Blount International 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

for the quarterly period ended September 30, 2009.

OR

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

Commission file number 001-11549

BLOUNT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

(503) 653-8881

(Registrant’s telephone number, including area code)

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

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

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

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

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

As of November 3, 2009 there were 47,714,461 shares outstanding of $0.01 par value common stock.

BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

Index

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

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PART I       FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Blount International, Inc. and Subsidiaries

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

The accompanying notes are an integral part of these consolidated financial statements.

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UNAUDITED CONSOLIDATED BALANCE SHEETS

Blount International, Inc. and Subsidiaries

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

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

The accompanying notes are an integral part of these consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

Blount International, Inc. and Subsidiaries

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

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

The accompanying notes are an integral part of these consolidated financial statements.

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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:  BASIS OF PRESENTATION

Basis of Presentation.  The unaudited consolidated financial statements include the accounts of Blount International, Inc. and its subsidiaries (collectively, “Blount” or the “Company”) and are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.”).  All significant intercompany balances and transactions have been eliminated.  In the opinion of management, the consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial position, results of operations, cash flows and changes in stockholders’ deficit for the periods presented.

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

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

Reclassifications.  Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.  Such reclassifications have no effect on previously reported net income or net stockholders’ deficit.

Subsequent Events Review.  We have performed an evaluation of subsequent events through November 6, 2009, which is the date the financial statements were issued.

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

NOTE 2:  ACQUISITION OF CARLTON HOLDINGS, INC.

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

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The following unaudited pro forma results present the estimated effect as if the acquisition had occurred on the first day of each period presented.   The unaudited pro forma results include the historical results of Carlton, pro forma purchase accounting effects, the pro forma interest expense effects of additional borrowings to fund the transaction and the related pro forma income tax effects.  In addition to the pro forma amortization of tangible and intangible asset adjustments to fair value, the unaudited pro forma results for each period presented include a charge of $1.7 million to expense the adjustment of inventory to estimated fair value.

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

NOTE 3:  DISCONTINUED OPERATIONS

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

Discontinued operations are summarized as follows:

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

NOTE 4:  RESTRUCTURING ACTIVITIES

Gain on Sale of Land and Building.  On June 25, 2009, we sold the land and building representing our former European headquarters and distribution center.  These operations have been moved to new, nearby leased facilities.  We recognized a pre-tax gain of $2.7 million on the sale.

Plant Closure Costs.  In January 2009, we announced our intent to close our manufacturing facility in Milan, Tennessee during the second quarter of 2009.  Products previously manufactured in that facility are now produced in our other manufacturing facilities.  For the nine months ended September 30, 2009, we have recognized a total of $3.8 million in charges related to this plant closure, consisting of $2.0 million in asset impairment charges, $1.0 million in employee severance and benefit costs and $0.8 million in other expenses.  Of these charges, $0.3 million is recognized in cost of goods sold on the Consolidated Statements of Income for the nine months ended September 30, 2009.  The land and building are currently being marketed for sale and are included in assets held for sale on the Consolidated Balance Sheets.

8

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

NOTE 5:  INVENTORIES, NET

Inventories consisted of the following:

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

NOTE 6:  LONG-TERM DEBT

Long-term debt consisted of the following:

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

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

8 7/8% Senior Subordinated Notes.  The Company has one registered debt security, the 8 7/8% senior subordinated notes.  The interest rate on these notes is fixed until their maturity on August 1, 2012.  These notes are subject to redemption at the option of the Company, in whole or in part, at redemption prices of 102.219% from August 1, 2009 through July 31, 2010; and at 100% 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 the Company and all of its domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8% senior subordinated notes are 100% owned, directly or indirectly, by the Company.  While the Company and all of its domestic subsidiaries guarantee these 8 7/8% senior subordinated notes, none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”) guarantee these notes.  See also Note 16.

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., first entered into a credit agreement with General Electric Capital Corporation (“GECC”) 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 a revolving credit facility and a term loan facility.

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

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

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

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

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

We paid fees and expenses of $1.9 million to amend the revolving credit facility in April 2009. The revolving credit facility principal balance outstanding was classified as current on the December 31, 2008 Consolidated Balance Sheet because, before the maturity date was extended by the amendment, the maturity date was less than 12 months from the balance sheet date at the time.  There were no changes to financial covenants, nor did this amendment affect the term loan facility.

