UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[ X ]  QUARTERLY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 

ACT OF 1934

 

FOR THE  QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009

 

OR

 

[    ]  TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 

ACT OF 1934

 

FOR THE  TRANSITION PERIOD FROM ____ TO ____

 

**COMMISSION  FILE NUMBER  0-21220**

 

 

**ALAMO GROUP INC.**

(EXACT  NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 
| **DELAWARE**                      | ** ** | **74-1621248**           |
|-----------------------------------|------------|--------------------------|
| (*State or other jurisdiction of* | * *   | *(I.R.S. Employer*       |
| *incorporation or organization)*  | * *   | *Identification Number)* |

 

**1627 East Walnut, Seguin, Texas  78155**

*(Address of principal executive  offices*)

 

**830-379-1480**

(*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 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 REQUIREMENT FOR  THE PAST 90 DAYS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| YES  X      NO  ___                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|  

INDICATE BY CHECK MARK  WHETHER REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A  NON-ACCELERATED FILER.  SEE DEFINITION OF “ACCELERATED FILER AND LARGE  ACCELERATED FILER” IN EXCHANGE ACT RULE 12B-2.  LARGE ACCELERATED FILER [  ]                 ACCELERATED FILER [X]               NON-ACCELERATED FILER   [  ]

 

INDICATE BY CHECK MARK  WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE  EXCHANGE ACT).           YES [  ]            NO [X]

  |
| AT NOVEMBER 1, 2009, 11,746,929  SHARES OF COMMON STOCK, $.10 PAR VALUE, OF THE  REGISTRANT WERE OUTSTANDING.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

 

 

 

----

 

 

 

 

 

**Alamo Group Inc. and Subsidiaries**

** **

INDEX

 

|                                 |                                                                           | PAGE       |
|--------------------------------------|--------------------------------------------------------------------------------|-----------------|
|                                 |                                                                           |            |
|                                 |                                                                           |            |
| PART I.                         | FINANCIAL  INFORMATION                                                    |            |
| ** **                           | ** **                                                                     | ** **      |
| Item 1.                         | Interim Condensed  Consolidated Financial Statements  (Unaudited)         |            |
|                                 |                                                                           |            |
|                                 | Interim Condensed  Consolidated Balance Sheets                                 |            |
|                                 | September 30, 2009  and December 31, 2008 (Audited)                            | 3          |
|                                 |                                                                           |            |
|                                 | Interim Condensed  Consolidated Statements of Income                           |            |
|        | Three months and  Nine months ended September 30, 2009

and September 30, 2008 |  

4  |
|                                 |                                                                           |            |
|        | Interim Condensed  Consolidated Statements of Cash Flows                       |            |
|             | Nine months ended  September 30, 2009 and September 30, 2008                   | 5          |
|                                 |                                                                           |            |
|        | Notes to Interim  Condensed Consolidated Financial Statements                  | 6               |
|                                 |                                                                           |            |
| Item 2.                              | Management's  Discussion and Analysis of Financial Condition                   |            |
|                                 | and Results of  Operations                                                     | 15              |
|                                 |                                                                           |            |
| Item 3.                              | Quantitative and  Qualitative Disclosures about Market Risks                   | 22              |
|                                 |                                                                           |            |
| Item 4.                              | Controls and  Procedures                                                       | 23              |
|                                 |                                                                           |            |
| PART II.                        | OTHER INFORMATION                                                              | 24              |
|                                 |                                                                           |            |
| Item 1.                         | None                                                                           | 24              |
| Item 2.                         | Unregistered Sales of Equity Securities and Use of	Proceeds.                   | 24              |
| Item 3.                              | None                                                                           | 24              |
| Item 4.                         | None                                                                           | 24              |
| Item 5.                         | Other Information                                                              | 24              |
| Item 6.                         | Exhibits and  Reports on Form 8-K                                              | 24              |
|                                 |                                                                           |            |
|                                 | SIGNATURES                                                                     | 25              |

 

| 2 |
|---|

 

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## Alamo Group Inc. and Subsidiaries

**Interim Condensed Consolidated  Balance Sheets**

** **

 

 
|  

(in thousands, except share amounts)                                                                                                                              |   |   | **September 30,**

**2009**

**(Unaudited)** |   |   | **December 31, 2008**

**(Audited)** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------------------------|--------|--------|-------------------------------------------|
| ** **                                                                                                                                                                |   |   |                                         |   |   |                                      |
| **ASSETS**                                                                                                                                                                |   |   |                                         |   |   |                                      |
| Current assets:                                                                                                                                                           |   |   |                                         |   |   |                                      |
|       Cash and cash equivalents                                                                                                                  |   | $      | 13,474                                  |   | $      | 4,532                                |
|       Accounts receivable, net                                                                                                                   |   |   | 104,156                                 |   |   | 124,197                              |
|       Inventories                                                                                                                                |   |   | 113,194                                 |   |   | 132,248                              |
|       Deferred income taxes                                                                                                                      |   |   | 2,513                                   |   |   | 2,671                                |
|       Prepaid expenses                                                                                                                           |   |   | 3,164                                   |   |   | 2,377                                |
|           Total current assets                                                                                               |   |   | 236,501                                 |   |   | 266,025                              |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
| Property, plant and equipment                                                                                                                                             |   |   | 130,138                                 |   |   | 125,952                              |
|           Less:  Accumulated depreciation                                                                          |   |   | (70,265)                                     |   |   | (64,168)                                  |
|                                                                                                                                                                      |   |   | 59,873                                  |   |   | 61,784                               |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
|     Goodwill                                                                                                                                               |   |   | 49,449                                  |   |   | 48,107                               |
|     Intangible assets                                                                                                                                      |   |   | 3,923                                   |   |   | 3,982                                |
|     Deferred income taxes                                                                                                                                  |   |   | 2,463                                   |   |   | 2,463                                |
|     Assets held for sale                                                                                                                                   |   |   | 426                                     |   |   | 291                                  |
|     Other assets                                                                                                                                           |   |   | 1,303                                   |   |   | 1,702                                |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
|           Total assets                                                                                                       |   | $      | 353,938                                 |   | $      | 384,354                              |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                             |   |   |                                         |   |   |                                      |
| Current liabilities:                                                                                                                                                      |   |   |                                         |   |   |                                      |
|       Trade accounts payable                                                                                                                     |   |   | 38,646                                  |   |   | 54,598                               |
|       Income taxes payable                                                                                                                       |   |   | 3,305                                   |   |   | 841                                  |
|       Accrued liabilities                                                                                                                        |   |   | 28,895                                  |   |   | 26,059                               |
|       Current maturities of long-term debt                                                                                                       |   |   | 5,423                                   |   |   | 4,186                                |
|           Total current liabilities                                                                                          |   |   | 76,269                                  |   |   | 85,684                               |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
| Long-term debt, net of current maturities                                                                                                                                 |   |   | 62,928                                  |   |   | 99,884                               |
| Deferred pension liability                                                                                                                                                |   |   | 8,614                                   |   |   | 8,682                                |
| Other long-term liabilities                                                                                                                                               |   |   | 4,144                                   |   |   | 5,139                                |
| Deferred income taxes                                                                                                                                                     |   |   | 1,101                                   |   |   | 653                                  |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
| Stockholders’ equity:                                                                                                                                                |   |   |                                         |   |   |                                      |
| Common  stock, $.10 par value, 20,000,000 shares authorized;

