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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2014.
OR
¨
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
4909 SE International Way, Portland, Oregon
 
97222-4679
(Address of principal executive offices)
 
(Zip Code)
(503) 653-8881
(Registrant’s 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  ¨    No  x
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  ¨ No  x
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
(Do not check if a smaller reporting company)
  
Smaller reporting company
  
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 31, 2014 there were 49,473,018 shares outstanding of $0.01 par value common stock.




BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
Index
 
 
 
 
 
 
Page
Part I
 
 
 
 
 
 
Three and six months ended June 30, 2014 and 2013
 
 
Three and six months ended June 30, 2014 and 2013
 
 
June 30, 2014 and December 31, 2013
 
 
                        Six months ended June 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 



2



PART I     FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Blount International, Inc. and Subsidiaries
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands, except per share data)
2014

2013
 
2014

2013
Sales
$
235,423

 
$
220,407

 
$
467,382

 
$
453,022

Cost of goods sold
166,632

 
159,745

 
331,698

 
329,255

Gross profit
68,791

 
60,662

 
135,684

 
123,767

Selling, general, and administrative expenses
45,977

 
41,389

 
90,545

 
85,351

Facility closure and restructuring charges
463

 

 
2,000

 

Operating income
22,351

 
19,273

 
43,139

 
38,416

Interest income
17

 
29

 
54

 
59

Interest expense
(4,479
)
 
(4,605
)
 
(9,004
)
 
(8,952
)
Other income (expense), net
242

 
(969
)
 
244

 
(144
)
Income before income taxes
18,131

 
13,728

 
34,433

 
29,379

Provision for income taxes
5,841

 
4,398

 
11,557

 
10,710

Net income
$
12,290

 
$
9,330

 
$
22,876

 
$
18,669


 
 
 
 
 
 
 
Basic net income per share
$
0.25

 
$
0.19

 
$
0.46

 
$
0.38

Diluted net income per share
$
0.25

 
$
0.19

 
$
0.46

 
$
0.37


 
 
 
 
 
 
 
Weighted average shares used in per share calculations:
 
 
 
 
 
Basic
49,635

 
49,430

 
49,633

 
49,402

Diluted
50,143

 
50,057

 
50,198

 
50,113



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



3



UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Blount International, Inc. and Subsidiaries

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
12,290

 
$
9,330

 
$
22,876

 
$
18,669

Unrealized gains (losses) on derivative financial instruments:
 
 
 
 
 
Unrealized holding gains (losses)
693

 
52

 
91

 
(381
)
Losses reclassified to net income
306

 
153

 
916

 
196

Unrealized gains (losses) on derivative financial instruments, net
999

 
205

 
1,007

 
(185
)
Pension and other post-employment benefit plans:
 
 
 
 
 
 
 
Net actuarial gains

 

 
142

 

Amortization of net actuarial losses
1,483

 
1,937

 
3,170

 
4,284

Amortization of prior service cost
(358
)
 

 
(718
)
 

Pension and other post-employment benefit plans
1,125

 
1,937

 
2,594

 
4,284

 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(581
)
 
1,118

 
(627
)
 
(1,773
)
 
 
 
 
 
 
 
 
Other comprehensive income before tax
1,543

 
3,260

 
2,974

 
2,326

Income tax provision on other comprehensive income
(739
)
 
(728
)
 
(1,233
)
 
(811
)
Other comprehensive income, net of tax
804

 
2,532

 
1,741

 
1,515

Comprehensive income, net of tax
$
13,094

 
$
11,862

 
$
24,617

 
$
20,184



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

4



UNAUDITED CONSOLIDATED BALANCE SHEETS
Blount International, Inc. and Subsidiaries

 
June 30,
 
December 31,
(Amounts in thousands, except share and per share data)
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24,343

 
$
42,797

Accounts receivable, net
137,380

 
110,807

Inventories
162,062

 
156,955

Deferred income taxes
18,307

 
17,925

Assets held for sale
7,680

 
7,680

Other current assets
18,671

 
20,189

Total current assets
368,443

 
356,353

Property, plant, and equipment, net
163,256

 
164,194

Deferred income taxes
350

 
456

Intangible assets, net
125,659

 
127,141

Goodwill
143,143

 
142,682

Other assets
24,249

 
25,525

Total Assets
$
825,100

 
$
816,351

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
15,077

 
$
15,016

Accounts payable
58,679

 
43,009

Accrued expenses
67,184

 
70,431

Deferred income taxes
25

 
45

Total current liabilities
140,965

 
128,501

Long-term debt, excluding current maturities
394,417

 
422,972

Deferred income taxes
51,105

 
48,104

Employee benefit obligations
45,123

 
49,630

Other liabilities
12,407

 
12,744

Total liabilities
644,017

 
661,951

Commitments and contingent liabilities

 

Stockholders’ equity:
 
 
 
Common stock: par value $0.01 per share, 100,000,000 shares authorized, 49,473,018 and 49,378,506 outstanding, respectively
495

 
494

Capital in excess of par value of stock
614,791

 
612,726

Accumulated deficit
(392,369
)
 
(415,245
)
Accumulated other comprehensive loss
(41,834
)
 
(43,575
)
Total stockholders’ equity
181,083

 
154,400

Total Liabilities and Stockholders’ Equity
$
825,100

 
$
816,351



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

5



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Blount International, Inc. and Subsidiaries
 
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
22,876

 
$
18,669

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation
15,126

 
15,540

Amortization
7,369

 
7,928

Stock-based compensation expense
2,417

 
2,744

Excess tax benefit from stock-based compensation
(35
)
 
(389
)
Asset impairment charges
1,090

 

Deferred income taxes
(237
)
 
445

Other non-cash items
377

 
966

Changes in assets and liabilities, net of acquisitions:
 
 
 
(Increase) decrease in accounts receivable, net
(25,423
)
 
(10,656
)
(Increase) decrease in inventories
(5,264
)
 
(1,331
)
(Increase) decrease in other assets
1,490

 
(857
)
Increase (decrease) in accounts payable
15,179

 
(7,282
)
Increase (decrease) in accrued expenses
(4,016
)
 
(7,639
)
Increase (decrease) in other liabilities
(2,212
)
 
(410
)
Net cash provided by operating activities
28,737

 
17,728

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property, plant, and equipment
(14,846
)
 
(14,208
)
Proceeds from sale of assets
114

 
142

Acquisition, net of cash acquired
(2,741
)
 

Collection of escrow proceeds from sale of discontinued operations
100

 
3,394

Net cash used in investing activities
(17,373
)
 
(10,672
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net repayments under revolving credit facility
(21,400
)
 
(15,500
)
Repayment of term loan principal and capital lease obligations
(7,520
)
 
(13,851
)
Debt issuance costs

 
(1,576
)
Excess tax benefit from stock-based compensation
35

 
389

Proceeds from stock-based compensation activity
52

 
553

Taxes paid under stock-based compensation activity
(336
)
 
(462
)
Net cash used in financing activities
(29,169
)
 
(30,447
)
 
 
 
 
Effect of exchange rate changes
(649
)
 
(4
)
 
 
 
 
Net decrease in cash and cash equivalents
(18,454
)
 
(23,395
)
Cash and cash equivalents at beginning of period
42,797

 
50,267

Cash and cash equivalents at end of period
$
24,343

 
$
26,872



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

6



BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO 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.” and "U.S. GAAP"). 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, comprehensive income, and cash flows for the periods presented.

The accompanying financial data as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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 U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations. The December 31, 2013 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 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, 2013.

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP 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 routinely and frequently evaluates and updates these estimates and it is reasonably possible that these estimates will change in the near term.

Allowance for Doubtful Accounts. The Company estimates the amount of accounts receivable that may not be collectible and records an allowance for doubtful accounts which is presented net with accounts receivable on the Consolidated Balance Sheets. As of June 30, 2014 and December 31, 2013, the allowance for doubtful accounts was $3.2 million and $3.1 million, respectively. It is reasonably possible that actual collection experience may differ significantly from management's estimate.

Accumulated Depreciation. The Company reports property, plant, and equipment ("PP&E") net of accumulated depreciation on the Consolidated Balance Sheets. Accumulated depreciation was $279.8 million and $269.2 million as of June 30, 2014 and December 31, 2013, respectively.

Income taxes. The income tax provision in the six months ended June 30, 2013 includes a non-cash charge of $0.9 million from the effect of a change in the estimated average state tax rate applied to U.S. deferred tax assets and liabilities.

Recently Adopted Accounting Pronouncements. Recent accounting pronouncements issued by the Financial Accounting Standards Board and the SEC did not have a material impact on the Company's consolidated financial statements.

Reclassifications. Certain immaterial amounts in the prior period financial statements and notes may have been reclassified to conform to the current period presentation.

NOTE 2: ACQUISITIONS

2014 Acquisition of Pentruder Inc.

On January 29, 2014, we acquired Pentruder Inc. ("Pentruder") and became the exclusive distributor of Pentruder high-performance concrete cutting systems in the Americas. Pentruder operates a distribution center in Chandler, Arizona, and is reported within the Corporate and Other category as part of the Company's Concrete Cutting and Finishing ("CCF") equipment business. Purchase accounting for Pentruder is preliminary as of June 30, 2014, and will be adjusted as additional information becomes available. Preliminary intangible assets totaling $5.5 million were recorded in conjunction with the Pentruder acquisition, consisting of a distribution agreement, a non-compete agreement, and goodwill.



7



NOTE 3: FACILITY CLOSURE AND RESTRUCTURING COSTS

In August 2013, the Company announced its two manufacturing facilities in Portland, Oregon would be consolidated into one location, and its Milwaukie, Oregon location would be closed, to further improve efficiencies. Direct costs associated with this action were $0.1 million and $0.9 million in the three and six months ended June 30, 2014, respectively. These costs consisted of moving costs for equipment relocated to other Blount manufacturing facilities and impairment charges on certain scrapped equipment. The cumulative costs incurred to date, including amounts recognized in 2013, were $9.1 million, including $2.2 million reported in cost of sales during 2013. Of these cumulative charges, $4.0 million were cash transition costs, including severance and equipment moving expenses, and $5.1 million were non-cash charges for impairment and accelerated depreciation on land, building and equipment. As of June 30, 2014, substantially all accrued severance expense had been paid and the Company does not expect to incur significant further costs on this facility consolidation.

