Cash provided by operating activities  |       | $                                                       | 38,857     |   | $ | 14,159 |   |

 

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

 

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Duringthe nine months ended September 30, 2008, operating activities provided$38.9 million of cash.  Income fromcontinuing operations plus non-cash items totaled $55.2 million in the firstnine months of 2008, reflecting improved operating results and a net increasein non-cash items.  The increase innon-cash items reflects higher depreciation and amortization expenses, offsetby fluctuations in the deferred income tax provision when compared to the firstnine months of 2007.  In addition,purchase accounting for the Carlton acquisition resulted in non-cash charges of$2.8 million recognized in the first nine months of 2008.  We expect non-cash charges related to theCarlton acquisition purchase accounting to total $3.5 million for 2008, andapproximately $1.7 million in 2009 and $1.8 million in 2010.  The positive operating cash flow from theseitems was partially offset by the net increase in working capital and otherassets and liabilities during the period, including an increase in accountsreceivable of $10.6 million and an increase in inventories of $2.8million.  Discontinued operations used$4.2 million in cash during the first nine months of 2008 as certainobligations and liabilities related to the sale of our Forestry Division werepaid in 2008.  Cash payments during thefirst nine months of 2008 also included $21.7 million for interest and $11.8million for income taxes.

 

Duringthe first nine months of 2007, operating activities provided $14.2 million ofcash.  Income from continuing operationsplus non-cash items totaled $45.8 million. The positive operating cash flow from these items was partially offsetby the net increase in working capital and other assets and liabilities duringthe period.   An increase in accountsreceivable of $6.0 million, inventories of $10.1 million, other assets of $3.5million and a net decrease in liabilities of $10.5 million used a combined totalof $30.1 million in the first nine months of 2007. In addition, discontinuedoperations used $1.6 million of cash during the first nine months of 2007,reflecting increases in working capital components.  Cash payments during the first nine months of2007 also included $27.1 million for interest, $10.5 million for income taxesand $19.0 million for contributions to defined benefit pension plans.

 

Cashused in investing activities is summarized as follows:

 
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**       | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Proceeds from sale of assets               |       | $                                                       | 1,349      |   | $ | 184 |   |
| Purchases of property, plant and equipment |       | (17,675                                                 | )          | (13,760 | ) |
| Acquisition of Carlton Holdings, Inc. |       | (64,381                                                 | )          | — |   |
| Discontinued operations                    |       | 1,725                                                   |       | 968 |   |
| Cash used in investing activities          |       | $                                                       | (78,982    | ) | $ | (12,608 | ) |

 

During2008, we expect to invest $24 million to $26 million in available cash forcapital expenditures, primarily for ongoing productivity and cost improvementsin our manufacturing processes, routine replacement of machinery and equipment,replacement of tooling that is consumed in the production process andincremental capacity expansion.

 

Cashprovided by financing activities is summarized as follows:

 
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Amounts in thousands)**                          | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Net increase in debt principal outstanding                    |       | $                                                       | 35,079     |   | $ | 4,125 |   |
| Proceeds and tax benefits from the exercise  of stock options |       | 1,034                                                   |       | 311 |   |
| Cash provided by financing activities                         |       | $                                                       | 36,113     |   | $ | 4,436 |   |

 

Cashprovided by financing activities in the first nine months of 2008 consisted ofnet borrowings of $35.1 million under our credit facilities.  These net borrowings include $58.5 millionborrowed under our revolving credit facility for the acquisition of CarltonHoldings, Inc., partially offset by scheduled principal repayments of $1.9million on our term loans and payments against the revolver balance from cashgenerated during the period. Net proceeds and tax benefits from the exercise ofstock options totaled $1.0 million during the first nine months of 2008. Cashprovided by financing activities in the first nine months of 2007 was $4.4million, consisting of net borrowings of $4.1 million under our revolvingcredit facility and term loans, and the net proceeds and tax benefits from theexercise of stock options.

 

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**Critical Accounting Policies**

 

There have been no materialchanges to our critical accounting policies and estimates from the informationprovided in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, included in our Form 10-K for thefiscal year ended December 31, 2007.

