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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

for the quarterly period ended September 30, 2010.

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)

(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.

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

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BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES

Index

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PART I      FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

Blount International, Inc. and Subsidiaries

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

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

The accompanying notes are an integral part of these Consolidated Financial Statements.

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

Blount International, Inc. and Subsidiaries

Other comprehensive income (loss) was $3.0 million and ($0.8) million for the three and nine months ended September 30, 2010, respectively.  These amounts are net of a deferred tax expense (benefit) of $0.2 million and ($0.8) million for the three and nine months ended September 30, 2010, respectively.  Other comprehensive income, net of a deferred tax expense of $0.9 million and $1.8 million, was $2.4 million and $4.0 million for the three and nine months ended September 30, 2009, 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’ equity (deficit) for the periods presented.

The accompanying financial data as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 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, 2009 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, 2009.

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 consolidated net income, cash flows, or net stockholders’ equity (deficit).

NOTE 2:  ACQUISITION OF SPEECO AND INTANGIBLE ASSETS

On August 10, 2010, we acquired all of the outstanding stock of SP Companies, Inc. (“SpeeCo”) pursuant to a Stock Purchase Agreement (the “Agreement”), dated August 9, 2010.  SpeeCo, located in Golden, Colorado, was founded in 1957 and is a supplier of log splitters, post-hole diggers, tractor three-point linkage parts and equipment, and farm and ranch accessories.  The acquisition of SpeeCo expands our product offerings to our current markets and customers, as well as offering opportunities for synergies in the areas of marketing, sales, and distribution, including marketing SpeeCo’s products to our international customers.  We also expect to benefit from the acquisition of SpeeCo by leveraging its experience in low-cost sourcing of materials and components.

We paid $91.7 million in cash for SpeeCo.   As part of the stock acquisition we assumed liabilities totaling $31.0 million.  Pursuant to the terms of the Agreement, none of SpeeCo’s debt was assumed by Blount.  SpeeCo had $0.8 million in cash on the closing date, resulting in a net cash outflow of $90.9 million for the acquisition.  Additionally, we incurred legal and other third party fees totaling $0.7 million resulting in a total cash outflow of $91.6 million for the acquisition.  These fees were expensed to selling, general, and administrative expenses (“SG&A”) in the Consolidated Statements of Income in the second and third quarters of 2010. The acquisition was financed with a combination of cash on hand and borrowing under the Company’s revolving credit facility.  The operating results of SpeeCo are included in the Company’s Consolidated Financial Statements from the date of acquisition forward.

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The Company accounted for the acquisition in accordance with Accounting Standards Codification (“ASC”) Section 805.  Accordingly, SpeeCo’s assets and liabilities were recorded at their estimated fair values on the date of acquisition.  The Company estimated the fair value of assets using various methods and considering, among other factors, projected discounted cash flows, replacement cost less an allowance for depreciation, recent comparable transactions, and historical book values.  The Company estimated the fair value of inventory by considering the stage of completion of the inventory, estimated costs to complete the manufacturing and assembly process, and the normal gross profit margin typically associated with its sale.  The Company estimated the fair value of liabilities assumed considering the historical book values and projected future cash flows.  The fair value of goodwill represents the residual enterprise value which does not qualify for separate recognition, including the value of the assembled workforce. Approximately $7.0 million of the SpeeCo goodwill is amortizable and deductible for U.S. income tax purposes. The Company has conducted a preliminary assessment of liabilities arising from tax matters related to SpeeCo, and has recognized provisional amounts in its initial accounting for the acquisition for the identified tax liabilities. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the tax liabilities initially recognized, as well as any additional tax liabilities that existed as of the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.   A summary of the purchase price allocation for the fair value of the assets acquired and the obligations assumed at the date of the acquisition is presented below.

Summary of SpeeCo Purchase Price Allocation

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

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The following table summarizes the Company’s intangible assets related to SpeeCo and earlier acquisitions:

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

The following unaudited pro forma results present the estimated effect as if the acquisition of SpeeCo had occurred on the first day of each period presented.   The unaudited pro forma results include the historical results of SpeeCo, pro forma purchase accounting effects, 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 intangible asset adjustments to fair value, the unaudited pro forma results for all periods presented include charges of $0.5 million to expense the adjustment of inventory to estimated fair value and $0.4 million to amortize the estimated fair value of SpeeCo’s backlog on the date of acquisition.