In January 2014, the Company announced plans to consolidate its North American lawn and garden blade manufacturing into its Kansas City, Missouri plant and close a small facility acquired with Finalame SA, which included PBL SA and related companies (collectively “PBL”) in 2011, located in Queretaro, Mexico. This consolidation was undertaken in order to reduce operating costs and improve efficiencies. During the three and six months ended June 30, 2014, we recognized direct costs of $0.4 million and $1.1 million, respectively, associated with this plant closure and consolidation. These costs represented severance, asset impairment charges, lease exit costs, and moving expenses for equipment and inventories. As of June 30, 2014, substantially all accrued severance expense had been paid and the Company expects to incur between $0.1 million and $0.2 million in additional costs on this facility consolidation.

NOTE 4: INVENTORIES
Inventories consisted of the following: 
Inventories
June 30,
 
December 31,
(Amounts in thousands)
2014
 
2013
Raw materials and supplies
$
21,406

 
$
21,476

Work in process
19,236

 
19,400

Finished goods
121,420

 
116,079

   Total inventories
$
162,062

 
$
156,955


NOTE 5: INTANGIBLE ASSETS, NET

The following table summarizes intangible assets related to acquisitions:
 
 
 
June 30, 2014
 
December 31, 2013
 
Useful
 
Gross
 
 
 
Gross
 
 
Intangible Assets
Life
 
Carrying
 
Accumulated
 
Carrying
 
Accumulated
(Amounts in thousands)
In Years
 
Amount
 
Amortization
 
Amount
 
Amortization
Goodwill
Indefinite
 
$
143,143

 
$

 
$
142,682

 
$

Trademarks and trade names
Indefinite
 
58,771

 

 
58,814

 

Total with indefinite lives
 
 
201,914

 

 
201,496

 

Distribution and non-compete agreements
2 - 7
 
6,092

 
1,416

 
1,112

 
1,064

Patents
11 - 13
 
5,320

 
2,205

 
5,320

 
1,988

Manufacturing technology
n/a
 
2,623

 
2,623

 
2,639

 
2,639

Trademarks and trade names
5
 
546

 
73

 
549

 
18

Customer relationships
10 - 19
 
107,571

 
48,947

 
107,633

 
43,217

Total with finite lives
 
 
122,152

 
55,264

 
117,253

 
48,926

Total intangible assets
 
 
$
324,066

 
$
55,264

 
$
318,749

 
$
48,926



8



The following table shows the change in goodwill for the six months ended June 30, 2014:
Change in Goodwill
Forestry, Lawn, and Garden ("FLAG")
 
Farm, Ranch, and Agriculture ("FRAG")
 
Corporate and Other
 
Total
(Amounts in thousands)
 
 
 
 
 
 
 
December 31, 2013
$
64,607

 
$
78,061

 
$
14

 
$
142,682

Acquisition of Pentruder

 

 
492

 
492

Effect of changes in foreign exchange rates
(31
)
 

 

 
(31
)
June 30, 2014
$
64,576

 
$
78,061

 
$
506

 
$
143,143


In the fourth quarter of 2013, the Company recognized impairment charges totaling $24.9 million on goodwill and indefinite-lived intangible assets other than goodwill. Specifically, the Company's impairment analysis resulted in impairment charges of $19.6 million on goodwill at our SpeeCo reporting unit and $3.2 million on our PBL reporting unit. To date, these are the only impairments of goodwill the Company has recognized. In addition, impairment charges totaling $2.1 million were recognized on the Carlton and SpeeCo trade name intangible assets. Determining the fair value of goodwill and other intangible assets is a complex process involving the discounting of projected future expected cash flows to present value. The process involves numerous significant assumptions about future events and is highly judgmental in nature. For certain of the Company's goodwill reporting units, the estimated fair value exceeds the recorded value of net assets by limited amounts. Certain of the Company's indefinite-lived intangible assets also have a limited amount of excess of estimated fair value over the recorded value. Significant adverse developments or changes in assumptions related to these goodwill reporting units or other intangible assets could result in additional impairment charges being recognized in the future. See additional information regarding the annual impairment analysis of goodwill and other indefinite-lived intangible assets in the Company's annual report on Form 10-K for the year ended December 31, 2013.

Amortization expense for these intangible assets, included in cost of goods sold in the Consolidated Statements of Income, was as follows:
Amortization Expense for Intangible Assets
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Amortization expense for acquired intangible assets
$
3,213

 
$
3,549

 
$
6,395

 
$
7,106


Amortization expense for these intangible assets is expected to total $12.8 million in 2014, $11.4 million in 2015, $10.0 million in 2016, $8.4 million in 2017, and $7.0 million in 2018.

NOTE 6: DEBT

Debt consisted of the following:
Debt
June 30,
 
December 31,
(Amounts in thousands)
2014
 
2013
Revolving credit facility
$
153,600

 
$
175,000

Term loans
252,780

 
260,107

Capital lease obligations
3,114

 
2,881

Total debt
409,494

 
437,988

Less current maturities
(15,077
)
 
(15,016
)
Long-term debt, net of current maturities
$
394,417

 
$
422,972

Weighted average interest rate at end of period
2.67
%
 
2.68
%

The Company has entered into a series of interest rate swap contracts as required by the senior credit facility agreement. The interest rate swaps fix the interest rate the Company will pay at between 3.30% and 4.20% on $130.0 million of the term loan principal. The interest rate swaps were effective in June 2013 and mature on varying dates between December 2014 and August 2016. The weighted average interest rate at June 30, 2014, including the effect of the interest rate swaps, is 3.09%. See Note 15 for further discussion of the interest rate swaps.

9




Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintains a senior credit facility with General Electric Capital Corporation as Agent for the Lenders and also as a lender, which has been amended and restated on several occasions. As of June 30, 2014 and December 31, 2013, the senior credit facilities consisted of a revolving credit facility and a term loan.

May 2013 Amendment of Senior Credit Facilities. On May 3, 2013, the senior credit facilities were amended to modify the minimum fixed charge coverage ratio covenant and the maximum leverage ratio covenant, as defined below. The amendment also included a mechanism that allows for adjustment to interest rates if the leverage ratio exceeds certain limits and made certain other modifications to the credit agreement. The Company incurred $1.6 million in fees and transaction costs in connection with this amendment, of which $1.5 million was deferred to be amortized over the remaining term of the credit facilities.

March 2014 Amendment of Senior Credit Facilities. On March 28, 2014, the senior credit facilities were amended to extend the due date to provide audited financial statements for the year ended December 31, 2013 by an additional 60 days to May 30, 2014. The Company incurred no fees or transaction costs in connection with this amendment. The Company met the extended due date by providing the audited financial statements for the year ended December 31, 2013 on April 24, 2014.

Terms of Senior Credit Facilities as of June 30, 2014. The revolving credit facility provides for total available borrowings of up to $400.0 million, reduced by outstanding letters of credit, and further limited by a specific leverage ratio. As of June 30, 2014, the Company had the ability to borrow an additional $129.0 million under the terms of the revolving credit agreement. The revolving credit facility bears interest at a floating rate, which, at the option of the Company, may be either LIBOR or an Index Rate, as defined in the credit agreement, plus an additional amount as outlined in the table below.
Maximum Leverage Ratio
Less than 4.00
 
Between 4.00 and 4.50
 
4.50 or above
LIBOR + 2.50%
 
LIBOR + 3.00%
 
LIBOR + 3.50%
Index Rate + 1.50%
 
Index Rate + 2.00%
 
Index Rate + 2.50%

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 of August 31, 2016. The principal amounts outstanding under the revolving credit facility are classified as long-term debt because the Company has the intent and ability to refinance these loans through the maturity date.

The term loan facility bears interest under the same terms as the revolving credit facility. The term loan facility also matures on August 31, 2016 and requires quarterly principal payments of $3.7 million, with a final payment of $219.8 million due on the maturity date. Once repaid, principal under the term loan facility may not be re-borrowed.

The amended and restated senior credit facilities contain financial covenants, including, as of June 30, 2014:
Minimum fixed charge coverage ratio, defined as earnings before interest, taxes, depreciation, amortization, and certain adjustments defined in the credit agreement (“Adjusted 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. The minimum fixed charge coverage ratio is set at 1.15.
Maximum leverage ratio, defined as total debt divided by Adjusted EBITDA, calculated on a trailing twelve-month basis. The maximum leverage ratio is set at 4.25 through June 30, 2014, 4.00 through December 31, 2014, 3.75 through June 30, 2015, 3.50 through September 30, 2015, 3.25 through December 31, 2015, and 3.00 thereafter.

In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. In the opinion of management, the Company was in compliance with all financial covenants as of June 30, 2014. Non-compliance with these covenants is an event of default under the terms of the credit agreement, and 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 a sufficient amount of our assets to repay the outstanding loans.

The amended and restated senior credit facilities may be prepaid at any time without penalty. 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 defined in the credit agreement. No payments were required in

10



the six months ended June 30, 2014 under the excess cash flow requirement in the credit agreement. However, during the six months ended June 30, 2013, an additional principal payment was made on the term loan in the amount of $6.3 million under the generation of excess cash flow requirement. Our senior credit facility agreement does not contain any provisions that would require early payment due to any adverse change in our credit rating.

The senior credit facility debt is incurred by the Company's wholly-owned subsidiary, Blount, Inc. The Company 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 direct non-domestic subsidiaries as additional collateral.

Capital Lease Obligations. The Company has entered into various equipment and building leases which are classified as capital leases under U.S. GAAP. The initial lease terms varied, and all current capital leases have terms ending in 2019. Minimum annual lease payments total $0.6 million. The weighted average implied interest rate is 5.18%, resulting in a total of $0.6 million of imputed interest over the terms of the lease obligations. The equipment lease terms include early buyouts after five and six years, at the Company's option, at the fair value of the equipment at that time. The leased assets and the lease obligations were recorded at their fair values on the Consolidated Balance Sheets at the commencement of each lease term.

Other Debt. In conjunction with the acquisition of PBL we assumed $13.5 million of PBL’s debt, consisting of current and long-term bank obligations, revolving credit facilities, and the capital lease obligation mentioned above. As of December 31, 2013, we had repaid all of PBL’s bank debt.

NOTE 7: PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS

The Company sponsors defined benefit pension plans covering employees in Canada and certain countries in Europe, and many of its current and former employees in the U.S. The U.S. pension plan was frozen effective January 1, 2007. The Company also sponsors various other post-employment benefit plans covering certain current and former employees.