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

The term loan facility bears interest at the LIBOR rate plus 1.75%, or at the prime rate, depending on the type of loan, and also matures on August 9, 2010.  The term loan facility requires quarterly payments of $0.3 million, with a final payment of $106.6 million due on the maturity date.  Once repaid, principal under the term loan facility may not be re-borrowed by the Company.

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

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

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

The revolving credit facility and the term loan facility mature on August 9, 2010 and are therefore classified as current liabilities on the balance sheet as of September 30, 2009.  Before these facilities mature, we plan to obtain replacement financing.  We are currently in negotiations with GECC to amend and extend these senior credit facilities.  If successful, we expect to complete the amendment and extension by the end of 2009.  The proposed terms include an extension of the maturity date, an increase in the interest rate applicable to the term loans and a reduction in the borrowing capacity of the revolving credit facility.  However, given the conditions in global credit markets, we may not be successful in consummating the proposed agreements.

NOTE 7:  PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS

The Company sponsors defined benefit pension plans covering employees in the U.S., Canada and Belgium.  The Company also sponsors various other post-employment medical and benefit plans covering many of its current and former employees.  The U.S. defined benefit pension plan and the associated nonqualified plan have been frozen since December 31, 2006.  Employees who currently participate in these U.S. plans no longer accrue benefits and new employees hired since December 31, 2006 are not eligible to participate.  All retirement benefits accrued up to the time of the freeze were preserved.

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

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

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

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

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

NOTE 8:  COMMITMENTS

Significant financial guarantees and commitments are summarized in the following table:

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

NOTE 9:  CONTINGENT LIABILITIES

The Company is a defendant in a number of product liability lawsuits, some of which seek significant or unspecified damages, involving serious personal injuries for which there are retentions or deductible amounts under the Company’s insurance policies. Some of these lawsuits arise out of the Company’s duty to indemnify certain purchasers of the Company’s discontinued operations for lawsuits involving products manufactured prior to the sale of these businesses.  In addition, the Company is a party to a number of other suits arising out of the normal course of its business, including suits concerning commercial contracts, employee matters, intellectual property rights and other matters.  In some instances the Company is the plaintiff, and is seeking recovery of damages. In others, the Company is a defendant against whom damages are being sought.  While there can be no assurance as to their ultimate outcome, management does not believe these lawsuits will have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows.

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

NOTE 10:  EARNINGS PER SHARE DATA

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

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

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

NOTE 11:  STOCK-BASED COMPENSATION

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

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

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

Under terms of the Company’s stock compensation plans, employee grantees who are retirement eligible generally receive continued vesting after retirement.  In such circumstances, stock-based compensation expense is recognized on an accelerated basis.  The effect of such accelerated expense recognition for 2009 was to reduce by $1.0 million the expense that otherwise would have been recognized in 2009 on stock compensation grants made and expensed in earlier years.

12

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

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

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

NOTE 12:  SEGMENT INFORMATION

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

Certain financial information by segment is presented in the table below:

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

NOTE 13:  SUPPLEMENTAL CASH FLOWS INFORMATION

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

13

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

The Company has manufacturing or distribution operations in Brazil, Canada, China, Europe, Japan, Russia and the U.S. The Company sells to customers in these locations and other countries throughout the world. At September 30, 2009, approximately 74% of accounts receivable were from customers outside the U.S. If the U.S. Dollar strengthens against foreign currencies, as it did during the latter half of 2008, it becomes more costly for these foreign customers to pay their U.S. Dollar balances owed.  They may have difficulty in repaying these amounts, and in turn, the Company’s bad debt expense may increase.  Accounts receivable are principally from distributors, dealers, mass merchants, chainsaw manufacturers and other original equipment manufacturers (“OEMs”) and are normally not collateralized.

The carrying amount of cash and cash equivalents approximates fair value because of the short term maturity of those instruments. The carrying amount of accounts receivable approximates fair value because the maturity period is short and the Company has reduced the carrying amount to the estimated net realizable value with an allowance for doubtful accounts.  The carrying amount of the revolving credit facility approximates fair value because the applicable interest rates are variable and the maturity period is relatively short.  The fair value of the term loans is determined by reference to prices of recent transactions whereby buyers and sellers exchange their interests in portions of these loans.  The fair value of the fixed rate 8 7/8% senior subordinated notes is determined by reference to quoted market prices.  The carrying amount of other financial instruments approximates fair value because of the short term maturity periods and variable interest rates associated with the instruments.