10,089,529  and 9,964,529 issued and outstanding at September 30, 2009 and December 31, 2008,  respectively |   |   | 1,009                                   |   |   | 996                                  |
| Additional paid-in capital                                                                                                                                                |   |   | 57,217                                  |   |   | 55,683                               |
| Treasury stock, at cost; 42,600 shares at September 30, 2009  and December 31, 2008                                                                                       |   |   |  

(426)                                |   |   |  

(426)                             |
| Retained earnings                                                                                                                                                         |   |   | 139,386                                 |   |   | 132,064                              |
| Accumulated  other comprehensive income                                                                                                                                   |   |   | 3,696                                   |   |   | (4,005)                                   |
|             Total  stockholders’ equity                                                                       |   |   | 200,882                                 |   |   | 184,312                              |
|                                                                                                                                                                      |   |   |                                         |   |   |                                      |
|           Total liabilities and stockholders’ equity                                                                    |   | $      | 353,938                                 |   | $      | 384,354                              |
|                                                                                                                                                                           |        |        |                                              |        |        |                                           |  |  |

                                                                        

See accompanying notes.

 

| 3 |
|---|

 

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## Alamo Group Inc. and Subsidiaries 

**Interim Condensed Consolidated  Statements of Income **

**(Unaudited) **

 

|                                                        |   | Three Months EndedSeptember 30, |          | Nine Months EndedSeptember 30, |
|-------------------------------------------------------------|--------|---------------------------------|---------------|--------------------------------|
| (in thousands, except per share amounts)** **          |   |                            | 2009     |                           |   | 2008 |   |   | **2009** |   |   | **2008** |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Net sales:                                             |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     North American                      |   |                            |          |                           |   |   |   |   |   |   |   |   |
|         Industrial  |   | $                               | 45,547   |                           | $ | 64,803  |   | $ | 134,737  |   | $ | 199,866  |
|         Agricultural     |   |                            | 20,158   |                           |   | 29,555  |   |   | 63,263  |   |   | 94,826  |
|     European                                 |   |                            | 44,613   |                           |   | 54,349  |   |   | 135,704  |   |   | 139,956  |
| Total net  sales                                            |   |                            | 110,318  |                           |   | 148,707  |   |   | 333,704  |   |   | 434,648  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Cost of  sales                                              |   |                            | 84,669   |                           |   | 119,097  |   |   | 261,999  |   |   | 349,553  |
| Gross  profit                                          |   |                            | 25,649   |                           |   | 29,610  |   |   | 71,705  |   |   | 85,095  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expense           |   |                            | 17,983   |                           |   | 21,795  |   |   | 55,478  |   |   | 62,518  |
|     Income  from operations                  |   |                            | 7,666    |                           |   | 7,815  |   |   | 16,227  |   |   | 22,577  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Interest  expense                                           |   |                            | (1,005)       |                           |   | (2,024) |   |   | (3,248) |   |   | (5,748) |
| Interest  income                                       |   |                            | 15       |                           |   | 691  |   |   | 337  |   |   | 1,630  |
| Other  income (expense), net                                |   |                            | 134      |                           |   | 222  |   |   | 130  |   |   | 881  |
|     Income  before income taxes              |   |                            | 6,810    |                           |   | 6,704  |   |   | 13,446  |   |   | 19,340  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Provision  for income taxes                            |   |                            | 2,227    |                           |   | 2,251  |   |   | 4,328  |   |   | 6,490  |
|     Net  income                              |   | $                               | 4,583    |                           | $ | 4,453  |   | $ | 9,118  |   | $ | 12,850  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Net income  per common share:                               |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     Basic                                    |   | $                               | .46      |                           | $ | .45  |   | $ | .91  |   | $ | 1.31  |
|     Diluted                                  |   | $                               | .46      |                           | $ | .45  |   | $ | .91  |   | $ | 1.29  |
| Average  common shares                                 |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     Basic                               |   |                            | 10,047   |                           |   | 9,870  |   |   | 9,988  |   |   | 9,822  |
|     Diluted                                  |   |                            | 10,086   |                           |   | 9,970  |   |   | 10,012  |   |   | 9,949  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Dividends  declared                                         |   | $                               | 0.06     |                           | $ | 0.06  |   | $ | 0.18  |   | $ | 0.18  |

 

 

See accompanying notes.

 

| 4 |
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## Alamo Group Inc. and Subsidiaries

**Interim Condensed Consolidated  Statements of Cash Flows**

**(Unaudited)**

** **

|                                                                                                              |   | **Nine Months Ended**

**September 30,** |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
|  

(in thousands, except per share amounts)                                                                  |   |                                     | ** **

**2009** | ** ** | ** ** | ** **

**2008** |
| **Operating  Activities**                                                                                         |   |                                     |   |   |   |   |
| Net  income                                                                                                       |   | $                                        | 9,118  |   | $ | 12,850  |
| Adjustment  to reconcile net income to net cash