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

Three Months Ended June 30,
Post-Employment Benefit Plan Expense
2014
 
2013
 
2014
 
2013
(Amounts in thousands)
Pension Benefits
 
Other Benefits
Service cost
$
1,077

 
$
1,300

 
$
39

 
$
67

Interest cost
2,810

 
2,681

 
275

 
361

Expected return on plan assets
(3,785
)
 
(3,878
)
 

 

Amortization of net actuarial losses
1,350

 
1,800

 
133

 
137

Amortization of prior service cost
1

 

 
(359
)
 

Total net periodic benefit cost
$
1,453

 
$
1,903

 
$
88

 
$
565



Six Months Ended June 30,
Post-Employment Benefit Plan Expense
2014
 
2013
 
2014
 
2013
(Amounts in thousands)
Pension Benefits
 
Other Benefits
Service cost
$
2,152

 
$
2,618

 
$
87

 
$
160

Interest cost
5,622

 
5,380

 
558

 
786

Expected return on plan assets
(7,566
)
 
(7,768
)
 

 

Amortization of net actuarial losses
2,850

 
3,792

 
320

 
492

Amortization of prior service cost
1

 

 
(719
)
 

Total net periodic benefit cost
$
3,059

 
$
4,022

 
$
246

 
$
1,438


In August 2013, the Company amended the larger of its two U.S. post-retirement medical benefit plans and changed the method of providing benefits under that plan to a Health Reimbursement Account for retirees over age 65. The amendment was effective January 1, 2014. This plan amendment resulted in an $11.6 million reduction in the unfunded accumulated

11



benefit obligation included in employee benefit obligations and accrued expenses, a reduction of $7.4 million in accumulated other comprehensive loss, and a $4.2 million reduction in deferred income tax liabilities in the third quarter of 2013. This plan amendment is expected to reduce the Company's expense for this plan by approximately $2.1 million in 2014 compared to the expense recognized in 2013.


NOTE 8: FINANCIAL GUARANTEES AND COMMITMENTS

Significant financial guarantees and other commercial commitments are as follows: 
Financial Guarantees and Commitments
June 30,
 
December 31,
(Amounts in thousands)
2014
 
2013
Letters of credit outstanding
$
3,248

 
$
3,248

Other financial guarantees
2,941

 
3,363

Total financial guarantees and commitments
$
6,189

 
$
6,611


See also Note 6 regarding guarantees of debt.
 
NOTE 9: CONTINGENT LIABILITIES

The Company reserves for the estimated costs of product liability, environmental remediation, and other legal matters as management becomes aware of such items. A portion of these claims or lawsuits may be covered by insurance policies that generally contain both deductible and coverage limits. Management monitors the progress of each legal or environmental matter to ensure that the appropriate reserve for its estimated obligation has been recognized and disclosed in the financial statements. Management also monitors trends in case types and environmental regulations to determine if there are any specific issues that relate to the Company that may result in additional future exposure on an aggregate basis. 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 probable loss contingency in light of all of the then known circumstances. As of June 30, 2014 and December 31, 2013, management believes the Company has appropriately recorded and disclosed all material costs for its obligations in regard to known matters. Management believes that the recoverability of the costs of certain claims from insurance companies, subject to self-retention amounts, will continue in the future and periodically assesses these insurance companies to monitor their ability to pay such claims.

From time to time the Company is named a defendant in product liability claims and 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 the purchasers of the Company’s discontinued operations for lawsuits involving products manufactured prior to the sale of certain 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, and intellectual property rights. In some instances the Company has been the plaintiff, and has sought recovery of damages. In others, the Company is a defendant against whom damages are sought. While there can be no assurance as to their ultimate outcome, management does not believe these claims and lawsuits will have a material adverse effect on the Company’s consolidated financial position, operating results or cash flows in the future. As of June 30, 2014 and December 31, 2013, the Company has recorded liabilities totaling $5.9 million and $6.3 million, respectively, on the Consolidated Balance Sheets for estimated product liability and environmental remediation costs.



12



NOTE 10: ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes accumulated other comprehensive loss by component, net of related income taxes:
Accumulated other comprehensive (loss) gain
June 30,
 
December 31,
(Amounts in thousands)
2014
 
2013
Pension and post-retirement benefits
$
(51,269
)
 
$
(53,009
)
Unrealized losses on derivative instruments
(1,545
)
 
(2,173
)
Foreign currency translation
10,980

 
11,607

Total accumulated other comprehensive loss
$
(41,834
)
 
$
(43,575
)

The following tables summarize the changes in accumulated other comprehensive loss by component, net of income taxes, for the periods indicated:
 
Six Months Ended June 30, 2014
Changes in Accumulated Other Comprehensive Loss
Pension and other post-employment benefits
 
Unrealized losses on derivative financial instruments
 
Foreign currency translation adjustment
 
Total
(Amounts in thousands)
Accumulated other comprehensive gain (loss) at beginning of period
$
(53,009
)
 
$
(2,173
)
 
$
11,607

 
$
(43,575
)
Other comprehensive gain (loss) before reclassifications
95

 
59

 
(627
)
 
(473
)
Amounts reclassified from accumulated other comprehensive loss to Consolidated Statement of Income
1,645

 
569

 

 
2,214

Other comprehensive income (loss), net of tax
1,740

 
628

 
(627
)
 
1,741

Accumulated other comprehensive gain (loss) at end of period
$
(51,269
)
 
$
(1,545
)
 
$
10,980

 
$
(41,834
)

 
Six Months Ended June 30, 2013
Changes in Accumulated Other Comprehensive Loss
Pension and other post-employment benefits
 
Unrealized losses on derivative financial instruments
 
Foreign currency translation adjustment
 
Total
(Amounts in thousands)
Accumulated other comprehensive gain (loss) at beginning of period
$
(81,983
)
 
$
(2,514
)
 
$
9,078

 
$
(75,419
)
Other comprehensive gain (loss) before reclassifications
550

 
(213
)
 
(1,773
)
 
(1,436
)
Amounts reclassified from accumulated other comprehensive loss to Consolidated Statement of Income
2,829

 
122

 

 
2,951

Other comprehensive income (loss), net of tax
3,379

 
(91
)
 
(1,773
)
 
1,515

Accumulated other comprehensive gain (loss) at end of period
$
(78,604
)
 
$
(2,605
)
 
$
7,305

 
$
(73,904
)


13



The following table summarizes the reclassifications from accumulated other comprehensive loss on the Consolidated Balance Sheets to the Consolidated Statements of Income:
Reclassifications From Accumulated Other Comprehensive Loss to Income
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Affected line item in Consolidated
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Statement of Income
Unrealized losses on derivative instruments:
 
 
 
 
 
 
 
 
Foreign currency hedge losses
$
(306
)
 
$
(153
)
 
$
(916
)
 
$
(196
)
Cost of sales
Income tax benefit
120

 
58

 
347

 
74

Provision for income taxes
Unrealized losses on derivative instruments, net
$
(186
)
 
$
(95
)
 
$
(569
)
 
$
(122
)
 
 
 
 
 
 
 
 
 
 
Pension and other post-employment benefits amortization:
 
 
 
 
 
 
 
 
Amortization of net actuarial losses
$
(1,483
)
 
$
(1,937
)
 
$
(3,170
)
 
$
(4,284
)
Cost of goods sold and Selling, general, and administrative ("SG&A")
Amortization of prior period service cost
358

 

 
718

 

Cost of sales and SG&A
Income tax benefit
325

 
651

 
807

 
1,455

Provision for income taxes
Pension and other post-employment benefits amortization, net
$
(800
)
 
$
(1,286
)
 
$
(1,645
)
 
$
(2,829
)
 
Total reclassifications for the period, net
$
(986
)
 
$
(1,381
)
 
$
(2,214
)
 
$
(2,951
)
 

See Note 7 for discussion of pension and other post-employment benefit plans and Note 15 for discussion of derivative instruments.

NOTE 11: EARNINGS PER SHARE DATA

Shares used in the denominators of the basic and diluted earnings per share computations were as follows: 
Earnings Per Share
Three Months Ended June 30,
 
Six Months Ended June 30,
(Shares in thousands)
2014
 
2013
 
2014
 
2013
Actual weighted average common shares outstanding
49,635

 
49,430

 
49,633

 
49,402

Dilutive effect of common stock equivalents
508

 
627

 
565

 
711

Diluted weighted average common shares outstanding
50,143

 
50,057

 
50,198

 
50,113

Options and stock appreciation rights ("SARs") excluded from computation as anti-dilutive
3,132

 
2,556

 
2,906

 
2,288

Unvested restricted stock and restricted stock units ("RSUs") considered to be participating securities
247

 
239

 
247

 
239

Effect of allocation of undistributed earnings to participating securities under the two class method:

 

 

 

Basic earnings per share
$

 
$

 
$

 
$

Diluted earnings per share
$
(0.01
)
 
$

 
$
(0.01
)
 
$


No adjustment was required to reported amounts for inclusion in the numerators of the per share computations.

The Company holds 382,380 shares of its common stock in treasury. These shares have been accounted for as constructively retired in the Consolidated Financial Statements, and are not included in the number of shares outstanding.



14



NOTE 12: STOCK-BASED COMPENSATION

The Company made the following stock-based compensation awards in the periods indicated: 
Stock-Based Compensation
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
SARs granted (number of shares)
749

 
713

RSUs granted (number of shares)
150

 
135

Aggregate fair value at time of grant; SARs
$
4,346

 
$
4,681

Aggregate fair value at time of grant; RSUs
$
1,862

 
$
1,865


The SARs and RSUs granted in 2014 and 2013 vest quarterly over a three-year period and are generally restricted from exercise, sale, or other transfer for three years from the grant date. The SARs granted have a ten-year term before expiration.

The following assumptions were used to estimate the fair value of SARs in the six months ended June 30, 2014 and 2013: 
Assumptions Used
2014
 
2013
Estimated average life
6 years
 
6 years
Risk-free interest rate
1.9%
 
1.1%
Expected volatility
46.8%
 
49.4% - 49.6%
Weighted average volatility
46.8%
 
49.6%
Dividend yield
0.0%
 
0.0%
Estimated forfeiture rate
4.29%
 
2.66%
Weighted average exercise price
$12.44
 
$13.83
Weighted average grant date fair value
$5.80
 
$6.56

As of June 30, 2014, the total unrecognized stock-based compensation expense related to previously granted awards was $9.4 million. The weighted average period over which this expense is expected to be recognized is 26 months. The Company’s policy upon the exercise of options, RSUs, or SARs has been to issue new shares into the public market as authorized under the stockholder-approved 2006 Equity Incentive Plan.

NOTE 13: SEGMENT INFORMATION

We are a global industrial company that designs, manufactures, purchases, and markets equipment, replacement and component parts, and accessories to professionals and consumers in select end-markets and to original equipment manufacturers (“OEMs”) for use on original equipment. Our products are sold in more than 115 countries and approximately 54% of 2013 sales were shipped to customers outside of the U.S.