 

**Recent Accounting Pronouncements**

 

In September 2006, theFASB issued FAS No. 157, “Fair Value Measurements” (“FAS No. 157”).  FAS No. 157 defines fair value,establishes a framework for measuring fair value in accordance with accountingprinciples generally accepted in the U. S., and expands disclosures about fairvalue measurements.  We adopted FAS No. 157 for financial assets andliabilities on January 1, 2008, with no immediate effect on theconsolidated financial statements.  Aspermitted by FASB Staff Position No. FAS 157-2, “Effective Date of FASBStatement No. 157”, we elected to defer the adoption of SFAS No. 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  In February 2008,the FASB issued Staff Position No. FAS 157-1, “Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13” (“FSP No. 157-1”).  We also adopted FSP No. 157-1 on January 1,2008, with no immediate effect on the consolidated financial statements.  In October 2008, the FASB issued StaffPosition No. FAS 157-3, “Determining the Fair Value of a Financial AssetWhen the Market for That Asset Is Not Active” (“FSP No. 157-3”).  We adopted FSP No. 157-3 on October 1,2008, with no immediate effect on the consolidated financial statements.

 

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

 

In December 2007, theFASB issued FAS No. 141(R), “Business Combinations” (“FAS No. 141(R)”).  FAS No. 141(R) replaces FAS No. 141,Business Combinations. The provisions of FAS No. 141(R) are effectivefor the Company on January 1, 2009. The impact of adopting FAS No. 141(R) will depend on thenature, terms and size of any business combinations completed after theeffective date.

 

In December 2007, theFASB issued FAS No. 160, “Non-controlling Interests in ConsolidatedFinancial Statements” (“FAS No. 160”). FAS No. 160 amends Accounting Research Bulletin No. 51,Consolidated Financial Statements. The provisions of FAS No. 160 areeffective for the Company on January 1, 2009.    Earlier adoption is prohibited.  The adoption of FAS No. 160 is notanticipated to have a material impact on the financial position and results ofoperations of the Company.

 

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

 

In April 2008, the FASBissued FSP No. FAS 142-3, “Determination of the Useful Life of IntangibleAssets” (“FSP No. 142-3”).  ThisFASB Staff Position amends the factors that should be considered in developingassumptions used to determine useful lives of recognized intangible assetsunder FAS 142, “Goodwill and Other Intangible Assets”. The provisions of FSP No. 142-3are effective for the Company on January 1, 2009.  Early adoption is prohibited.  The impact of adopting FSP No. 142-3will depend on the nature, terms and size of any business combinationscompleted after the effective date.

 

**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,”

 

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“estimates,”“anticipations,” and their variants, are based upon available information andupon assumptions that the Company believes are reasonable; however, theseforward looking statements involve certain risks and should not be consideredindicative of actual results that the Company may achieve in the future.Specifically, issues concerning foreign currency exchange rates, the cost tothe Company of commodities in general, and of steel in particular, theanticipated level of applicable interest rates, the state of global financialmarkets and the anticipated effects of discontinued operations involve certainestimates and assumptions. To the extent that these, or any other suchassumptions, are not realized going forward, or other unforeseen factors arise,actual results for the periods subsequent to the date of this report may differmaterially.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

Althoughthe recent events in the world-wide economy and credit markets have notsignificantly affected our business to date, they could impact our business inthe future, including the following effects:

 

·                  Our ability to obtainnew financing facilities and to refinance our existing debt could be impactedif credit markets do not improve by the maturity dates of our existingfacilities.  New credit facilities couldcarry higher interest rates, increased fees and more restrictive terms andconditions compared to our current credit facilities.

 

·                  The expectedworld-wide recession could adversely affect our customers businesses, andthereby affect the demand for our products. For the nine months ended September 30, 2008, our sales were 67%international and 23% domestic.

 

·                  Our customers’ability to pay their accounts receivable to us may be adversely affected byrecent changes in currency exchange rates. For example, accounts receivable denominated in U. S. dollars owed byinternational customers may be harder for them to pay if the U. S. dollarstrengthens against their currencies while the balance is outstanding.

 

·                  Our defined benefitpension plans may require increased funding and may result in increased expensegiven the recent decline in fair value of the related pension assets.

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

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

 

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

 

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There have been no changesin the Company’s internal control over financial reporting during the Company’slast fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**PART II     OTHER INFORMATION**

 

**ITEM 6.  EXHIBITS**

 

**(a) Exhibits:**

 

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

 

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

 

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

 

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

 

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**   Filed electronicallyherewith.  Copies of such exhibits may beobtained upon written request from:

 

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

 

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**SIGNATURES**

 

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

 

| BLOUNT  INTERNATIONAL, INC. |   |
|-----------------------------|--------|
| Registrant                  |   |

 

 
| /s/  Calvin E. Jenness         |   | /s/  Mark V. Allred                    |
|--------------------------------|--------|----------------------------------------|
| Calvin  E. Jenness             |   | Mark  V. Allred                        |
| Senior  Vice President and     |   | Vice  President - Corporate Controller |
| Chief  Financial Officer       |   | (Principal  Accounting Officer)        |
|                           |   |                                   |
| Dated:  November 10, 2008 |   |                                   |

 

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