    provided  by operating activities:            |   |                                     |   |   |   |   |
|           Provision  for doubtful accounts                           |   |                                     | 392  |   |   | 318  |
|           Depreciation                                               |   |                                     | 6,050  |   |   | 6,990  |
|           Amortization                                               |   |                                     | 59  |   |   | 78  |
|           Stock-based  compensation expense                          |   |                                     | 429  |   |   | 443  |
|           Excess  tax benefits from stock-based payment arrangements |   |                                     | (43) |   |   | (45) |
|           Provision  (benefit) for deferred income tax benefit       |   |                                     | 529  |   |   | 218  |
|           Gain  on sale of property, plant and equipment             |   |                                     | (22) |   |   | (99) |
| Changes in  operating assets and liabilities:                                                                     |   |                                     |   |   |   |   |
|           Accounts  receivable                                       |   |                                     | 22,869  |   |   | (14,719) |
|           Inventories                                                |   |                                     | 22,019  |   |   | (4,238) |
|           Prepaid  expenses and other assets                         |   |                                     | 136  |   |   | (1,206) |
|           Trade  accounts payable and accrued liabilities            |   |                                     | (15,232) |   |   | 17,068  |
|           Income  taxes payable                                      |   |                                     | 2,211  |   |   | 1,173  |
|           Other  long-term liabilities                               |   |                                     | (784) |   |   | (833) |
| Net cash  provided by operating activities                                                                        |   |                                     | 47,731  |   |   | 17,998  |
|                                                                                                              |   |                                     |   |   |   |   |
| **Investing  Activities**                                                                                         |   |                                     |   |   |   |   |
| Acquisitions,  net of cash acquired                                                                               |   |                                     | –  |   |   | (22,055) |
| Purchase  of property, plant and equipment                                                                        |   |                                     | (2,661) |   |   | (5,052) |
| Proceeds  from sale of property, plant and equipment                                                              |   |                                     | 95  |   |   | 209  |
| Net cash  used by investing activities                                                                            |   |                                     | (2,566) |   |   | (26,898) |
|                                                                                                              |   |                                     |   |   |   |   |
| **Financing  Activities**                                                                                         |   |                                     |   |   |   |   |
| Net change  in bank revolving credit facility                                                                     |   |                                     | (36,000) |   |   | 11,000  |
| Principal  payments on long-term debt and capital leases                                                          |   |                                     | (1,670) |   |   | (2,038) |
| Proceeds  from issuance of long-term debt                                                                         |   |                                     | 1,497  |   |   | 1,986  |
| Dividends  paid                                                                                                   |   |                                     | (1,796) |   |   | (1,766) |
| Proceeds  from sale of common stock                                                                               |   |                                     | 1,117  |   |   | 1,073  |
| Excess tax  benefits from stock-based payment arrangements                                                        |   |                                     | 43  |   |   | 45  |
| Net cash  provided by financing activities                                                                        |   |                                     | (36,809) |   |   | 10,300  |
|                                                                                                              |   |                                     |   |   |   |   |
| Effect of  exchange rate changes on cash                                                                          |   |                                     | 586  |   |   | (412) |
| Net change  in cash and cash equivalents                                                                          |   |                                     | 8,942  |   |   | 988  |
| Cash and  cash equivalents at beginning of the period                                                             |   |                                     | 4,532  |   |   | 4,459  |
| Cash and  cash equivalents at end of the period                                                                   |   | $                                        | 13,474  |   | $ | 5,447  |
|                                                                                                              |   |                                     |   |   |   |   |
| Cash paid  during the period for:                                                                                 |   |                                     |   |   |   |   |
|         Interest                                                               |   | $                                        | 3,659  |   | $ | 5,732  |
|         Income  taxes                                                          |   | $                                        | 1,906  |   | $ | 2,866  |
|                                                                                                                   |        |                                          |  |  |  |  |  |

 

See accompanying notes.

 

| 5 |
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** **

**Alamo Group Inc. and Subsidiaries**

**Notes to Interim Condensed  Consolidated Financial Statements - (Unaudited)**

## September 30, 2009

** **

** **

**1.  Basis of Financial Statement Presentation**

 

    The accompanying unaudited interim consolidatedfinancial statements of Alamo Group Inc. and its subsidiaries (the “Company”)have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulations S-X.  Accordingly, they do notinclude all of the information and footnotes required by U.S. GAAP for completefinancial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Operating results for the periods presentedare not necessarily indicative of the results that may be expected for the yearending December 31, 2009.  The balance sheet at December 31, 2008, has beenderived from the audited financial statements at that date but does not includeall of the information and footnotes required by U.S. GAAP for completefinancial statements.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended December 31, 2008.

 

    In connection with the preparation of the consolidatedfinancial statements and in accordance with FASB ASC Topic 855, SubsequentEvents, formerly Statement of Financial Standards No. (SFAS) 165, SubsequentEvents, the Company evaluated subsequent events after the balance sheet date ofSeptember  30, 2009 through November 7, 2009 and has disclosed a subsequentevent in footnote 17.

** 2.  Acquisitions**

On May 30, 2008 the Company purchased RivardDeveloppement (“*Rivard*”), a leading French manufacturer of vacuumtrucks, high pressure cleaning systems and trenchers, which was accounted foras a business combination.  The purchase price was €15 million (approximatelyU.S. $23 million) plus the assumption of certain liabilities.  We haveallocated the purchase price to the acquired assets and liabilities assumed andrecorded goodwill of €9 million (approximately U.S. $13 million) related tothis acquisition. The majority of the purchase price was funded utilizing theCompany’s cash reserves in Europe, with the balance from bank creditfacilities.  *Rivard’s* sales in 2007 were €40 million, (approximately U.S.$62 million) and the company has 275 full-time employees.  *Rivard* is located in Daumeray, France and was founded in1952.

 

     The unaudited pro formastatement of income of the Company assuming these transactions occurred atJanuary 1, 2008 is as follows:

|                                      | **Nine Months Ended** |
|-------------------------------------------|-----------------------|
|                                      | **September 30,**     |
| (In thousands, except per  share amounts) | **2009**              | ** ** | **2008** |
|                                      | ** **            |
| Net  Sales                                | $                     | 333,704 |   | $ | 460,481  |
| Net  Income                               | $                     | 9,118 |   | $ | 14,502  |
| Diluted  Earnings per Share               | $                     | 0.91 |   | $ | 1.46  |

** **

**3.  Accounts Receivable**

 

      Accounts Receivable is shown less allowance fordoubtful accounts of $2,506,000 and $2,430,000at September 30, 2009 and December 31, 2008, respectively.

** **

| 6 |
|---|

 

----

 

** **

**4.  Inventories**

 

      Inventories valued atLIFO cost represented 52% and 57% of total inventory at September 30, 2009 andDecember 31, 2008, respectively.  The excess of current costs over LIFO valuedinventories was $12,791,000 at September 30, 2009 and December 31, 2008. Inventory obsolescence reserves were $8,829,000 at September 30, 2009 and $8,978,000at December 31, 2008.  Net inventories consist of the following:

 

| (in thousands)   |   |   | **September 30,**

**2009** |   | **December 31,**

**2008** |
|------------------|--------|--------|-----------------------------|--------|----------------------------|
|             |   |   |                        |   |                       |
| Finished  goods  |   | $      | 89,881                      | $      | 104,819                    |
| Work in  process |   |   | 11,997                      |   | 16,247                     |
| Raw  materials   |   |   | 11,316                      |   | 11,182                     |
|             |   | $      | 113,194                     | $      | 132,248                    |

 

      An actual valuation ofinventory under the LIFO method can be made only at the end of each year basedon the inventory levels and costs at that time.  Accordingly, interim LIFO mustnecessarily be based to some extent on management's estimates at each quarterend. 

##  

**5.  Derivatives and Hedging**

 

      Most of the Company’s outstanding debt isadvanced from a revolving credit facility that accrues interest at a contractual margin over current marketinterest rates.  The Company’s financing costs associated with this creditfacility can materially change with market increases and decreases ofshort-term borrowing rates, specifically London Inter Bank Operating Rate(“LIBOR”).  During the second quarter of 2007, the Company entered into twointerest rate swap agreements with one of its current lenders that hedge futurecash flows related to its outstanding debt obligations.  As of September 30, 2009,the Company had $59.0 million outstanding under its revolving credit facilityand two interest rate swap contracts designated as cash flow hedges which areeffectively hedging $40 million of these borrowings from changes in underlyingLIBOR base rates.  One swap has a three year term and fixes the LIBOR base rateat 4.910% covering $20 million of this debt.  The other has a four year termand fixed the LIBOR base rate at 4.935% covering an additional $20 million ofthese variable rate borrowings.  The fair market value of these hedges, whichis the amount that would have been paid or received by the Company had itprematurely terminated these swap contracts at September 30, 2009, was a $1,671,000liability.  This is included in Other long-term liabilities with an offset inAccumulated other comprehensive income, net of taxes.  At September 30, 2009,ineffectiveness related to the interest rate swap agreements was not material.