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

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

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

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

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

We hedge the interest rate and foreign currency exposure on a portion of our cash and cash equivalents invested in Brazil with interest rate swap agreements.  The change in fair value of these instruments is recognized in interest income on the Consolidated Statements of Income.  Any change in fair value on these derivative contracts is fully

14

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

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

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

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

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

The amounts included in accumulated other comprehensive loss on the Consolidated Balance Sheets are expected to be reclassified to the Consolidated Income Statement within the next twelve months.

As specified in ASC 820.10, the framework for measuring fair value is based on independent observable inputs of market data and is based on the following hierarchy:

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

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

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

15

NOTE 15:  RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

In December 2008, the FASB revised authoritative guidance regarding employers’ disclosures about postretirement benefit plan assets to require expanded disclosures about plan assets of a defined benefit pension or other postretirement plan.  In September 2009, the FASB further revised the authoritative guidance for fair value measurements and disclosures to permit a reporting entity to measure the fair value of an investment on the basis of the net asset value per share of the investment.  This revised authoritative guidance will be effective for us in our 2009 Form 10-K, and will result in expanded disclosures in the notes to our consolidated financial statements.

In April 2009, the FASB revised authoritative guidance regarding interim disclosures about fair value of financial instruments.  This revised authoritative guidance requires expanded disclosures about fair value of financial instruments for interim periods and also requires those disclosures in summarized financial information at interim reporting periods.  We adopted this revised authoritative guidance in the first quarter of 2009. With this adoption, we also adopted new authoritative guidance regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly and recognition and presentation of other-than-temporary impairments.  The impact of adopting this authoritative guidance resulted in expanded disclosures in the notes to our consolidated financial statements.

In May 2009, the FASB issued new authoritative guidance on subsequent events that sets out general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  This authoritative guidance requires disclosure of the date through which subsequent events have been evaluated, the nature of any event and an estimate of its financial effect or disclosure that such estimate cannot be made.  We adopted this authoritative guidance in the quarter ended June 30, 2009 and such adoption resulted in additional disclosure regarding subsequent events.

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

NOTE 16:  CONSOLIDATING FINANCIAL INFORMATION

See Note 6 for a discussion of the Company’s guarantor subsidiaries.  The following consolidating financial information 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-guarantor subsidiaries:

16

Condensed Consolidating Statement of Income Information

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

17

Condensed Consolidating Statement of Income Information

(Amounts in thousands)	Blount International, Inc.			Blount,Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Three Months Ended September 30, 2008
Sales	$	—		$	125,855		$	12,979		$	96,446		$	(60,274	)	$	175,006
Cost of sales	—			91,113			10,561			79,273			(62,477		)	118,470
Gross profit	—			34,742			2,418			17,173			2,203			56,536
Operating expenses	—			16,560			1,039			8,927			—			26,526
Operating income	—			18,182			1,379			8,246			2,203			30,010
Other income (expense), net	(4,093		)	(1,578		)	141			(352		)	—			(5,882		)
Income (loss) from continuing 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
Operating expenses	—			49,166			3,142			27,729			—			80,037
Operating income	—			43,243			3,180			20,974			902			68,299
Other income (expense), net	(12,893		)	(5,747		)	431			169			—			(18,040		)
Income (loss) from continuing 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

18

Condensed Consolidating Balance Sheet Information

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

19

Condensed Consolidating Balance Sheet Information

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

20

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

21

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

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements included elsewhere in this report.