The Company identifies operating segments primarily based on organizational structure, reporting structure, and the evaluation of the Chief Operating Decision Maker (Chief Executive Officer). Our organizational structure reflects our view of the end-user market segments we serve, and we currently operate in two primary business segments. The Forestry, Lawn, and Garden, or FLAG segment, manufactures and markets cutting chain, guide bars, and drive sprockets for chain saw use, and lawnmower and edger blades for outdoor power equipment. The FLAG segment also purchases branded replacement parts and accessories from other manufacturers and markets them to our FLAG customers through our global sales and distribution network. The FLAG segment represented 69.6% of our consolidated sales for the six months ended June 30, 2014.

The Company's Farm, Ranch, and Agriculture, or FRAG segment, manufactures and markets attachments for tractors in a variety of mowing, cutting, clearing, material handling, landscaping and grounds maintenance applications, as well as log splitters, post-hole diggers, self-propelled lawnmowers, attachments for off-highway construction equipment applications, and other general purpose tractor attachments. In addition, the FRAG segment manufactures a variety of attachment cutting blade component parts. The FRAG segment also purchases replacement parts and accessories from other manufacturers and markets them to FRAG customers through our sales and distribution network. The FRAG segment represented 27.2% of our consolidated sales for the six months ended June 30, 2014.

The Company also operates a Concrete Cutting and Finishing, or CCF, equipment business that represented 3.2% of consolidated sales for the six months ended June 30, 2014, and is reported within the Corporate and Other category. The CCF

15



business manufactures and markets diamond cutting chain and assembles and markets concrete cutting chain saws and accessories for the construction equipment market.

The Corporate and Other category also includes the costs of providing certain centralized administrative functions, including accounting, banking, our continuous improvement program, credit management, executive management, finance, information systems, insurance, legal, our mergers and acquisitions program, treasury, and other functions. Costs of centrally provided shared services are allocated to business units based on various drivers, such as revenues, purchases, headcount, computer software licenses, and other relevant measures of the use of such services. We also include facility closure and restructuring costs recognized within this Corporate and Other category, because we do not consider such events to be ongoing aspects of our business segments’ activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

The following table presents selected financial information by segment: 
Segment Information
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Sales:
 
 
 
 
 
 
 
FLAG
$
160,112

 
$
150,758

 
$
325,327

 
$
315,901

FRAG
67,349

 
62,696

 
127,230

 
122,944

Corporate and Other
7,962

 
6,953

 
14,825

 
14,177

Total sales
$
235,423

 
$
220,407

 
$
467,382

 
$
453,022

Contribution to operating income (loss):
 
 
 
 
 
 
 
FLAG
$
23,834

 
$
20,685

 
$
51,912

 
$
45,253

FRAG
2,607

 
2,011

 
1,708

 
924

Corporate and Other
(4,090
)
 
(3,423
)
 
(10,481
)
 
(7,761
)
Operating income
$
22,351

 
$
19,273

 
$
43,139

 
$
38,416

Depreciation and amortization:
 
 
 
 
 
 
 
FLAG
$
6,505

 
$
6,708

 
$
13,020

 
$
13,692

FRAG
4,029

 
4,305

 
7,861

 
8,603

Corporate and Other
986

 
630

 
1,614

 
1,173

Depreciation and amortization
$
11,520

 
$
11,643

 
$
22,495

 
$
23,468



NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
 Supplemental Cash Flow Information
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
Cash paid for:
 
 
 
Interest
$
6,901

 
$
7,913

Income taxes, net
10,196

 
17,262

Non-cash investing and financing activities:
 
 
 
Acquisition of equipment under capital lease
429

 

Purchases of property, plant, and equipment not yet paid as of period end
946

 
1,115


Cash taxes paid in the six months ended June 30, 2013 includes $3.6 million of foreign taxes paid on dividends declared among certain of the Company's foreign affiliates. The purchase price of the Pentruder acquisition included assumption of a liability of $0.5 million, payable in three annual installments through January 2017. During the six months ended June 30, 2014, we collected the final $0.1 million previously held in escrow from the sale of our Forestry Division in 2007. During the six months ended June 30, 2013 we collected $3.4 million of proceeds held in escrow under this same transaction.



16



NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS

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 fair value of the senior credit facility principal outstanding is determined by reference to prices of recent transactions for similar debt. Derivative financial instruments are carried on the Consolidated Balance Sheets at fair value, as determined by reference to quoted terms for similar instruments. 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.

Under U.S. GAAP, the framework for measuring fair value is based on independent observable inputs of market data and follows the hierarchy below:
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.

The estimated fair values of the senior credit facility loans as of June 30, 2014 and December 31, 2013 are presented below:
Fair Value of Debt
June 30, 2014
 
December 31, 2013

(Amounts in thousands)
Carrying
Amount
 
Fair Value
Level 2
 
Carrying
Amount
 
Fair Value
Level 2
Senior credit facility debt
$
406,380

 
$
398,252

 
$
435,107

 
$
426,405


Derivative Financial Instruments and Foreign Currency Hedging. The Company has manufacturing and/or distribution operations in Brazil, Canada, China, Europe, Japan, Russia, and the U.S. Foreign currency exchange rate movements create a degree of risk by affecting the U.S. Dollar value of certain balance sheet positions denominated in foreign currencies, and by affecting the translated amounts of revenues and expenses. Additionally, the interest rates available in certain jurisdictions in which the Company holds cash may vary, thereby affecting the return on cash equivalent investments. The Company executes regular cash receipts and payments with its foreign subsidiaries and is exposed to changes in exchange rates from these transactions, which may adversely affect its results of operations and financial position.

The Company manages a portion of its foreign currency exchange rate exposures with derivative financial instruments. These instruments are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. The Company’s objective in executing these hedging instruments is to minimize earnings volatility resulting from conversion and re-measurement of foreign currency denominated transactions. The effective portion of the gains or losses on these contracts due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into net earnings when the contracts mature and the Company settles the hedged payment. The classification of effective hedge results is the same in the Consolidated Statements of Income as that of the underlying exposure. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates.

The cumulative unrealized pre-tax gain on these derivative contracts included in accumulated other comprehensive loss on the Consolidated Balance Sheets was $0.1 million as of June 30, 2014. The cumulative unrealized pre-tax loss on these derivative contracts included in accumulated other comprehensive loss on the Consolidated Balance Sheets was $0.6 million as of December 31, 2013. The unrealized pre-tax gain included in accumulated other comprehensive loss is expected to be recognized in the Consolidated Statement of Income during the next twelve months. See Note 10 for amounts recognized in the Consolidated Statements of Income at the maturity of these foreign currency derivative contracts. 

Gains and losses on these foreign currency derivative financial instruments are offset in net earnings by the effects of currency exchange rate changes on the underlying transactions. Through June 30, 2014, the Company has not recognized in earnings any amount from these contracts as a result of hedging ineffectiveness. The aggregate notional amount of these foreign currency contracts outstanding was $36.4 million at June 30, 2014 and $40.0 million at December 31, 2013.

Derivative Financial Instruments and Interest Rates. The senior credit facility agreement includes a requirement to fix or cap interest rates for certain periods on 35% of the outstanding principal on our term loan. We executed an interest rate cap agreement covering an initial notional amount of $103.7 million of term loan principal outstanding that capped the maximum

17



interest rate at 7.50% and matured on June 1, 2013. We also entered into a series of interest rate swap contracts whereby the interest rate we pay is fixed at between 3.30% and 4.20% on $130.0 million of term loan principal for the period of June 2013 through varying maturity dates between December 2014 and August 2016. These interest rate swap and cap agreements are designated as cash flow hedges and are recorded on the Consolidated Balance Sheets at fair value. Through June 30, 2014, the Company has not recognized in earnings any amount from these contracts as a result of hedging ineffectiveness.

Derivatives held by the Company are summarized as follows: 

Derivative Financial Instruments
Carrying Value on Consolidated Balance
 
Assets (Liabilities) Measured at Fair Value
Consolidated Balance Sheets
(Amounts in thousands)
Sheets
 
Level 1
 
Level 2
 
Level 3
Classification
June 30, 2014
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
Foreign currency hedge agreements
$
116

 
$

 
$
116

 
$

Other current assets
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
Interest rate hedge agreements
(1,470
)
 

 
(1,470
)
 

Accrued expenses
Foreign currency hedge agreements
(41
)
 

 
(41
)
 

Accrued expenses
 
 
 
 
 
 
 
 
 
Long-Term Liabilities:
 
 
 
 
 
 
 
 
Interest rate hedge agreements
(1,068
)
 

 
(1,068
)
 

Other liabilities
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
Interest rate hedge agreements
$
(1,509
)
 
$

 
$
(1,509
)
 
$

Accrued expenses
Foreign currency hedge agreements
(571
)
 

 
(571
)
 

Accrued expenses
 
 
 
 
 
 
 
 
 
Long-Term Liabilities:
 
 
 
 
 
 
 
 
Interest rate hedge agreements
(1,400
)
 

 
(1,400
)
 

Other liabilities

The fair value of these Level 2 derivatives was determined using a market approach based on daily market prices of similar instruments issued by financial institutions in an active market. The counterparties to the above mentioned derivative instruments are major financial institutions. In accordance with Accounting Standards Codification Section 820, the Company evaluates nonperformance risk of its counterparties in calculating fair value adjustments at each reporting period. The risk of nonperformance as of June 30, 2014 and December 31, 2013 is considered minimal.

NOTE 16: SHARE REPURCHASE PROGRAM

On August 6, 2014, the Company announced that the Board of Directors had authorized a new share repurchase program of up to $75 million of Blount common stock to be completed on or before December 31, 2016.

18





19



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 and notes included elsewhere in this report.