 

**6.  Fair Value Measurements**

 

      The Company adopted ASC Subtopic 820-10,(formerly SFAS 157), “Fair Value Measurements and Disclosures, as amended” asof January 1, 2008.  FSAS 157 defines fair value as the exchange price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants.  There is a three-tier fairvalue hierarchy based upon the observability of inputs used in valuationtechniques.  Observable inputs (highest level) reflect market data obtainedfrom independent sources, while unobservable inputs (lowest level) reflectinternally developed market assumptions.  Fair value measurements areclassified under the following hierarchy:

 

**Level 1**– Quoted prices for identical instruments in activemarkets.

**Level 2** –Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs or significantvalue-drivers are observable in active markets.

**Level 3** –Model-derived valuations in which one or more significant inputs or significantvalue-drivers are unobservable

 

| 7 |
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      When available, the Company uses quoted marketprices to determine fair value, and the Company classifies such measurementswithin Level 1.  In some cases where market prices are not available, theCompany makes use of observable market based inputs to calculate fair value, inwhich case the measurements are classified with Level 2.  If quoted orobservable market prices are not available, fair value is based upon internallydeveloped models that use, where possible, current market-based parameters suchas interest rates, yield curves, currency rates, etc.  These measurements areclassified within Level 3.

 

      Fair value measurements are classified to thelowest level input or value-driver that is significant to the valuation.  Ameasurement may therefore be classified within Level 3 even though there may besignificant inputs that are readily observable.

 

**Derivativefinancial instruments**

 

      The fair value of interest rate swapderivatives is primarily based on third-party pricing service models.  Thesemodels use discounted cash flows that utilize the appropriate market-basedforward swap curves and zero-coupon interest rates.  Interest rate swapderivatives are Level 2 measurements and have a fair value of a negative $1,671,000as of September 30, 2009.

 

      The fair value of foreign currency forwardcontracts is based on a valuation model that discounts cash flows resultingfrom the differential between the contract price and the market-based forwardrate and is a Level 2 measurement and has a fair value of $72,000 loss as ofSeptember 30, 2009.

** **

**7.  Common Stock and Dividends**

** **

Dividends declared and paidon a per share basis were as follows:

** **

|                |   | Nine Months Ended |
|---------------------|--------|-------------------|
|                |   |              | **September 30,** |
|                |   |              | **2009** |   |   | **2008** |
|                |   |              |   |   |   |   |
| Dividends  declared |   | $                 | 0.18 |   | $ | 0.18 |
| Dividends  paid     |   | $                 | 0.18 |   | $ | 0.18 |

** **

** ****8.  Stock-Based     Compensation**

** **

      The Company has grantedoptions to purchase its common stock to certain  employees and directors of theCompany and its affiliates under various stock option plans at no less than thefair market value of the underlying stock on the date of grant.  These optionsare granted for a term not exceeding ten years and are forfeited in the eventthe employee or director terminates his or her employment or relationship withthe Company or one of its affiliates other than by retirement, based on certaincriteria.  These options generally vest over five years.  All option planscontain anti-dilutive provisions that permit an adjustment of the number ofshares of the Company’s common stock represented by each option for any changein capitalization.

 

      The Company’s stock-based compensation expense was $429,000 and $443,000for the nine months ended September 30, 2009 and 2008, respectively.

 

There wereno shares granted during the third quarter of 2009 and 39,000 shares granted inthe third quarter of 2008.  The Company calculated the fair value for the 2009and 2008 options using a Black-Scholes option pricing model using weightedaverage assumptions.  For options granted in the second quarter of 2009 and 2008,they are as follows:

 

|                            |   |   | 2009      | 2008      |
|---------------------------------|--------|--------|-----------|-----------|
| Risk-free  interest rate        |   |   | 2.67%     | 3.13%     |
| Dividend  Yield                 |   |   | 1.20%     | 1.20%     |
| Volatility  Factors             |   |   | 42.8%     | 43.6%     |
| Weighted  Average Expected Life |   |   | 7.5 years | 9.0 years |

** **

| 8 |
|---|

 

----

 

 

*Qualified Options*

 

     Followingis a summary of activity in the Incentive Stock Option Plans for the periodindicated:

 

| *For  nine months ending September 30, 2009*       |   | ** **     |
|----------------------------------------------------|--------|----------------|
|                                               |   |  

Shares |   |   | Exercise

Price* |
| Options  outstanding at beginning of year          |   | 253,980   |   |   |   |
|       Granted             |   | 99,000    |   |   | $11.45  |
|       Exercised           |   | –    |   |   |   |
|       Cancelled           |   | (5,000)        |   |   | $22.66  |
|                                               |   |           |   |   |   |
| Options  outstanding at September 30, 2009         |   | 347,980   |   |   | $17.85  |
| Options  exercisable at September 30, 2009         |   | 157,580   |   |   | $18.74  |
| Options  available for grant at September 30, 2009 |   | 208,000   |   |   |   |

**WeightedAverages*

 

      Optionsoutstanding and exercisable at September 30, 2009 were as follows:

 

| **Qualified  Stock Options**         |   | **Options Outstanding** |   |   | **Options Exercisable**            |
|--------------------------------------|--------|-------------------------|--------|--------|------------------------------------|
|                                 |   |  

 

Shares  |   |   | Remaining

Contractual

Life(yrs)* |  

Exercise

Price* |   |   |  

 

Shares |  

Exercise

Price* |
| Range of Exercise Price              |   |                    |   |   |                               |   |   |   |   |   |
| $11.45 -  $17.85                     |   | 158,980            |   |   | 7.78                               | $ 12.25  |   |   | 59,980    | $ 13.58  |
| $19.79 -  $25.18                     |   | 189,000            |   |   | 7.42                               | $ 22.56  |   |   | 97,600    | $ 21.90  |
|       Total |   | 347,980            |   |   |                               |   |   |   | 157,580    |   |

 

**WeightedAverages*

*** ***

***Non-qualifiedOptions***

 

Following is a summary of activity in the Non-QualifiedStock Option Plans for the period indicated:

| *For  nine months ending September 30, 2009*       |   | ** **    |
|----------------------------------------------------|--------|---------------|
|                                               |   | Shares        |   |   | Exercise

Price* |
| Options  outstanding at beginning of year          |   | 226,000  |   |   |   |
|       Granted             |   | 93,000   |   |   |   |
|       Exercised           |   | (125,000)     |   |   | $8.9375  |
|       Cancelled           |   | –   |   |   |   |
|                                               |   |          |   |   |   |
| Options  outstanding at September 30, 2009         |   | 194,000  |   |   | $  14.44  |
| Options  exercisable at September 30, 2009         |   | 79,000   |   |   | $  15.17  |
| Options  available for grant at September 30, 2009 |   | 367,000  |   |   |   |