Operating Results

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

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

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

22

Sales in the three months ended September 30, 2009 decreased by $44.6 million (25.5%) from the same period in 2008.  This sales decrease was primarily due to decreased unit volume of $46.5 million.  Selling price and mix improvements of $4.3 million partially offset the volume-related decrease in sales.  The translation of foreign currency-denominated sales transactions, given the stronger U.S. Dollar in comparison to the third quarter of 2008, reduced consolidated sales by $2.5 million in the comparative period.  International sales decreased by $24.7 million (21.3%) and domestic sales decreased by $20.0 million (33.8%).  The decrease in international sales reflected worldwide weakness in demand and poor market conditions related to the global recession, as well as the unfavorable effects from movement in foreign currency exchange rates compared to 2008.  We have continued to be cautious about extending credit to certain higher risk geographical areas during the current global recession, which we believe has contributed to a slowdown in sales and orders from portions of our international customer base.  The decrease in U.S. sales is attributed to poor economic conditions and weakness in demand for our products in the third quarter of 2009, compared to the strong domestic market conditions that prevailed during the third quarter of 2008, attributed in part to increased severe storm activity in the prior year.  While orders and sales in the third quarter of 2009 are up compared to the first two quarters of 2009, we believe that many of our customers have reduced or delayed orders for our products, and reduced their inventories of our products, over their concerns about the state of the economy and lower order rates from their customers.

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

Gross profit decreased $11.7 million (20.7%) from the third quarter of 2008 to the third quarter of 2009.  Much lower sales volume and moderate increases in product costs were partially offset by improved pricing and mix and the net favorable effects of movement in foreign currency exchange rates.  Year-over-year steel costs are estimated to be $0.3 million lower for the comparable third quarter periods, reversing the steel cost increases we have experienced in the first two quarters of 2009 compared to 2008.  Our manufacturing costs were adversely affected during the third quarter of 2009 by lower production volumes, including a higher number of idle manufacturing days, which caused lower absorption rates and higher period expenses for fixed and semi-variable manufacturing costs when compared to the third quarter of 2008.  Our production and shipment volumes were at record levels in the year-ago third quarter.  Gross margin in the third quarter of 2009 was 34.4% of sales compared to 32.3% in the third quarter of 2008.

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

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

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

23

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

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

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

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

The effective tax rate for the third quarter of 2009 was reduced from the federal statutory rate by the impact of lower taxes on our foreign operations and the positive effect from finalization of our advanced pricing agreement (“APA”) with Canada and the U.S.  Finalization of the APA resulted in the recognition of interest on refunds from prior years.  Additionally, our effective tax rate in 2009 was reduced by federal and state tax credits. Taxes on our foreign operations are lower than in the U.S. because of lower statutory tax rates and increased deductions for tax purposes in foreign jurisdictions that are not recognized as expenses for book purposes.  Partially offsetting these tax rate reductions were additional tax expenses recognized on interest and dividends repatriated from certain of our foreign locations.

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

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

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

24

Segment Results.  The following table reflects segment sales and operating results for 2009 and 2008:

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

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

Segment contribution to operating income decreased $9.0 million (26.2%) in the third quarter of 2009 compared to the third quarter of 2008.  The favorable effects of improved price and mix ($4.9 million), fluctuations in foreign currency translation rates ($2.3 million) and lower SG&A expenses ($1.2 million) were offset by the net effects of lower sales volume ($13.2 million) and higher product cost and mix ($4.3 million).  Our product costs were adversely affected during the third quarter of 2009 compared to the third quarter of 2008 by lower production volumes, including a higher number of idle manufacturing days, which caused lower absorption rates and higher period expenses for fixed and semi-variable manufacturing costs.  Steel costs on a year-over-year basis were essentially flat for the segment. The decrease in SG&A expense is largely attributable to the effects of cost-cutting measures we implemented in the first nine months of 2009 to reduce head count and operating expenses.  These SG&A cost reductions were partially offset by higher expenses for our defined benefit pension plans and an increase in the provision for bad debts.

Other.  The other category includes centralized administrative functions, the results of our gear components manufacturing business, a gain on the sale of land and building and plant closure and severance costs.  Sales of gear-related products decreased 60.9% from the third quarter of 2008 to the third quarter of 2009.  The sales decrease included lower volume of $4.8 million and a $0.5 million unfavorable effect of mix changes.  During the current quarter, a greater proportion of smaller-sized and lower-priced gear components were sold compared with the third quarter of 2008.  The contribution to operating income from our gear components business decreased $0.4 million (43.7%) year-over-year due to the lower sales volume, partially offset by reduced expenses from cost-cutting actions taken during 2009.  Central administrative expenses were down $0.2 million for the comparable period, largely due to lower compensation expense partially offset by higher costs for our employee benefit plans.  Severance costs were $0.5 million in the third quarter of 2009 as we continued with our restructuring and cost-cutting activities.  Similar actions were taken in the third quarter of 2008 resulting in the recognition of $0.4 million in severance costs.