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NOTE 3:  DISCONTINUED OPERATIONS

On September 30, 2010, we sold our indirect wholly-owned subsidiary Gear Products, Inc. (“Gear Products”) to Tulsa Winch, Inc., an operating unit of Dover Industrial Products, Inc., for initial cash proceeds of $25.2 million.  Cash proceeds from the sale are expected to be $24.8 million after finalization of the purchase price.  Gear Products is a manufacturer of mechanical power transmission components for original equipment manufacturers (“OEMs”), serving the utility, construction, forestry, marine, and mining markets.  Under terms of the stock purchase agreement, the parties agreed to treat the stock sale as if it were an asset sale for income tax purposes, which resulted in an increase in income tax expense recognized on the sale.  Gear Products results, which were previously reported within the Other category in our segment disclosures, are now reported as discontinued operations for all periods presented, and are summarized below:

NOTE 4:  RESTRUCTURING ACTIVITIES

Gain on Sale of Land and Building.  On June 25, 2009, we sold the land and building representing the location of our previous European headquarters and distribution center.  These operations were moved into nearby leased facilities.  We recognized a pre-tax gain of $2.7 million on the sale in the second quarter of 2009.

Plant Closure Costs.  In the second quarter of 2009, we closed our manufacturing facility in Milan, Tennessee.  Products previously manufactured in that facility are now produced in our other manufacturing facilities.  During the nine months ended September 30, 2009, we 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 are recognized in cost of goods sold in 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 other assets on the Consolidated Balance Sheets.

Severance Costs.  We took actions during 2009 to reduce the number of employees at certain of our locations in addition to the Milan facility mentioned above.  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.

NOTE 5:  INVENTORIES, NET

Inventories consisted of the following:

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NOTE 6:  PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:

NOTE 7:  LONG-TERM DEBT

Long-term debt consisted of the following:

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

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

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

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

·                  Maximum borrowings under the revolving credit facility were increased to $75.0 million and the maturity date was extended to August 2015.

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

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

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

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

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

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

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

The term loan A bears interest at the LIBOR Rate plus 3.50%, or the Index Rate plus 2.50%, and matures on August 9, 2015.  The term loan A facility requires quarterly principal payments of $1.9 million commencing on January 1, 2011, with a final payment of $39.4 million due on the maturity date.  Once repaid, principal under the term loan A facility may not be re-borrowed.

The term loan B bears interest at the LIBOR Rate plus 4.00%, or the Index Rate plus 3.00%, and matures on August 9, 2016.  The term loan B facility requires quarterly principal payments of $0.7 million commencing on January 1, 2011, with a final payment of $259.2 million due on the maturity date.  Once repaid, principal under the term loan B facility may not be re-borrowed.

The amended and restated senior credit facilities contain financial covenants relating to:

·                  Maximum capital expenditures of $42.5 million per calendar year.

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

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

In addition, there are covenants or restrictions relating to, among other categories, acquisitions, investments, loans and advances, indebtedness, dividends on our stock, and the sale of stock or assets.  We were in compliance with all debt covenants as of September 30, 2010.  Non-compliance with these covenants, if it were to become an event of default under the terms of the credit agreement, could result in severe limitations to our overall liquidity, and the term loan lenders could require immediate repayment of outstanding amounts, potentially requiring sale of our assets.  Our debt is not subject to any triggers that would require early payment due to any adverse change in our credit rating.

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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 its non-domestic subsidiaries as additional collateral.

NOTE 8:  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.

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

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

The Company receives a Medicare Part D subsidy for a portion of the cost of providing prescription drug benefits under its retiree medical benefit plan.  In March of 2010, new legislation was signed into law in the U.S. that makes this subsidy fully subject to federal income tax beginning in 2013.  Previously, this subsidy was essentially exempt from federal income tax.  Accordingly, the Company recognized a charge of $1.7 million to income tax expense in the three months ended March 31, 2010, reflecting the write-off of the deferred tax asset related to this subsidy.

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NOTE 9:  FINANCIAL GUARANTEES AND COMMITMENTS

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

NOTE 10:  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 and sold prior to the sale of these businesses.  In addition, the Company is a party to a number of other lawsuits 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 other instances, the Company is a defendant against whom damages are being sought.  While there can be no assurance as to the ultimate outcome of these lawsuits, management does not believe these lawsuits will have a material adverse effect on the Company’s consolidated financial position, operating results, or cash flows.

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.

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

NOTE 11:  EARNINGS PER SHARE DATA

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

The amount of unvested restricted stock and restricted stock units (“RSUs”) considered participating securities at September 30, 2010 and September 30, 2009 was 132 thousand and 176 thousand, respectively.  The allocation of undistributed earnings (net income) to the participating securities under the two class method had no effect on the calculation of earnings per share.

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NOTE 12:  STOCK-BASED COMPENSATION

The Company did not grant any stock-based compensation awards during the nine months ended September 30, 2009 but did grant the following awards during the nine months ended September 30, 2010:

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

The following assumptions and information was used to estimate the fair value of SARs in the nine months ended September 30, 2010:

As of September 30, 2010, the total unrecognized stock-based compensation expense related to previously granted awards was $6.4 million. The weighted average period over which this expense is expected to be recognized is 27 months.  The Company’s policy upon the exercise of options, restricted stock awards, RSUs, or SARs has been to issue new shares into the public market from the stockholder-approved 2006 Equity Incentive Plan.

NOTE 13:  SUPPLEMENTAL CASH FLOW INFORMATION