**WeightedAverages*

* *

      Options outstanding and exercisable at September 30,2009 were as follows:

| **Non-Qualified  Stock Options**     |   | **Options Outstanding** |   |   | **Options Exercisable**            |
|--------------------------------------|--------|-------------------------|--------|--------|------------------------------------|
|                                 |   |  

 

Shares  |   |   | Remaining

Contractual

Life(yrs)* |  

Exercise  

Price*    |   |   |  

 

Shares   |  

Exercise

Price* |
| Range of Exercise Price              |   |                    |   |   |                               |   |   |   |   |   |
| $11.45 -  $12.10                     |   | 148,000            |   |   | 7.45                               | $11.69  |   |   | 55,000    | $12.10  |
| $13.96 -  $19.79                     |   | 13,500             |   |   | 5.26                               | $18.71  |   |   | 10,500    |  $18.40  |
| $25.02 -  $25.18                     |   | 32,500             |   |   | 7.92                               | $25.17  |   |   | 13,500    |  $25.16  |
|       Total |   | 194,000            |   |   |                               |   |   |   | 79,000    |   |

**Weighted Averages*

** **

| 9 |
|---|

 

----

 

 

 

**9.  Earnings Per Share**

** **

The following table setsforth the reconciliation from basic to diluted average common shares and thecalculations of net income per common share.  Net income is the same for basicand diluted per share calculations. 

 

|                                     | **Three Months Ended**

**September 30,** |       | Nine Months Ended
**September 30,**    |       |
|------------------------------------------|-------------------------------------------|------------|----------------------------------------|------------|
| (In thousands, except per share amounts) | 2009                            | ** ** | **2008**      | ** ** | 2009     | ** ** | **2008**      |  
 

** **

Net  Income 

$

4,583

 

$

4,453

** **

$

9,118

** **

$

12,850

** **

 
                               	

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Average  Common Shares:                                               	

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
      Basic  (weighted-average outstanding shares) 

 

10,047

 

 

9,870

** **

 

9,988

** **

 

9,822

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
      Dilutive  potential common shares from stock 

      options  and warrants 

 

 

39

 

 

 

100

 

 

 

24

 

 

 

127

** **

 
       Diluted (weighted-average outstanding shares) 

 

10,086

 

 

9,970

 

 

10,012

 

 

9,949

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Basic  earnings per share 

$

0.46

 

$

0.45

** **

$

0.91

** **

$

1.31

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Diluted  earnings per share 

$

0.46

 

$

0.45

** **

$

0.91

** **

$

1.29

** **

 
 

 

**10.  Segment Reporting**

** **

      At September 30, 2009 and September 30, 2008 thefollowing unaudited financial information is segmented:  

 

 

**Three Months Ended**

**September 30,**

** **

** **

**Nine Months Ended**

**September 30,**

(in  thousands)

 

**2009**  ****

** **

** **

**2008**  

** **

** **

**2009**  

** **

**2008**  

 

 

 

 

 

 

 

 

 

 

 
Net Revenue
 

 

 

 

 

 

 

 

 

 

        Industrial

$

45,547 

 

$

64,803 

 

$

134,737 

$

199,866 

        Agricultural

 

20,158 

 

 

29,555 

 

 

63,263 

 

94,826 

        European

 

44,613 

 

 

54,349 

 

 

135,704 

 

139,956 

Consolidated

$

110,318 

 

$

148,707 

 

$

333,704 

$

434,648 

 

 

 

 

 

 

 

 

 

 

 

**Income  From Operations**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

947 

 

$

2,787 

 

$

415 

$

8,713 

        Agricultural

 

1,528 

 

 

(248)

 

 

2,988 

 

1,857 

        European

 

5,191 

 

 

5,276 

 

 

12,824 

 

12,007 

Consolidated

$

7,666 

 

$

7,815 

 

$

16,227 

$

22,577 

** **

 

 

 

 

 

 

 

 

 

 

**Goodwill**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

27,168 

 

$

27,183 

 

$

27,168 

$

27,183 

        Agricultural

 

– 

 

 

5,580 

 

 

– 

 

5,580 

        European

 

22,281 

 

 

22,744 

 

 

22,281 

 

22,744 

Consolidated

$

49,449 

 

$

55,507 

 

$

49,449 

$

55,507 

 

 

 

 

 

 

 

 

 

 

 

**Total  Identifiable Assets**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

151,226 

 

$

176,677 

 

$

151,226 

$

176,677 

        Agricultural

 

61,859 

 

 

81,841 

 

 

61,859 

 

81,841 

        European

 

140,853 

 

 

139,765 

 

 

140,853 

 

139,765 

Consolidated

$

353,938 

 

$

398,283 

 

$

353,938 

$

398,283 

 

10

 

 

 

 

**11.  Off-Balance Sheet Arrangements**

** **

The Company does not have any obligation under anytransaction, agreement or other contractual arrangement to which an entityunconsolidated with the Company is party, that has or is reasonably likely tohave a material effect on the Company’s financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

 

**12.   ComprehensiveIncome**

** **

      The components of ComprehensiveIncome, net of related tax are as follows:**

 

 

 

 

**Three Months Ended**

** **

** **

**Nine Months Ended**

 

 

 

**September 30,**

** **

** **

**September 30,**

(in  thousands)

 

 

**2009**

** **

** **

**2008**

** **

** **

**2009**

** **

** **

**2008**

Net  Income 

 

$

4,583 

 

$

4,453 

 

$

9,118 

 

$

12,850 

Cash  flow derivatives, net of taxes

 

 

142 

 

 

4 

 

 

476 

 

 

1 

Amortization  of actuarial net gain 

 

 

38 

 

 

(20)

 

 

116 

 

 

(60)

Foreign  currency  translation adjustment 

 

 

2,568 

 

 

(11,713)

 

 

7,109 

 

 

(9,711)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive  Income 

 

$

7,331 

 

$

(7,276)

 

$

16,819 

 

$

3,080 

 

 

      The components of Accumulated other comprehensive incomeas shown on the Balance Sheet are as follows:
      September 30,2009(Unaudited)   December 31, 2008
**(Audited)**

(in  thousands)

** **

** **

**2009**

** **

** **

**2008**

Foreign  currency translation adjustment

 

$

8,614 

 

$

   1,553 

Derivatives,  net of taxes

 

 

(1,036)

 

 

(1,560)

Actuarial  gain on defined benefit pension plan

 

$

(3,882)

 

$

(3,998)

 

 

 

 

 

 

 

Accumulated  other comprehensive income

 

$

3,696 

 

$

   (4,005)

** **

**13.   ContingentMatters**

** **

      The Company is subject to various unresolved legalactions that arise in the ordinary course of its business.  The most prevalentof such actions relates to product liability, which is generally covered byinsurance after various self-insured retention (“SIR”) amounts.  While amountsclaimed might be substantial and the liability with respect to such litigationcannot be determined at this time, the Company believes that the outcome ofthese matters will not have a material adverse effect on the Company’sconsolidated financial position or results of operations; however, the ultimateresolution cannot be determined at this time.