25

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

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

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

On May 2, 2008, we acquired all of the outstanding stock of Carlton, a manufacturer of cutting chain for chainsaws located near Portland, Oregon.  We paid a total of $66.2 million in cash for Carlton, including related acquisition costs of $1.5 million, and also assumed liabilities totaling $21.3 million.  Carlton had $1.8 million in cash on the date of acquisition, resulting in a net cash outflow of $64.4 million for the acquisition.  The acquisition was financed with a combination of cash on hand and $58.5 million borrowed under the Company’s revolving credit facility.  The operating results of Carlton are included in the Company’s consolidated financial statements from May 2, 2008 forward.  The Company accounted for the acquisition in accordance with ASC 805.  Accordingly, Carlton’s assets and liabilities were recorded at their estimated fair values on the date of acquisition.

26

Sales in the nine months ended September 30, 2009 decreased by $102.4 million (22.1%) from the same period in 2008.  This sales decrease was primarily due to decreased unit volume of $112.5 million.  This volume-related decrease was partially mitigated by the inclusion of Carlton sales for nine months of 2009 and only 5 months of 2008.  Partially offsetting the volume decrease was $18.9 million of selling price and mix improvements.  The translation of foreign currency-denominated sales transactions, given the stronger U.S. Dollar in comparison to the first nine months of 2008, reduced consolidated sales by $8.8 million in the comparative period.  International sales decreased by $71.4 million (23.0%) and domestic sales decreased by $31.0 million (20.2%).  The decrease in international sales reflected worldwide weakness in demand and poor market conditions related to the global recession, as well as the $8.8 million unfavorable foreign currency exchange rate impact on reported sales compared to 2008.  We have continued to be cautious about extending credit to certain higher risk geographical areas during the current global recession, which we believe has contributed to a slowdown in sales and orders from portions of our international customer base.  The decrease in U.S. sales is attributed to poor economic conditions related to the U.S. recession and weakness in demand for our products.  We believe that many of our customers have reduced or delayed orders for our products in the first half of 2009, and reduced their inventories of our products, over their concerns about the state of the economy and lower order rates from their customers.

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

Gross profit decreased $31.1 million (20.9%) from the first nine months of 2008 to the first nine months of 2009.  Much lower sales volume and increases in product costs were partially offset by improved pricing and mix and the net favorable effects of movement in foreign currency exchange rates.  Our manufacturing costs were adversely affected during the first nine months of 2009 by lower production volumes, including a higher number of idle manufacturing days, which caused lower absorption rates and higher period expenses for fixed and semi-variable manufacturing costs.  Steel costs are also estimated to be $5.0 million higher in 2009 on a year-over-year basis for the comparable nine-month periods.  Gross margin in the first nine months of 2009 was 32.5% of sales compared to 32.0% in the first nine months of 2008.

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

SG&A was $72.8 million in the first nine months of 2009, compared to $78.5 million in the first nine months of 2008, representing a decrease of $5.8 million (7.3%).  As a percentage of sales, SG&A increased from 16.9% in the first nine months of 2008 to 20.2% in the first nine months of 2009 due to the sharp decrease in sales revenue, which has outpaced the reduction in SG&A spending.  Compensation expense decreased by $5.3 million year-over-year, reflecting reductions in staffing levels implemented during 2009 and a $1.9 million decrease in stock compensation expense because no awards have been granted to date in 2009.  Stock compensation expense is expected to increase in the future as additional awards are granted, including 750,000 stock options granted in October 2009 to the President, Chief Operating Officer and CEO Designate.  Additionally, annual merit increases, traditionally implemented in the first quarter of the fiscal year, were deferred for most of our salaried employees in 2009.  Employee benefit expenses increased by $3.8 million, primarily due to higher costs for our U.S. and Canadian defined benefit pension plans.  Expense for these plans is higher in 2009 than it was in 2008 due to increased amortization of actuarial losses and reduced return on plan assets following the significant market-related decrease in the value of the related pension assets.  We expect 2009 pension expense to be approximately $6.0 million higher than it was in 2008.  The provision for bad debts increased by $1.0 million in the first nine months of 2009 compared to the first nine months of 2008, as the global recession has adversely affected our expectations for the collectability of some of our receivables.  Depreciation expense was $1.6 million lower in the first nine months of 2009 than in the comparable 2008 period primarily because our enterprise resource planning software system became fully depreciated during the third quarter of 2008.  International operating expenses decreased $3.2 million from the prior year due to the stronger U.S. Dollar in the first nine months of 2009 compared to the prior year and its effect on the translation of foreign expenses.