Consolidated Operating Results for the Quarter
 
Three Months Ended June 30,
 
 
 
(Amounts in millions)
2014
 
2013
 
Change
 
 
Contributing Factor
(Amounts may not sum due to rounding)
 
 
 
 
 
 
 
 
Sales
$
235.4

 
$
220.4

 
$
15.0

 
 
 
 
 
 
 
 
 
15.3

 
Unit sales volume
 
 
 
 
 
 
(0.6
)
 
Average selling price and mix
 
 
 
 
 
 
0.3

 
Foreign currency translation
Gross profit
68.8

 
60.7

 
8.1

 
 
 
    Gross margin
29.2
%
 
27.5
%
 
 
 
 
 
 
 
 
 
 
 
6.5

 
Unit sales volume
 
 
 
 
 
 
(0.6
)
 
Average selling price and mix
 
 
 
 
 
 
(1.4
)
 
Average steel costs
 
 
 
 
 
 
0.4

 
Acquisition accounting
 
 
 
 
 
 
2.6

 
Other product costs and mix
 
 
 
 
 
 
0.7

 
Foreign currency translation
SG&A
46.0

 
41.4

 
4.6

 
 
 
    As a percent of sales
19.5
%
 
18.8
%
 
 
 
 
 
 
 
 
 
 
 
2.3

 
Compensation expense
 
 
 
 
 
 
1.1

 
Professional services
 
 
 
 
 
 
0.7

 
Office expenses
 
 
 
 
 
 
0.1

 
Foreign currency translation
 
 
 
 
 
 
0.4

 
Other, net
Facility closure and restructuring charges
0.5

 

 
0.5

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
22.4

 
19.3

 
3.1

 
 
 
    Operating margin
9.5
%
 
8.7
%
 
 
 
 
 
 
 
 
 
 
 
8.1

 
Increase in gross profit
 
 
 
 
 
 
(4.6
)
 
Increase in SG&A
 
 
 
 
 
 
(0.5
)
 
Facility closure and restructuring charges
Net income
$
12.3

 
$
9.3

 
$
3.0

 
 
 
 
 
 
 
 
 
3.1

 
Increase in operating income
 
 
 
 
 
 
0.1

 
Decrease in net interest expense
 
 
 
 
 
 
1.2

 
Change in other income (expense)
 
 
 
 
 
 
(1.4
)
 
Increase in income tax provision

Sales in the three months ended June 30, 2014 increased by $15.0 million, or 6.8%, from the same period in 2013, primarily due to higher unit sales volume, partially offset by lower average selling prices and mix due to targeted promotion programs in selected markets. The translation of foreign currency-denominated sales transactions also increased consolidated sales by $0.3 million in the second quarter of 2014 compared to the second quarter of 2013, primarily due to the relatively weaker U.S. Dollar in relation to the Euro, partially offset by a stronger U.S. Dollar in comparison to several other foreign currencies in which we invoice sales. International sales increased by $3.6 million, or 3.0%, including the favorable currency effects described above, and domestic sales increased by $11.4 million, or 11.5%. FLAG segment sales increased by $9.4 million, or 6.2%, FRAG

20



segment sales increased by $4.7 million, or 7.4%, and sales of CCF products increased by $1.0 million, or 14.5%. See further discussion about sales under Segment Results.

Gross profit increased by $8.1 million, or 13.4%, from the second quarter of 2013 to the second quarter of 2014. Gross profit on higher unit sales volume of $6.5 million, lower acquisition accounting effects of $0.4 million, and reduced product costs and mix of $2.6 million, all contributed to the increase in gross profit. The improvement in product cost and mix was primarily due to the closure and consolidation of our higher cost FLAG manufacturing plant in Milwaukie, Oregon, and improved plant utilization and absorption of manufacturing overhead from higher production volumes and reduced manufacturing capacity in our FLAG segment. Partially offsetting these improvements in gross profit were lower average selling prices and mix of $0.6 million and higher average steel costs estimated at $1.4 million. Gross margin in the second quarter of 2014 was 29.2% compared to 27.5% in the second quarter of 2013. The improvement in gross margin in the second quarter of 2014 occurred primarily in the FLAG segment and was driven by the cost improvement factors described above. FRAG segment gross margins also improved slightly in the second quarter of 2014 compared to the second quarter of 2013. See further discussion of gross profit under Segment Results.

Fluctuations in currency exchange rates increased our gross profit in the second quarter of 2014 compared to the second quarter of 2013 by an estimated $0.7 million, primarily due to the favorable currency effects on sales described above and the favorable effect on cost of goods sold from a relatively stronger U.S. Dollar in comparison to the Canadian Dollar and Brazilian Real.

SG&A increased by $4.6 million, or 11.1%, from the second quarter of 2013 to the second quarter of 2014. As a percentage of sales, SG&A increased from 18.8% in the second quarter of 2013 to 19.5% in the second quarter of 2014. Compensation expense increased by $2.3 million, reflecting annual merit increases and higher variable incentive compensation accruals. Professional services expense was $1.1 million higher, primarily due to higher internal and external audit costs. Office expenses increased by $0.7 million, primarily reflecting higher costs for software and software licenses.

In August 2013, the Company announced that its two manufacturing facilities in Portland, Oregon would be consolidated into one location, and its Milwaukie, Oregon facility would be closed, to reduce costs and further improve efficiencies. Direct costs associated with this facility closure and restructuring activity were $0.1 million in the second quarter of 2014, consisting of moving costs to relocate machinery and equipment to other Blount facilities. We do not expect to incur significant further costs associated with this facility consolidation.

In January 2014, the Company announced plans to consolidate its North American lawn and garden blade manufacturing into its Kansas City, Missouri plant and close a small facility acquired with PBL in 2011 in Queretaro, Mexico. This consolidation was undertaken in order to reduce operating costs and improve efficiencies. Direct costs associated with this facility closure and restructuring activity were $0.4 million in the second quarter of 2014, consisting of costs for severance benefits, impairment of PP&E that will not be utilized in the future, and moving costs to relocate inventory and machinery and equipment to our Kansas City, Missouri manufacturing facility. We expect to incur between $0.1 million and $0.2 million of additional restructuring costs on this facility consolidation.

Operating income increased by $3.1 million, or 16.0%, from the second quarter of 2013 to the second quarter of 2014. Operating margin was 9.5% of sales in the second quarter of 2014 compared to 8.7% of sales in the second quarter of 2013. The increase in operating income and operating margin reflects higher gross profit, primarily due to higher unit sales volume and lower product costs, reduced acquisition accounting effects, and the favorable net effect of movement in foreign currency exchange rates. Partially offsetting these favorable factors were slightly reduced average selling prices and mix, higher steel costs, higher SG&A expenses, and facility closure and restructuring charges.

Interest expense, net of interest income, was $4.5 million in the second quarter of 2014 compared to $4.6 million in the second quarter of 2013. The slightly lower interest expense was primarily due to lower average principal outstanding.

Other income in the second quarter of 2014 was $0.2 million compared to expense of $1.0 million in the second quarter of 2013. The 2013 amount is primarily related to foreign exchange impacts on non-operating assets.


21



Consolidated Operating Results for the Year-to-Date Period
 
Six Months Ended June 30,
 
 
 
(Amounts in millions)
2014
 
2013
 
Change
 
 
Contributing Factor
(Amounts may not sum due to rounding)
 
 
 
 
 
 
 
 
Sales
$
467.4

 
$
453.0

 
$
14.4

 
 
 
 
 
 
 
 
 
15.6

 
Unit sales volume
 
 
 
 
 
 
(0.6
)
 
Average selling price and mix
 
 
 
 
 
 
(0.6
)
 
Foreign currency translation
Gross profit
135.7

 
123.8

 
11.9

 
 
 
    Gross margin
29.0
%
 
27.3
%
 
 
 
 
 
 
 
 
 
 
 
7.2

 
Unit sales volume
 
 
 
 
 
 
(0.6
)
 
Average selling price and mix
 
 
 
 
 
 
(1.6
)
 
Average steel costs
 
 
 
 
 
 
0.7

 
Acquisition accounting effects
 
 
 
 
 
 
4.5

 
Other product costs and mix
 
 
 
 
 
 
1.7

 
Foreign currency translation
SG&A
90.5

 
85.4

 
5.2

 
 
 
    As a percent of sales
19.4
%
 
18.8
%
 
 
 
 
 
 
 
 
 
 
 
2.8

 
Compensation expense
 
 
 
 
 
 
1.4

 
Professional services
 
 
 
 
 
 
1.1

 
Office expenses
 
 
 
 
 
 
(0.1
)
 
Foreign currency translation
Facility closure and restructuring charges
2.0

 

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
43.1

 
38.4

 
4.7

 
 
 
    Operating margin
9.2
%
 
8.5
%
 
 
 
 
 
 
 
 
 
 
 
11.9

 
Increase in gross profit
 
 
 
 
 
 
(5.2
)
 
Increase in SG&A
 
 
 
 
 
 
(2.0
)
 
Facility closure and restructuring charges
Net income
$
22.9

 
$
18.7

 
$
4.2

 
 
 
 
 
 
 
 
 
4.7

 
Increase in operating income
 
 
 
 
 
 
(0.1
)
 
Increase in net interest expense
 
 
 
 
 
 
0.4

 
Change in other income (expense)
 
 
 
 
 
 
(0.8
)
 
Increase in income tax provision

Sales in the six months ended June 30, 2014 increased by $14.4 million, or 3.2%, from the first six months of 2013, primarily due to increased unit sales volume, partially offset by slightly lower average selling prices due to targeted promotion programs in selected markets, and unfavorable effects of movements in foreign currency exchange rates. The translation of foreign currency-denominated sales transactions decreased consolidated sales by $0.6 million in the first six months of 2014 compared to the first six months of 2013, primarily due to the relatively stronger U.S. Dollar in comparison to several foreign currencies in which we invoice, partially offset by a weaker U.S. Dollar in relation to the Euro. International sales increased by $4.7 million, or 1.8%, net of the unfavorable currency effects described above, while domestic sales increased by $9.6 million, or 4.9%. FLAG segment sales increased by $9.4 million, or 3.0%, FRAG segment sales increased by $4.3 million, or 3.5%, and sales of CCF products increased by $0.6 million, or 4.6%. See further discussion about sales under Segment Results.

Gross profit increased by $11.9 million, or 9.6%, from the first six months of 2013 to the first six months of 2014. Gross profit on higher unit sales volume of $7.2 million, lower acquisition accounting effects of $0.7 million, and reduced product costs and mix of $4.5 million all contributed to the increase in gross profit. The improvement in product cost and mix was primarily due to the closure of the higher cost FLAG manufacturing plant in Milwaukie, Oregon, and improved plant utilization and absorption

22



of manufacturing overhead from higher production volumes and reduced manufacturing capacity in our FLAG segment. Partially offsetting these improvements in gross profit were slightly lower average selling prices and mix of $0.6 million and higher average steel costs of $1.6 million. Gross margin in the first six months of 2014 was 29.0% compared to 27.3% in the first six months of 2013. The improvement in gross margin in the first six months of 2014 occurred primarily in the FLAG segment and was driven by the cost improvement factors described above. FRAG segment gross margins also improved moderately in the first six months of 2014 compared to the first six months of 2013. See further discussion of gross profit under Segment Results.

Fluctuations in currency exchange rates increased our gross profit in the first six months of 2014 compared to the first six months of 2013 by an estimated $1.7 million, primarily due to the favorable effect on cost of goods sold from a relatively stronger U.S. Dollar in comparison to the Brazilian Real and Canadian Dollar, partially offset by the unfavorable net effect on reported sales described above.

SG&A increased by $5.2 million, or 6.1%, from the first six months of 2013 to the first six months of 2014. As a percentage of sales, SG&A increased from 18.8% in the first six months of 2013 to 19.4% in the first six months of 2014. Compensation expense increased by $2.8 million, reflecting annual merit increases and higher variable incentive compensation accruals. Professional services expense increased by $1.4 million, primarily due to higher internal and external audit costs. Office expenses increased by $1.1 million, reflecting higher costs for software and software licenses.