      TheCompany is subject to numerous environmental laws and regulations concerningair emissions, discharges into waterways, and the generation, handling,storage, transportation, treatment and disposal of waste materials.  TheCompany’s policy is to comply with all applicable environmental, health andsafety laws and regulations, and the Company believes it is currently inmaterial compliance with all such applicable laws and regulations.  These lawsand regulations are constantly changing, and it is impossible to predict withaccuracy the effect that changes to such laws and regulations may have on theCompany in the future.  Like other industrial concerns, the Company’smanufacturing operations entail the risk of noncompliance, and there can be noassurance that the Company will not incur material costs or other liabilitiesas a result.  

 

11

 

 

 

 

 

 

      TheCompany knows that its Indianola, Iowa property is contaminated with chromiumwhich most likely resulted from chrome plating operations which werediscontinued before the Company purchased the property.  Chlorinated volatileorganic compounds have also been detected in water samples on the property,though the source is unknown at this time.  The Company has been voluntarilyworking with an environmental consultant and the State of Iowa with respect tothese issues and believes it completed its remediation program in June 2006. The work was accomplished within the Company’s environmental liability reservebalance.  We requested a “no further action” classification from the state.  Wereceived a conditional “no further action” letter in January of 2009.  When wedemonstrate stable or improving conditions below residential standards byfuture monitoring of existing wells, an unconditional no further action letterwill be requested.

 

      At September30, 2009, the Company had an environmental reserve in the amount of $1,608,000related to the acquisition of *Gradall’s* facility in Ohio.  Threespecific remediation projects that were identified prior to the acquisition arein process of remediation with a remaining reserve balance of $143,000.  TheCompany has a reserve of $277,000 concerning a potential asbestos issue that isexpected to be abated over time.  The balance of the reserve, $1,188,000, ismainly for potential ground water contamination/remediation that was identifiedbefore the acquisition and believed to have been generated by a third partycompany located near the *Gradall* facility.  Certain other assets of theCompany contain asbestos that may have to be remediated over time.  Managementhas made its best estimate of the cost to remediate these environmentalissues.  However, such estimates are difficult to estimate including the timingof such costs.  The Company believes that any subsequent change in theliability associated with the asbestos removal will not have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.

**     **

      The Company is subject to various other federal,state, and local laws affecting its business, as well as a variety ofregulations relating to such matters as working conditions, equal employmentopportunities, and product safety. A variety of state laws regulate theCompany’s contractual relationships with its dealers, some of which imposerestrictive standards on the relationship between the Company and its dealers,including events of default, grounds for termination, non-renewal of dealercontracts and equipment repurchase requirements. The Company believes it iscurrently in material compliance with all such applicable laws and regulations.

**14.  PensionBenefits**

** **

      In connection with the February 3,2006 purchase of all the net assets of the *Gradall* excavator business,Alamo Group Inc. assumed sponsorship of two *Gradall* non-contributorydefined benefit pension plans, both of which were frozen with respect to bothfuture benefit accruals and future new entrants.  

 

      The *Gradall*Company Hourly Employees’ Pension Plan covers approximately 310 formeremployees and 210 current employees who (i) were formerly employed by theformer parent of Gradall, (ii) were covered by a collective bargainingagreement and (iii) first participated in the plan before April 6, 1997.  Anamendment ceasing all future benefit accruals was effective April 6, 1997.

 

      The *Gradall*Company Employees’ Retirement Plan covers approximately 190 former employeesand 150 current employees who (i) were formerly employed by the former parentof Gradall, (ii) were not covered by a collective bargaining agreement and(iii) first participated in the plan before December 31, 2004. An amendmentceasing future benefit accruals for certain participants was effective December31, 2004.  A second amendment discontinued all future benefit accruals for allparticipants effective April 24, 2006.

 

      The Company’s pension expense was $138,000and pension income was $89,000 for the three months ended September 30, 2009and 2008, respectively.  The Company is required to contribute $487,000 to thepension plans for 2009.

 

**15.  Income Taxes**

** **

      Weare subject to U.S. federal income tax and various state, local, andinternational income taxes in numerous jurisdictions. Our domestic andinternational tax liabilities are subject to the allocation of revenue andexpenses in different jurisdictions and the timing of recognizing revenue andexpenses. Additionally, the amount of income taxes paid is subject to ourinterpretation of applicable tax laws in the jurisdictions in which we file.

 

12

 

 

 

 

 

 

      Wecurrently file income tax returns in the U.S., U.K., France, Canada and Australia, which are periodically under audit by federal, state, and international taxauthorities. These audits can involve complex matters that may require anextended period of time for resolution. Although the outcome of open tax auditsis uncertain, in management’s opinion, adequate provisions for income taxeshave been made. If actual outcomes differ materially from these estimates, theycould have a material impact on our financial condition and results ofoperations. Differences between actual results and assumptions, or changes inassumptions in future periods are recorded in the period they become known. Tothe extent additional information becomes available prior to resolution, suchaccruals are adjusted to reflect probable outcomes. Our effective tax rate isimpacted by earnings being realized in countries where we have lower statutoryrates.

 

**16.  Recent Accounting Pronouncements**

** **

      In June 2009, the Financial Accounting Standards Board(FASB) issued SFAS 168, *The FASB Accounting Standards Codification and theHierarchy of Generally Accepted Accounting Principles, a replacement of FASBStatement No. 162*.  U.S. GAAP will no longer be issued in the form of an“accounting standard,” but rather as an update to the applicable “topic” or“subtopic” within the codification. As such, accounting guidance will beclassified as either “authoritative” or “non-authoritative” based on itsinclusion or exclusion from the codification.  The codification will be thesingle source of authoritative U.S. accounting and reporting standards, exceptfor rules and interpretive releases of the SEC under authority of federalsecurities laws, which are sources of authoritative GAAP for SEC registrants. The codification of U.S. GAAP became effective for the quarter ending afterSeptember 30, 2009.  We do not expect this statementto have a material impact on our consolidated financial statements.

 

      InMay 2009, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 165, “Subsequent Events” (“SFASNo. 165”).  SFAS No. 165 was subsequently codified in the FASBAccounting Standards Codification Topic 855 (“ASC 855”).  ASC 855establishes principles and standards related to the accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued.  ASC 855 requires an entity torecognize, in the financial statements, subsequent events that provideadditional information regarding conditions that existed at the balance sheetdate.  In accordance with this standard, which was effective beginningwith the quarter ended June 30, 2009, management has evaluated subsequentevents for accounting and disclosure through the date of filing this quarterlyreport on Form 10-Q, which is November 9, 2009.