27

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

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

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

Operating income decreased by $28.0 million from the first nine months of 2008 to the first nine months of 2009, resulting in an operating margin for 2009 of 11.2% of sales compared to 14.7% for the first nine months of 2008. The decrease was due to lower sales and gross profit, as well as increased plant closure and severance costs, partially offset by reduced SG&A expenses and the gain on the sale of property in Belgium.

Interest expense was $18.5 million in the first nine months of 2009 compared to $20.5 million in the first nine months of 2008.  The decrease was due to lower average interest rates on our variable rate debt.  Although the interest rate on our revolver borrowings was increased as a result of the April 2009 amendment of that credit facility, the amendment did not apply to the variable interest rate we pay on our term loans, which has been lower during the first nine months of 2009 compared to the first nine months of 2008.

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

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

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

The effective tax rate for the first nine months of 2009 was reduced from the federal statutory rate by the impact of lower taxes on our foreign operations and the positive effect from finalization of our APA with Canada and the U.S.  Finalization of the APA resulted in the recognition of interest on refunds from prior years.  Additionally, our effective tax rate in 2009 was reduced by federal and state tax credits. Taxes on our foreign operations are lower than in the U.S. because of lower statutory tax rates and increased deductions for tax purposes in foreign jurisdictions that are not recognized as expenses for book purposes.  Partially offsetting these tax rate reductions were additional tax expenses recognized on interest and dividends repatriated from certain of our foreign locations.  The effective tax rate in the first nine months of 2008 was also reduced from the federal statutory rate by the impact of lower tax rates on our foreign operations.

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

28

Discontinued operations are summarized as follows:

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

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

Segment Results.  The following table reflects segment sales and operating results for 2009 and 2008:

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

Outdoor Products Segment. Sales for the Outdoor Products segment decreased $90.3 million (20.6%) in the first nine months of 2009 compared to the first nine months of 2008.  Lower sales volume reduced sales by $99.9 million, reflecting weak market conditions and lower shipments for all product lines, geographic regions and sales channels due to the global recession.  Improved price and product mix of $18.4 million partially offset the volume decline.  Fluctuations in foreign currency exchange rates further reduced reported segment sales revenue by $8.8 million compared to the first nine months of 2008.  Sales of wood-cutting chainsaw components were down 22.2% and sales of outdoor care products were down 7.0%.  Sales of concrete-cutting products were down 33.8% due to continued weak market conditions in the construction equipment industry.  Sales to OEM customers decreased by 25.1%, while replacement market sales decreased by 19.2%.  International sales declined 23.0% for the first nine month comparable periods, while domestic sales decreased 14.9%.

Segment contribution to operating income decreased $25.2 million (31.0%) in the first nine months of 2009 compared to the first nine months of 2008.  The favorable effects of improved price and mix ($18.4 million), lower SG&A costs ($1.2 million) and the positive effects of fluctuations in foreign currency translation rates ($5.8 million) were offset by the net effects of lower sales volume ($37.0 million) and higher product cost and mix ($13.6 million).  The higher product cost and mix includes $5.6 million in higher steel costs on a year-over-year basis. The reduction in segment SG&A expenses included lower compensation, depreciation and advertising costs, partially offset by higher legal fees and charges for bad debts.

Other.  The other category includes centralized administrative functions, the results of our gear components manufacturing business, a gain on sale of land and building and plant closure and severance costs.  Sales of gear-related products decreased 49.3% from the first nine months of 2008 to the first nine months of 2009.  Lower volume of $12.6 million was partially offset by a $0.5 million favorable effect of price and mix improvements. The contribution to operating income from our gear components business decreased $1.0 million (41.6%) year-over-year due to the lower sales volume, partially offset by reduced expenses from cost-cutting actions taken during 2009.  Central administrative expenses decreased $0.9 million (6.6%) for the comparable periods, largely due to lower compensation and audit expenses, partially offset by higher costs for employee benefit plans.  We recognized a pre-tax gain of $2.7 million on the sale of property in Belgium during the second quarter of 2009.  Plant closure and severance costs were $6.9 million in the first nine months of 2009 compared to $1.5 million in the first nine months of 2008.