The year-to-date cost of facility closure and restructuring activities was $2.0 million, including $0.9 million for the consolidation of manufacturing facilities in Portland, Oregon. These consolidation costs included impairment of PP&E that will not be utilized in the future, and moving costs to relocate machinery and equipment to other Blount facilities. We do not expect to incur significant further costs associated with this facility consolidation. Facility closure and restructuring costs for the consolidation and closure of a small blade manufacturing facility in Queretaro, Mexico were $1.1 million in the first half of 2014, consisting of costs for severance benefits, impairment of PP&E that will not be utilized in the future, moving costs to relocate inventory and machinery and equipment to our Kansas City, Missouri manufacturing facility, and lease exit costs. We expect to incur between $0.1 million and $0.2 million in additional costs associated with this facility consolidation. See further discussion above under Consolidated Operating Results for the Quarter and in Note 3 to the Consolidated Financial Statements.

Operating income increased by $4.7 million, or 12.3%, from the first six months of 2013 to the first six months of 2014. Operating margin was 9.2% of sales in the first six months of 2014 compared to 8.5% of sales in the first six months of 2013. The increase in operating income and operating margin reflects higher gross profit, primarily due to higher unit sales volume and lower product costs and mix. Partially offsetting these favorable factors were slightly lower average selling prices and mix, increased average steel costs, higher SG&A expenses, and facility closure and restructuring charges.

Interest expense, net of interest income, was $9.0 million in the first six months of 2014 compared to $8.9 million in the first six months of 2013.

Income Tax Provision

The following table summarizes our income tax provisions in 2014 and 2013:
 Effective Tax Rate
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
 
2014
 
2013
 
2014
 
2013
Income before income taxes
 
$
18,131

 
$
13,728

 
$
34,433

 
$
29,379

Provision for income taxes
 
5,841

 
4,398

 
11,557

 
10,710

Effective tax rate
 
32.2
%
 
32.0
%
 
33.6
%
 
36.5
%

The effective tax rate for both the three and six months ended June 30, 2014 was lower than the federal statutory rate of 35%. The effective rate was reduced by the favorable impacts of foreign income taxes and the domestic production deduction in the U.S., partially offset by state income taxes and foreign withholding taxes on intercompany dividends. The impact of foreign income taxes generally reduces our effective tax rate because most of our foreign operations are subject to lower statutory tax rates compared with our U.S. operations.

The effective tax rate for the three months ended June 30, 2013 was lower than the federal statutory rate of 35% primarily due to the favorable effects of foreign income taxes and the domestic production deduction, partially offset by state income taxes and

23



foreign withholding taxes on intercompany dividends. The provision for income taxes in the six months ended June 30, 2013 was higher than the federal statutory rate primarily due to state income taxes and foreign withholding taxes on dividends, partially offset by the favorable effects of foreign income taxes and the domestic production deduction. The provision for income taxes in the six months ended June 30, 2013 also included a non-cash charge of $0.9 million, representing the effect of a change in the estimated average state tax rate applied to U.S. deferred tax assets and liabilities.
 
Net Income and Net Income per Share

Net income in the second quarter of 2014 was $12.3 million, or $0.25 per diluted share, compared to $9.3 million, or $0.19 per diluted share, in the second quarter of 2013. In the first six months of 2014, net income was $22.9 million, or $0.46 per diluted share, compared to $18.7 million, or $0.37 per diluted share, in the first six months of 2013.

Consolidated Sales Order Backlog

Consolidated sales order backlog was $180.5 million as of June 30, 2014 compared to $182.6 million at December 31, 2013 and $173.1 million at June 30, 2013. The decrease in consolidated backlog during the first half of 2014 reflects reduced backlog in our FRAG segment due to seasonal customer ordering patterns, partially offset by increased sales order backlog in our FLAG segment. See further discussion of backlog under Segment Results.

Segment Results

See description of the Company's reporting segments in Note 13 to the Consolidated Financial Statements. The following table reflects segment sales and operating results for the comparable periods of 2014 and 2013: 
Segment Information
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
 
2014
 
2013
Sales:
 
 
 
 
 
 
 
FLAG
$
160,112

 
$
150,758

 
$
325,327

 
$
315,901

FRAG
67,349

 
62,696

 
127,230

 
122,944

Corporate and Other
7,962

 
6,953

 
14,825

 
14,177

Total sales
$
235,423

 
$
220,407

 
$
467,382

 
$
453,022

Contribution to operating income (loss):
 
 
 
 
 
 
 
FLAG
$
23,834

 
$
20,685

 
$
51,912

 
$
45,253

FRAG
2,607

 
2,011

 
1,708

 
924

Corporate and Other
(4,090
)
 
(3,423
)
 
(10,481
)
 
(7,761
)
Operating income
$
22,351

 
$
19,273

 
$
43,139

 
$
38,416

Depreciation and amortization:
 
 
 
 
 
 
 
FLAG
$
6,505

 
$
6,708

 
$
13,020

 
$
13,692

FRAG
4,029

 
4,305

 
7,861

 
8,603

Corporate and Other
986

 
630

 
1,614

 
1,173

Depreciation and amortization
$
11,520

 
$
11,643

 
$
22,495

 
$
23,468



24



Forestry, Lawn, and Garden Segment. The following table reflects the factors contributing to the change in sales and contribution to operating income for the FLAG segment between the comparable periods of 2014 and 2013:
FLAG Segment Results
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
Sales
 
Contribution to Operating Income
 
Sales
 
Contribution to Operating Income
2013 reporting period
$
150,758

 
$
20,685

 
$
315,901

 
$
45,253

Unit sales volume
11,042

 
4,642

 
12,492

 
5,546

Average selling price and mix
(1,644
)
 
(1,644
)
 
(1,914
)
 
(1,914
)
Average steel cost

 
(1,497
)
 

 
(1,428
)
Other product costs and mix

 
4,555

 

 
6,598

SG&A expense

 
(3,616
)
 

 
(4,271
)
Acquisition accounting effects

 
170

 

 
347

Foreign currency translation
(44
)
 
539

 
(1,152
)
 
1,781

2014 reporting period
$
160,112

 
$
23,834

 
$
325,327

 
$
51,912


Sales in the FLAG segment increased by $9.4 million, or 6.2%, from the second quarter of 2013 to the second quarter of 2014, due to increased unit sales volume of $11.0 million, partially offset by lower average selling prices of $1.6 million. In the first six months of 2014, sales increased by $9.4 million, or 3.0%, due to higher unit sales volume of $12.5 million, partially offset by lower average selling prices of $1.9 million and unfavorable foreign currency effects of $1.2 million. Lower average selling prices were the result of targeted sales promotions in select end markets. The foreign currency effects were primarily due to the relatively stronger U.S. Dollar in comparison to several foreign currencies in which we invoice, partially offset by a weaker U.S. Dollar in relation to the Euro.

Sales of forestry products were up 3.8% in the quarter and 2.7% year-to-date, while sales of lawn and garden products were up 15.7% in the quarter and 4.0% year-to-date. Sales to the replacement market were up 9.6% in the quarter and 6.1% year-to-date, while sales to OEMs were down 3.1% in the quarter and 3.5% year-to-date. FLAG sales increased by 15.3% in North America in the quarter and by 5.5% year-to-date, reflecting improved economic and market conditions. In Europe and Russia, FLAG sales increased by 7.9% in the quarter and 6.4% year-to-date, also reflecting improved economic and market conditions. In the Asia Pacific Region, FLAG sales decreased by 9.5% in the quarter and by 8.6% year-to-date, reflecting soft market demand due to weak economic conditions and above average inventory levels remaining in the distribution channel. FLAG sales increased by 8.2% in South America in the quarter but were down 1.3% year-to-date, reflecting improving market conditions in the second quarter of 2014 but unfavorable foreign currency translation effects from a relatively stronger U.S. Dollar compared with the Brazilian Real.

Sales order backlog for the FLAG segment at June 30, 2014 was $160.9 million compared to $150.9 million at December 31, 2013 and $156.3 million as of June 30, 2013. The increase in backlog in the FLAG segment during the first half of 2014 reflects improving market conditions and customer demand in the market sectors and geographic regions described above.

The contribution to operating income from the FLAG segment increased by $3.1 million, or 15.2%, from the second quarter of 2013 to the second quarter of 2014, and by $6.7 million, or 14.7% on a year-to-date basis. Higher unit sales volume, reduced product cost and mix, and the favorable net effects of foreign currency movements all contributed to the improved operating results. Partially offsetting these positive factors were lower average selling prices and mix, higher average steel costs, and increased SG&A expenses. The stronger U.S. Dollar in relation to the Canadian Dollar and Brazilian Real reduced reported cost of goods sold and SG&A expense by more than the reduction to sales described above from currency movements.

The improvement in product cost and mix in the FLAG segment was primarily due to the closure and consolidation of our higher cost manufacturing plant in Milwaukie, Oregon, and improved plant utilization and absorption of manufacturing overhead from higher production volumes and reduced manufacturing capacity. FLAG production facilities for the second quarter of 2014 were operated at an average of approximately 90.8% of capacity, compared to approximately 75.7% of capacity in the second quarter of 2013. On a year-to-date basis, capacity utilization was 89.3% during the first six months of 2014 compared to 80.1% during the first six months of 2013. The increase in SG&A expense for both the quarter and year-to-date was primarily driven by increased compensation costs, reflecting annual merit increases and increased variable incentive compensation accruals, as well as increased office expenses and professional services costs.