 

      InDecember 2007, the FASB issued Statement of Financial Accounting Standards No.141(R), “Business Combinations”, (“SFAS 141R”), which replaces SFAS 141. SFAS 141R has subsequently been codified in the FASB Accounting StandardsCodification Topic 805 (“ASC 805”).  ASC 805 requires most assets acquiredand liabilities assumed in a business combination, contingent consideration,and certain acquired contingencies to be measured at their fair values as ofthe date of acquisition.  The new standard also requires thatacquisition-related costs and restructuring costs be recognized separately fromthe business combination.  The new standard became effective for theCompany on January 1, 2009.

 

      In December2007, the FASB issued Statement of Financial Accounting Standards No. 160,“Noncontrolling Interest in Consolidated Financial Statements”, (“SFAS160”).  SFAS 160 has subsequently been codified in the FASB AccountingStandards Codification Topic 810 (“ASC 810”).  The new standard amendsprevious accounting literature to establish new accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  The new standard is effective for the Companythis fiscal year.  

 

      TheFinancial Accounting Standards Board’s Emerging Issues Task Force has issuednew accounting guidance for revenue arrangements with multipledeliverables.  Under current accounting guidance, one of the requirementsfor recognition of revenue for a delivered item under a multiple elementarrangement is that there must be objective and verifiable evidence of thestandalone selling price of the undelivered item.  The new guidanceeliminates that requirement and requires an entity to estimate the sellingprice of each element in the arrangement.  The result will likely be thatmore arrangements will be separated into multiple elements of accounting thanwas the case previously.

 

13

 

 

 

 

 

 

      Thenew guidance is effective for the Company as of beginning January 1, 2011, andwill be applied prospectively to new arrangements entered into beginning onthat date.  Early adoption is permitted as of the beginning of a fiscalyear.  If the new guidance is adopted early in other than the first periodof the fiscal year, the guidance must be adopted retrospectively to thebeginning of the fiscal year of adoption.  Retrospective application toprior years is allowed, but not required.  In the initial year ofapplication, certain qualitative and quantitative disclosures about the impactof the adoption are required.  The Company has not yet determined the impact ofadoption. 

 

      In March 2008 the FASB issued Statement of FinancialAccounting Standards No. 161, "Disclosures About DerivativeInstruments and Hedging Activities**(“SFAS 161”) expanding the disclosurerequirements to provide greater transparency about (i) how and why anentity uses derivative instruments, (ii) how derivative instruments andrelated hedge items are accounted for and (iii) how derivative instrumentsand related hedged items affect an entity's financial position, results ofoperations and cash flows.  SFAS 161 has subsequently been codified in the FASBAccounting Standards Codification Topic 815 (“ASL 815”).  To meet thoseobjectives, Statement 161 requires qualitative disclosures aboutobjectives and strategies for using derivatives, quantitative disclosures aboutfair value amounts of gains and losses on derivative instruments anddisclosures about credit-risk-related contingent features in derivativeagreements. The Company adopted SFAS 161 on January 1, 2009 and it did not have a significant impact on the Company's financial statements.

 

In June 2009, the FASB issued SFAS 167, *Amendmentsto FASB Interpretation No. 46(R),* which is to be included in ASC Topic810, consolidation. This guidance amends FASB InterpretationNo. 46(revised December 2003) to address the elimination of theconcept of a qualifying special purpose entity. SFAS 167 also replaces thequantitative-based risks and rewards calculation for determining whichenterprise has a controlling financial interest in a variable interest entitywith an approach focused on identifying which enterprise has the power todirect the activities of a variable interest entity and the obligation toabsorb losses of the entity or the right to receive benefits from the entity.Additionally, SFAS 167 provides more timely and useful information about anenterprise’s involvement with a variable interest entity. SFAS 167 will becomeeffective in the first quarter of 2010. We are currently evaluating the impactof this standard on our Consolidated Financial Statements.

 

**17.  Subsequent Events**

 

On September 4, 2009 the Company announced it has signed anagreement to acquire the majority of the assets and assume certain liabilitiesof Bush Hog, LLC (“Bush Hog”), a leader in the design, manufacture,distribution and service of rotary cutters and other agricultural implementsand equipment.  The purchase consideration was 1.7 million shares of Alamo GroupInc. common stock which, after the closing, would represent approximately 14.5%of the outstanding common stock of Alamo Group.  The purchase includessubstantially all of the ongoing business of Bush Hog, including the Bush Hogbrand name and all related product names and trademarks.  

 

On October 22, 2009, the Company announced it had completedthe acquisition of the majority of the assets of Bush Hog.  As considerationfor the assets acquired, the Company issued 1.7 million unregistered shares ofAlamo Group Inc. common stock ($.10 par value) and assumed certain operatingliabilities, though no funded debt.

 

      OnNovember 6, 2009, the Company entered into the Seventh Amendment of the Amendedand Restated Revolving Credit Agreement with Bank of America, N.A., Wells FargoBank, N.A., BBVA Compass Bank, and Rabobank, as its lenders.  Prior to theexecution of this Amendment, BBVA Compass Bank acquired certain assets ofGuaranty Bank which included this credit facility and JPMorgan Chase Bankassigned its interest to Well Fargo Bank, N.A.  The purpose of the amendmentwas to add Bush Hog as a member of the Obligated Group and pledge a firstpriority security interest in certain U.S. assets (accounts receivable,inventory, equipment, trademarks and trade names) of the Borrower and eachmember of the Obligated Group.  The Lenders agreed to increase the operatingleverage ratio during the next three quarters and to add a new EBIT to InterestExpense covenant in exchange for a commitment fee and an increase in theApplicable Interest Margin over LIBOR or Prime Rate advances.  

 

 

14

 

 

 

 

**Item 2.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

 

The following tables set forth, for the periods indicated,certain financial percentages:

 

 

**Three Months Ended**

**September 30,**

 

**Nine Months Ended**

**September 30,**

 

 
(As  Percentages of Net Sales)

**2009**   

 

 

**2008**  

 

 

**2009**  

 

 

**2008**  

 

North American

 

 

 

 

 

 

 

 

 

    Industrial 

41.3

%

43.6

%

40.4

%

 

46.0

%

    Agricultural 

18.3

%

19.9

%

18.9

%

 

21.8

%

European 

40.4

%

36.5

%

40.7

%

 

32.2

%

    Total sales, net

100.0

%

100.0

%

100.0

%

 

100.0

%

 

 

 

 

**Three Months Ended**

**September 30,**

 

**Nine Months Ended**

**September 30,**

 

(Cost  Trends and Profit Margin, as

Percentages  of Net Sales)

** **

**2009**  

 

** **

**2008**  

 

** **

**2009**  

 

** **

**2008**  

 

 

 

 

 

 

 

 

 

 

Gross margin 

23.3

%

19.9

%

21.5

%

19.6

%

Income from operations

6.9

%

5.3

%

4.9

%

5.2

%

Income before income taxes 

6.2

%

4.5

%

4.0

%

4.5

%

Net income 

4.2

%

3.0

%

2.7

%

3.0

%

** **

**Overview**

** **

*Thisreport contains forward-looking statements that are based on Alamo Group’scurrent expectations.  Actual results in future periods may differ materiallyfrom those expressed or implied because of a number of risks and uncertaintieswhich are discussed below and in the Forward-Looking Information section.*

 

      Duringthe nine months of 2009, the Company’s net income was down due to the generalweakness in the worldwide economy.  The acquisition of Rivard was accretive tothe Company in sales and net income during the nine months of the year.  Salesin the Industrial Division were down 33% during the first nine months of 2009due to budget constraints and revenue shortfalls of governmental entities andrelated contractors.  Higher dollar items such as the excavator and sweeperproducts were particularly affected.  The Agricultural Division also saw a 33%decrease as both dealers and end users were reluctant to make commitments dueto the uncertainty in the economy.  Excluding the acquisition of Rivard, salesin local currency for the European Division were essentially flat for the ninemonths of 2009.  