29

Financial Condition, Liquidity and Capital Resources

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

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

The revolving credit facility and the term loan facility mature on August 9, 2010 and are therefore classified as current liabilities on the balance sheet as of September 30, 2009.  Before these facilities mature, we plan to obtain replacement financing.  We are currently in negotiations with GECC to amend and extend these senior credit facilities.  If successful, we expect to complete the amendment and extension by the end of 2009.  The proposed terms include an extension of the maturity date, an increase in the interest rate applicable to the term loans and a reduction in the borrowing capacity of the revolving credit facility.  However, given the conditions in global credit markets, we may not be successful in consummating the proposed agreements.

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 to redemption at the option of the Company, in whole or in part, at redemption prices of 102.219% from August 1, 2009 through July 31, 2010; and at 100% 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 the Company and all of its domestic subsidiaries (“guarantor subsidiaries”) other than Blount, Inc.  All guarantor subsidiaries of these 8 7/8% senior subordinated notes are 100% owned, directly or indirectly, by the Company.  While the Company and all of its domestic subsidiaries guarantee these 8 7/8% senior subordinated notes, none of Blount’s existing foreign subsidiaries (“non-guarantor subsidiaries”) guarantee these notes.  See also Note 16.

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., first entered into a credit agreement with GECC 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 a revolving credit facility and a term loan facility.

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

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

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

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

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

We paid fees and expenses of $1.9 million to amend the revolving credit facility in April 2009. The revolving credit facility principal balance outstanding was classified as current on the December 31, 2008 Consolidated Balance Sheet because, before the maturity date was extended by the amendment, the maturity date was less than 12 months from the balance sheet date at that time.  There were no changes to financial covenants, nor did this amendment affect the term loan facility.

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

The term loan facility bears interest at the LIBOR rate plus 1.75%, or at the prime rate, depending on the type of loan, and also matures on August 9, 2010.  The term loan facility requires quarterly payments of $0.3 million, with a final payment of $106.6 million due on the maturity date.  Once repaid, principal under the term loan facility may not be re-borrowed by the Company.

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

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

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

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

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

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

Our interest expense may vary in the future because the revolving credit facility and term loan interest rates are variable. In addition, any replacement financing for the term loan is expected to involve a higher interest rate premium over benchmark interest rates than we currently pay. The interest rate is fixed on the senior subordinated notes.  Our weighted average interest rate on all debt was 6.37% as of September 30, 2009 compared to 6.42% as of December 31, 2008.

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

Cash provided by operating activities is summarized in the following table:

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

Non-cash items consist of expenses for depreciation of property, plant and equipment; amortization; stock compensation and other non-cash charges; asset impairment charges; the tax benefit or expense from share-based compensation; deferred income taxes; and gains or losses on disposal of property, plant and equipment.

During the first nine months of 2009, operating activities provided $28.9 million of cash.  Income from continuing operations, plus non-cash items, totaled $35.6 million in the first nine months of 2009, reflecting reduced income compared with the first nine months of 2008, as well as lower non-cash items. The change in non-cash items is primarily due to the inclusion in 2009 of the $2.7 million gain on sale of our land and building in Belgium.  The net change in working capital components and other assets and liabilities during the period used $6.6 million in cash flow from operating activities.  Decreases in accounts receivable of $5.0 million, inventories of $10.2 million and other assets of $0.8 million all positively affected cash flows from operating activities.  These positive effects were offset by reductions in accounts payable and accrued expenses of $16.7 million and a reduction in other liabilities of $5.8 million.  Discontinued operations used $0.1 million in cash during the first nine months of 2009 as certain accrued obligations and liabilities related to these former operations were paid.  Cash payments during the first nine months of 2009 also included $19.7 million for interest and $9.9 million for income taxes. In September 2009, we made a $10 million cash contribution to our U.S. defined benefit pension plan.  We expect to contribute a total of approximately $14 to $15 million to our funded pension plans during 2009.