25



Farm, Ranch, and Agriculture Segment. The following table reflects the factors contributing to the change in sales and contribution to operating income in the FRAG segment between the comparable periods of 2014 and 2013: 
FRAG Segment Results
Three Months Ended June 30,
 
Six Months Ended June 30,
(Amounts in thousands)
Sales
 
Contribution to Operating Income
 
Sales
 
Contribution to Operating Income
2013 reporting period
$
62,696

 
$
2,011

 
$
122,944

 
$
924

Unit sales volume
3,326

 
1,340

 
2,598

 
1,346

Average selling price and mix
1,121

 
1,121

 
1,354

 
1,354

Steel cost

 
54

 

 
(127
)
Other product costs and mix

 
(1,881
)
 

 
(2,107
)
SG&A expense

 
(372
)
 

 
(349
)
Acquisition accounting effects

 
351

 

 
694

Foreign currency translation
206

 
(17
)
 
334

 
(27
)
2014 reporting period
$
67,349

 
$
2,607

 
$
127,230

 
$
1,708


Sales in the FRAG segment increased by $4.7 million, or 7.4%, from the second quarter of 2013 to the second quarter of 2014. On a year-to-date basis, FRAG segment sales increased by $4.3 million, or 3.5%. Higher unit sales volume, higher average selling price and mix, and positive effects of foreign currency translation contributed to the increase in both periods. The unit sales volume increase was driven by strong growth in log splitter sales, up 88.7% in the quarter and 50.3% year-to-date compared to 2013. Log splitter growth is attributable to increased retail demand from higher home heating costs and promotional programs at certain of our customers. Unit sales volume was also up for tractor attachments by 4.0% in the second quarter and by 3.6% year-to-date. Partially offsetting growth in log splitters and tractor attachments were decreased unit sales volume in FRAG segment parts and accessories product lines. Higher average selling prices were attributable to our tractor attachment product lines. FRAG sales in North America increased by 8.2% in the quarter and by 4.5% year-to-date, while sales in Europe, consisting primarily of agricultural cutting parts, were down 11.4% in the quarter and 10.7% year-to-date.

Sales order backlog for the FRAG segment at June 30, 2014 was $19.1 million compared to $31.4 million at December 31, 2013 and $16.3 million at June 30, 2013. The decrease in backlog compared with December 31, 2013 reflects the typical seasonal ordering patterns in the agricultural equipment market. The increase in FRAG backlog from June 30, 2013 reflects improved market conditions and increased demand in North America for our log splitter and tractor attachment products.

The contribution to operating income from the FRAG segment improved from $2.0 million in the second quarter of 2013 to $2.6 million in the second quarter of 2014. On a year-to-date basis, contribution to operating income from the FRAG segment increased from $0.9 million in the first half of 2013 to $1.7 million in the first half of 2014. The improved profitability in both periods reflects increased unit sales volume, higher average pricing and product mix, and reduced acquisition accounting effects. These positive factors were partially offset by higher product costs and mix and increased SG&A expense. The higher product costs and mix were primarily driven by temporary equipment outages, marginally higher labor costs due to increased production volumes which required overtime and training expense for new and temporary personnel, and higher utility expenses during the winter months due to weather being colder than average. The reported results of the FRAG segment are also significantly affected by non-cash charges for acquisition accounting, because the entire segment is composed of recently acquired businesses. Acquisition accounting effects in the segment were $2.8 million and $5.6 million in the three and six months ended June 30, 2014, respectively. Acquisition accounting effects were $3.2 million and $6.3 million in the three and six months ended June 30, 2013, respectively.

Corporate and Other. Sales of CCF products increased $1.0 million, or 14.5%, in the three months ended June 30, 2014, and by $0.6 million, or 4.6%, in the six months ended June 30, 2014, compared to the corresponding periods of 2013. North American sales of CCF products strengthened in the second quarter of 2014 after a sluggish first quarter of the year reflecting the pattern in the general and utility construction industries following severe winter weather experienced in much of the U.S. Also contributing to the increase in CCF sales in North America was the acquisition of Pentruder in the first quarter of 2014. CCF sales in Europe were down slightly in both the three month and six month periods. The net operating loss in the corporate and other category increased by $0.7 million in the quarter, and by $2.7 million on a year-to-date basis. Facility closure and restructuring costs, increased SG&A expense, and acquisition accounting related to Pentruder all negatively affected operating results. These negative factors were partially offset by the gross profit on increased unit sales volume in the CCF unit.

26




Financial Condition, Liquidity, and Capital Resources

Debt consisted of the following: 
Debt
June 30,
 
December 31,
(Amounts in thousands)
2014
 
2013
Revolving credit facility
$
153,600

 
$
175,000

Term loans
252,780

 
260,107

Capital lease obligations
3,114

 
2,881

Total debt
409,494

 
437,988

Less current maturities
(15,077
)
 
(15,016
)
Long-term debt, net of current maturities
$
394,417

 
$
422,972

Weighted average interest rate at end of period
2.67
%
 
2.68
%

Senior Credit Facilities. The Company, through its wholly-owned subsidiary, Blount, Inc., maintains a senior credit facility with General Electric Capital Corporation as Agent for the Lenders and also as a lender, which has been amended and restated on several occasions. As of June 30, 2014 and December 31, 2013, the senior credit facilities consisted of a revolving credit facility and a term loan.

The revolving credit facility provides for total available borrowings of up to $400.0 million, reduced by outstanding letters of credit, and further limited by a specific leverage ratio. As of June 30, 2014, the Company had the ability to borrow an additional $129.0 million under the terms of the revolving credit agreement. The revolving credit facility bears interest at a floating rate, which, at the option of the Company, may be either LIBOR or an Index Rate, as defined in the credit agreement, plus an additional amount as outlined in the table below.
Maximum Leverage Ratio
Less than 4.00
 
Between 4.00 and 4.50
 
4.50 or above
LIBOR + 2.50%
 
LIBOR + 3.00%
 
LIBOR + 3.50%
Index Rate + 1.50%
 
Index Rate + 2.00%
 
Index Rate + 2.50%

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 of August 31, 2016.

The term loan facility bears interest under the same terms as the revolving credit facility. The term loan facility also matures on August 31, 2016 and requires quarterly principal payments of $3.7 million, with a final payment of $219.8 million due on the maturity date. Once repaid, principal under the term loan facility may not be re-borrowed.

The amended and restated senior credit facilities contain financial covenants, including, as of June 30, 2014:
Minimum fixed charge coverage ratio, defined as Adjusted 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. The minimum fixed charge coverage ratio is set at 1.15.
Maximum leverage ratio, defined as total debt divided by Adjusted EBITDA, calculated on a trailing twelve-month basis. The maximum leverage ratio is set at 4.25 through June 30, 2014, 4.00 through December 31, 2014, 3.75 through June 30, 2015, 3.50 through September 30, 2015, 3.25 through December 31, 2015, and 3.00 thereafter.

The status of financial covenants was as follows:
 
As of June 30, 2014
Financial Covenants
Requirement
 
Actual
Minimum fixed charge coverage ratio
1.15

 
1.65

Maximum leverage ratio
4.25

 
3.24


In addition, there are covenants, restrictions, or limitations relating to acquisitions, investments, loans and advances, indebtedness, dividends on our stock, the sale or repurchase of our stock, the sale of assets, and other categories. In the opinion
of management, the Company was in compliance with all financial covenants as of June 30, 2014. Non-compliance with these covenants is an event of default under the terms of the credit agreement, and 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 a sufficient amount of our assets to repay the outstanding loans.

The amended and restated senior credit facilities may be prepaid at any time without penalty. 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 defined in the credit agreement. No payments were required in the six months ended June 30, 2014 under the excess cash flow requirement in the credit agreement. However, during the six months ended June 30, 2013, an additional principal payment was made on the term loan in the amount of $6.3 million under the generation of excess cash flow requirement. Our senior credit facility agreement does not contain any provisions that would require early payment due to any adverse change in our credit rating.

We intend to fund working capital, operations, capital expenditures, acquisitions, debt service requirements, and obligations under our post-employment benefit plans for the next twelve months through cash and cash equivalents, expected cash flows generated from operating activities, and amounts available under our revolving credit agreement. We expect our financial resources will be sufficient to cover any additional increases in working capital, capital expenditures, and acquisitions; however, there can be no assurance that these resources will be sufficient to meet our needs, particularly if we make significant acquisitions, or significantly increase our rate of capital expenditures. 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. The senior credit facility agreement includes a requirement to fix or cap interest rates for certain periods on 35% of the outstanding principal on our term loan, and we have entered into interest rate cap and swap agreements to meet this requirement. We entered into an interest rate cap agreement which matured June 1, 2013 and we entered into interest rate swap agreements effective in June 2013. The weighted average interest rate on all debt was 2.67% as of June 30, 2014 and 2.68% as of December 31, 2013. The weighted average interest rate at June 30, 2014, including the effect of the interest rate swaps, is 3.09%.

Cash and cash equivalents at June 30, 2014 were $24.3 million, compared to $42.8 million at December 31, 2013. As of June 30, 2014, $20.6 million of our cash and cash equivalents was held in accounts at our foreign locations. The potential repatriation of foreign cash to the U.S. under current U.S. income tax law would most likely result in the payment of significant taxes. It is the intention of management for this cash to remain at or be used by our foreign locations indefinitely. This foreign cash is currently being used or is expected to be used to fund foreign operations and working capital requirements, additions to property, plant, and equipment at foreign locations, and foreign acquisitions.

Cash provided by operating activities is summarized as follows: 
Cash Flows from Operating Activities
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
Net income
$
22,876

 
$
18,669

Non-cash items
26,107

 
27,234

Net income plus non-cash charges
48,983

 
45,903

Changes in assets and liabilities, net
(20,246
)
 
(28,175
)
Net cash provided by operating activities
$
28,737

 
$
17,728


Non-cash items in the preceding table consist of depreciation; amortization; stock-based compensation expense; excess tax benefit from stock-based compensation; asset impairment charges; deferred income taxes; and other non-cash items.

During the first six months of 2014, operating activities provided $28.7 million of cash compared to $17.7 million in the first six months of 2013. Net income plus non-cash items totaled $49.0 million in the six months ended June 30, 2014. Non-cash items in the 2014 period reflect a $1.0 million reduction in depreciation and amortization expense compared to the prior year, primarily due to the consolidation of our manufacturing facilities in Portland and the accelerated nature of amortization of acquired intangible assets. In addition, asset impairment charges of $1.1 million were recognized in the first half of 2014

27



related to our facility closure and restructuring activities, whereas no impairment charges were recognized in the first six months of 2013.

The net change in working capital components and other assets and liabilities during the 2014 period used $20.2 million in cash compared to $28.2 million in the first six months of 2013.

Accounts receivable increased by $25.4 million during the first six months of 2014, primarily due to increased sales levels in the months immediately preceding June 30, 2014 compared to the months immediately preceding December 31, 2013. Sales were $235.4 million in the second quarter of 2014 and $216.9 million in the fourth quarter of 2013. Sales in the month of June 2014 were $16.5 million higher than sales in the month of December 2013. Additionally, in the farm equipment business, we offer longer payment terms to dealers during late winter and early spring to encourage early stocking orders for the peak farm equipment selling season. Our tractor attachment products are sold under a graduated cash discount schedule to encourage early payment, but with longer payment terms available as an option for our equipment dealer customers. This long-standing practice tends to increase the receivables balance at June 30 compared to year end. Receivables in the FRAG segment increased by $8.2 million in the first half of 2014, reflecting this industry practice.