During the nine months ended September 30, 2008, operating activities provided $39.7 million of cash.  Income from continuing operations, plus non-cash items, totaled $55.2 million in the first nine months of 2008, reflecting improved operating results and larger non-cash items.  The non-cash items reflect higher depreciation and amortization expenses offset by fluctuations in the deferred income tax provision.  In addition, purchase accounting for the Carlton acquisition resulted in non-cash charges of $2.8 million, which was recognized in the first nine months of 2008.  The positive operating cash flow from these items was partially offset by the net increase in working capital and other assets and liabilities during the period, including an increase in accounts receivable of $10.3 million and an increase in inventories of $2.7 million.  Discontinued operations used $4.2 million in cash during the first nine months of 2008 as certain obligations and liabilities related to the sale of our Forestry Division were paid in 2008.  Cash payments during the first nine months of 2008 also included $21.7 million for interest and $11.8 million for income taxes.

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Cash used in investing activities is summarized as follows:

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

In June 2009, we sold property in Belgium for proceeds of $3.2 million and moved our European headquarters and distribution center to new leased facilities nearby.  Purchases of property, plant and equipment are primarily for productivity improvements, expanded manufacturing capacity and replacement of consumable tooling and equipment. Generally, about one-third of our capital spending represents replacement of consumable tooling, dies and existing equipment, with the remainder devoted to capacity and productivity improvements.  During 2009, we expect to invest $17 million to $19 million in available cash for capital expenditures compared to $26.1 million for the full year in 2008.

Discontinued operations provided net cash from investing activities of $1.7 million in the first nine months of 2008, as we collected a purchase price adjustment from the sale of our Forestry Division.

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

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

Cash used in financing activities in the first nine months of 2009 consisted of $15.3 million in net repayments of principal on our revolving credit and term debt facilities.  We also incurred $1.9 million in costs to amend and extend the maturity date of our revolving credit facility in April of this year.  Cash provided by financing activities in the first nine months of 2008 consisted of net borrowing under our revolving credit facility, primarily to fund the acquisition of Carlton, partially offset by scheduled quarterly principal payments on our term debt facility.  Activity under our stock compensation plans, including the related income tax effects, used $0.2 million of cash during the first nine months of 2009 and provided $1.0 million in cash during the first nine months of 2008.

Critical Accounting Policies

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

Recent Accounting Pronouncements

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

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

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

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

In December 2008, the FASB revised authoritative guidance regarding employers’ disclosures about postretirement benefit plan assets to require expanded disclosures about plan assets of a defined benefit pension or other postretirement plan.  In September 2009, the FASB further revised the authoritative guidance for fair value measurements and disclosures to permit a reporting entity to measure the fair value of an investment on the basis of the net asset value per share of the investment.  This revised authoritative guidance will be effective for us in our 2009 Form 10-K, and will result in expanded disclosures in the notes to our consolidated financial statements.

In April 2009, the FASB revised authoritative guidance regarding interim disclosures about fair value of financial instruments.  This revised authoritative guidance requires expanded disclosures about fair value of financial instruments for interim periods and also requires those disclosures in summarized financial information at interim reporting periods.  We adopted this revised authoritative guidance in the first quarter of 2009. With this adoption, we also adopted new authoritative guidance regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly and recognition and presentation of other-than-temporary impairments.  The impact of adopting this authoritative guidance resulted in expanded disclosures in the notes to our consolidated financial statements.

In May 2009, the FASB issued new authoritative guidance on subsequent events that sets out general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  This authoritative guidance requires disclosure of the date through which subsequent events have been evaluated, the nature of any event and an estimate of its financial effect or disclosure that such estimate cannot be made.  We adopted this authoritative guidance in the quarter ended June 30, 2009 and such adoption resulted in additional disclosure regarding subsequent events.

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

Forward Looking Statements

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

ITEM 4.  CONTROLS AND PROCEDURES

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

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

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

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PART II     OTHER INFORMATION

ITEM 5.  OTHER INFORMATION

On October 1, 2009, Blount filed a report on Form 8-K which, among other things, announced the selection of Joshua L. Collins as President, Chief Operating Officer and CEO Designate and attached the press release that the Company issued in connection with Mr. Collins’ selection and Mr. Collins’ Executive Employment Agreement as exhibits to the report.  At that time, it was contemplated that Mr. Collins would report to Blount on October 15, 2009.

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

ITEM 6.  EXHIBITS

(a) Exhibits:

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

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

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

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

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

Blount International, Inc.

P.O. Box 22127

Portland, Oregon 97269-2127

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SIGNATURES

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

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

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