Inventories increased by $5.3 million during the first six months of 2014, primarily reflecting a buildup in the FRAG segment in anticipation of the peak summer selling season for agricultural equipment. FRAG inventories increased by $7.0 million in the first half of 2014 while FLAG inventories were down $3.0 million in the same period.

Accounts payable increased by $15.2 million during the first six months of 2014, reflecting increased levels of purchases of raw materials and products for resale, as well as increased SG&A expenses, compared with the fourth quarter of 2013. Accrued expenses decreased by $4.0 million in the first half of 2014, reflecting payments of the Company's contribution to the U.S. defined contribution retirement plan and management incentive plan payments. Cash payments during the first six months of 2014 also included $10.2 million for income taxes and $6.9 million for interest.

During the first six months of 2013, operating activities provided $17.7 million of cash. Net income plus non-cash items totaled $45.9 million. The non-cash items reflected increased depreciation of PP&E and amortization expense on intangible assets related to recent acquisitions, and increased stock-based compensation expense. The net change in working capital components and other assets and liabilities during the 2013 period used $28.2 million in cash. Accounts receivable increased by $10.7 million, reflecting increased sales in the second quarter of 2013 compared to the fourth quarter of 2012, particularly in the last month of each period. Sales in the month of June 2013 were $8.4 million higher than sales in the month of December 2012. In addition, the seasonal build up described above in our FRAG segment further contributed to the increase in receivables in the first half of 2013. Accounts payable decreased by $7.3 million and accrued expenses decreased by $7.6 million. Cash payments during the first six months of 2013 also included $7.9 million for interest and $17.3 million for income taxes.

Certain of our post-employment benefit plans are funded on a pay-as-you-go basis. Other plans are funded via contributions to trust funds which invest the funds. As of December 31, 2013, our total unfunded post-employment benefit obligation was $49.2 million, of which $24.1 million pertained to our defined benefit pension plans. The measurement of the unfunded obligation of post-employment benefit plans, and the related funding requirements, can vary widely. Funding requirements are affected by many factors, including interest rates used to compute the discounted future benefit obligations; actual returns on plan assets in the funded plans; actuarial gains and losses based on experience and changes in actuarial calculations, methods, and assumptions; changes in regulatory requirements; and the amount contributed to the plans in any given period. Our future cash flows could be significantly affected by funding requirements for these plans. We expect to contribute or pay out total cash of approximately $19.0 million during 2014 for its various post-employment benefit plans.

In August 2013, the Company amended the larger of its two U.S. post-retirement medical benefit plans and changed the method of providing benefits under that plan to a Health Reimbursement Account for retirees over age 65. The amendment was effective January 1, 2014. This plan amendment resulted in a $11.6 million reduction in the unfunded accumulated benefit obligation included in employee benefit obligations and accrued expenses, a reduction of $7.4 million in accumulated other comprehensive loss, and a $4.2 million reduction in deferred income tax liabilities in the third quarter of 2013. This plan amendment is expected to reduce the Company's expense for this plan by $2.1 million in 2014, as compared to the expense recognized in 2013.


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Cash used in investing activities is summarized as follows: 
Cash Flows from Investing Activities
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
Purchases of property, plant, and equipment
$
(14,846
)
 
$
(14,208
)
Proceeds from sales of assets
114

 
142

Acquisition, net of cash acquired
(2,741
)
 

Collection of escrow proceeds on sale of discontinued operations
100

 
3,394

Net cash used in investing activities
$
(17,373
)
 
$
(10,672
)

Purchases of PP&E 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 2014, we expect to invest a total of between $38 million and $42 million in capital expenditures, compared to $29.6 million for the full year in 2013. In January of 2014, we acquired Pentruder, a distributor of specialty concrete cutting saws based in Chandler, Arizona. During the six months ended June 30, 2013, we collected $3.4 million held in escrow from the 2007 sale of our Forestry Division. During the six months ended June 30, 2014, we collected the final $0.1 million held in escrow from the sale of our Forestry Division.

Cash flows from financing activities are summarized as follows: 
Cash Flows from Financing Activities
Six Months Ended June 30,
(Amounts in thousands)
2014
 
2013
Net repayments under revolving credit facility
$
(21,400
)
 
$
(15,500
)
Repayment of term loan principal and capital lease obligations
(7,520
)
 
(13,851
)
Debt issuance costs

 
(1,576
)
Proceeds and tax effects from stock-based compensation
(249
)
 
480

Net cash used in financing activities
$
(29,169
)
 
$
(30,447
)

Cash used in financing activities in the first six months of 2014 consisted primarily of voluntary net repayment of principal outstanding under our revolving credit facility and the scheduled repayment of principal under our term loans and capital leases. Cash generated from operating activities was used to make these financing payments. Cash used in financing activities in the first six months of 2013 consisted of voluntary net repayment of principal outstanding under our revolving credit facility, scheduled repayments of principal on our term loans and capital leases, and a required repayment of principal in the amount of $6.3 million on our term loan from the generation of excess cash flow as defined in the related credit agreement. In addition, we paid debt issuance costs of $1.6 million in conjunction with an amendment of our senior credit facility agreement in the second quarter of 2013. Cash generated from operating activities was used to make these financing payments.

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, 2013.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which includes amendments that change the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations and long-lived assets classified as held for sale. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. The guidance is effective for annual periods beginning on or after December 15, 2014. The adoption of this standard is not expected to have a material impact on the financial statements of the Company.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

29



The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its Consolidated Financial Statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
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 uncertainties and should not be considered indicative of actual results that the Company may achieve in the future. Specifically, issues concerning 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, tax rates, discount rates, rates of return, and the anticipated effects of discontinued operations involve 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.

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. Substantially all of our debt is subject to variable interest rates. We previously entered into an interest rate cap agreement that established maximum fixed interest rates on 35% of the principal amount outstanding under our term loans through June 1, 2013. We also entered into a series of interest rate swap contracts whereby the interest rate we pay is fixed on a portion of term loan principal for the period of June 2013 through varying maturity dates between December 2014 and August 2016.

See also Note 15 to the Consolidated Financial Statements included in Item 1 for further discussion of derivative financial instruments. See also, the Market Risk section of 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, 2013. 

ITEM 4.
CONTROLS AND PROCEDURES

We maintain Disclosure Controls and Procedures (“DCP”) that are designed with the objective of providing reasonable assurance that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) (principal executive officer) and Chief Financial Officer (“CFO”) (principal financial officer), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our DCP, our 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 our management is required to apply their 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 CEO and CFO, evaluated the effectiveness of the design and operation of the Company's DCP as of December 31, 2013. The Company's management, including the CEO and the CFO, identified material weaknesses in Internal Control over Financial Reporting ("ICFR") as of December 31, 2013, and therefore concluded that DCP were not effective as of December 31, 2013 because of the material weaknesses, as described below, in our ICFR. Management has also concluded that, because those same

30



material weaknesses had not yet been remediated by June 30, 2014, our ICFR and DCP continued to be ineffective as of June 30, 2014.

Material weaknesses in internal control over financial reporting

A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following control deficiencies that constituted material weaknesses in our ICFR as of December 31, 2013 and June 30, 2014:

1.
The Company did not design and maintain effective internal control over the accounting for goodwill. Specifically, the Company did not design and maintain effective controls related to the reassignment of goodwill between reporting units as a result of changes in its reporting structure, the review of assumptions and data used in the annual impairment test, and the identification of changes in events and circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests.

2.
The Company did not design and maintain effective internal control over the accounting for intangible assets other than goodwill. Specifically, the Company did not properly perform its annual impairment analysis for indefinite-lived intangible assets other than goodwill; did not properly evaluate in each reporting period the remaining useful lives of intangible assets not subject to amortization to determine whether events or circumstances continue to support an indefinite useful life; did not evaluate whether events or circumstances were present that would require an impairment assessment of indefinite and finite-lived intangible assets; and did not evaluate the useful lives of finite-lived intangible assets each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization.

3.
The Company did not design and maintain effective information technology general controls at our Woods/TISCO subsidiary and did not design effective information technology general controls at our PBL and KOX subsidiaries. Specifically, the Company did not design and maintain effective controls with respect to segregation of duties, restricted access to programs and data at the Woods/TISCO subsidiary and did not design effective controls with respect to segregation of duties and restricted access to programs and data at the PBL and KOX subsidiaries. Additionally, the Company did not design effective change management controls at the KOX subsidiary. Consequently, controls that were dependent on the effective operation of information technology were not effectively designed to include adequate review of system generated data used in the operation of the controls and were determined not to be operating effectively. Accordingly, the Company did not maintain effective internal controls over the journal entry, inventory, revenue and receivables, purchasing and payables, payroll, and fixed asset processes at these subsidiaries.

4.
The Company did not design and maintain effective controls over restricted access and segregation of duties within the SAP system as certain personnel have administrator access to execute certain conflicting transactions. Further, certain personnel have the ability to prepare and post journal entries without an independent review required by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to provide reasonable assurance that transactions were appropriately recorded or were properly reviewed for validity, accuracy, and completeness.

These control deficiencies did not result in a material misstatement to the Company’s consolidated financial statements. However, these control deficiencies could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected on a timely basis. Accordingly, our management has determined that these control deficiencies constitute material weaknesses. As a result, we have concluded that we did not maintain effective ICFR as of December 31, 2013 and as of June 30, 2014, based on the criteria in Internal Control-Integrated Framework (1992) issued by the COSO.

The Company is in the process of remediating the identified deficiencies in ICFR but is unable at this time to estimate when the remediation effort will be completed.

Changes in internal control over financial reporting

There have been no changes in the Company’s ICFR during the Company’s fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR, except for the implementation of SAP at KOX in May, 2014. In addition, we implemented SAP at PBL in January, 2014. Implementation of SAP at these subsidiaries

31



provides the opportunity to standardize and improve financial and transactional processes and strengthen ICFR at these locations by improving information technology general controls and segregation of duties. These improvements to ICFR will require testing for operating effectiveness before the Company can reach conclusions regarding the remediation of the related material weaknesses described above.

PART II
OTHER INFORMATION

ITEM 4.
MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 6.
EXHIBITS
(a) Exhibits: 
*31.1 Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 by Joshua L. Collins, Chairman 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 Joshua L. Collins, Chairman 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.
 
101.INS XBRL Instance Document
 
101.SCH XBRL Taxonomy Extension Schema Document
 
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
 
101.LAB XBRL Taxonomy Extension Label Linkbase Document
 
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
* Filed electronically herewith. Copies of such exhibits may be obtained upon written request to:
 
Blount International, Inc.
P.O. Box 22127
Portland, Oregon 97269-2127


32



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
 
Chief Financial Officer
 
Corporate Controller
 
(Principal Financial Officer)
 
(Principal Accounting Officer)
 
Dated: August 6, 2014

33