 

      TheCompany remains concerned that our markets for the remainder of 2009 couldcontinue to be negatively affected by a variety of factors such as the downturnin the overall economy; constrained credit availability; increase ingovernmental regulations, changes in farm incomes due to commodity prices orgovernmental aid programs; outbreak of the H1N1 virus at one or more of theCompany’s facilities which could affect our manufacturing capabilities; adversesituations that could affect our customers such as cutback on dealer stockinglevels; weather conditions such as droughts and floods; budget constraints orrevenue shortfalls in governmental entities to which the Company sells itsproducts and changes in our customer’s buying habits due to lack of confidencein the economic outlook.

** **

**Results of Operations**

*Three Months Ended September 30, 2009 vs. Three Months EndedSeptember 30, 2008*

 

      Net sales for the third quarter of 2009 were $110,318,000,a decrease of $38,389,000 or 25.8% compared to $148,707,000 for the thirdquarter of 2008.  The decrease was primarily attributable to the decline in theworldwide economy which continued to affect the markets which the Companyserves.

 

 

15

 

 

 

 

 

 

 

Net North American Industrialsales decreased during the third quarter by $19,256,000 or 29.7% to $45,547,000for 2009 compared to $64,803,000 during the same period in 2008. The majorityof the decrease came from lower sales to governmental entities and relatedcontractors of excavator, sweeper and mowing products.  Compared to 2008, salesto cities and counties remained steadier than those to state agencies.

 

Net North AmericanAgricultural sales were $20,158,000in 2009 compared to $29,555,000 for the same period in 2008, a decrease of$9,397,000 or 31.8%.  The decrease was the result of continued soft marketconditions and lower commodity prices in the agricultural market.  Market uncertainty and tighter credit has made dealersreluctant to stock inventory at historic levels.

 

Net European Sales for the third quarter of 2009 were $44,613,000, a decrease of $9,736,000 or 17.9%compared to $54,349,000 during the third quarter of 2008.  The majority of thedecrease was primarily due to softness in French markets as well as changes inthe exchange rates.

 

 

      Gross profit for the third quarter of 2009 was $25,649,000(23.3% of net sales) compared to $29,610,000 (19.9% of net sales) during thesame period in 2008, a decrease of $3,961,000.  The decrease was due to declinein sales during the third quarter of 2009.  The increase in gross marginpercentage was a result of cost saving initiatives implemented earlier in theyear along with favorable pricing of raw materials and purchased components.
 
      Selling, general and administrative expense(“SG&A”) was $17,983,000 (16.3% of net sales)during the third quarter of 2009 compared to $21,795,000 (14.7% of netsales) during the same period of 2008, a decrease of $3,812,000.  The decreasecame from reductions in headcounts despite severance costs along with lowercommissions due to reduced sales volume.

 

      Interest expense was $1,005,000 for the third quarter of 2009 comparedto $2,024,000 during the same period in 2008, a decrease of $1,019,000.  Thedecrease was from lower borrowings and lower interest rates in 2009 compared to2008.

 

      Other income (expense) was $134,000 of income during the third quarter of 2009 compared to $222,000 of income in the third quarter of 2008.  The gains inboth 2009 and 2008 are entirely from changes in exchange rates.
 
      Provision for income taxes was $2,227,000 (32.7% of income before taxes) for the third quarter of 2009 compared to $2,251,000(33.6% of income before taxes) in the third quarterof 2008. 

 

      The Company’s net income after tax was $4,583,000or $.46 per share on a diluted basis for the third quarter of 2009 compared to$4,453,000 or $.45 per share on a diluted basis for the third quarter of 2008. The increase of $130,000 resulted from the factors described above.

 

* *

*Nine Months Ended September 30, 2009 vs. NineMonths Ended September 30, 2008*

 

      Net sales for the first nine months of 2009were $333,704,000, a decrease of $100,944,000 or 23.2% compared to $434,648,000for the first nine months of 2008.  The decrease was primarily from continuedweakness in the economy which has continued since the fourth quarter of 2008.

 

Net North American Industrial sales decreased during the firstnine months by $65,129,000 or 32.6% to$134,737,000 for 2009 compared to $199,866,000 during the same period in 2008.The decrease was due from lower sales of excavator, vacuum truck, sweeper andmowing equipment as governmental entities continue to be affected by budgetconstraints and revenue shortfalls. 

 

 

16

 

 

 

 

 

 

 

Net North American Agriculturalsales were $63,263,000 in 2009 compared to$94,826,000 for the same period in 2008, a decrease of $31,563,000 or 33.3%. The decrease was mainly due to dealer reluctance to stock farm equipment athistorical levels as a result of the slowdown in the agricultural sector andconcerns about the overall economy.

 

NetEuropean Sales for the first nine months of 2009 were $135,704,000, a decreaseof $4,252,000 or 3.0% compared to $139,956,000during the same period of 2008.  The decrease was primarily due to changes inexchange rates and softness in the French markets.  The *Rivard*acquisition added to sales for the year and to a lesser extent higher exportsales outside our core markets.

 

      Gross profit for the first ninemonths of 2009 was $71,705,000 (21.5% of net sales) compared to $85,095,000 (19.6%of net sales) during the same period in 2008, a decrease of $13,390,000. The decrease was mainly due to reduced salesduring 2009, which was somewhat offset by the *Rivard*acquisition.  Grossmargin percentages improved over 2008 as a result of favorable pricing in bothraw material and purchased components and continued improvements fromefficiency initiatives.
 
Selling, generaland administrative expense (“SG&A”) were$55,478,000 (16.6% of net sales) during thefirst nine months of 2009 compared to $62,518,000 (14.4% of net sales) duringthe same period of 2008, a decrease of $7,040,000.  The decrease in SG&Afor the nine months of 2009 was due to reductions in workforce despiteseverance costs, reductions in insurance premiums and audit fees, and reducedcommissions from lower sales volumes. 

 

      Interest expense was $3,248,000 for the firstnine months of 2009 compared to $5,748,000 during the same period in 2008, a decreaseof $2,500,000.  The decrease was due to reduced borrowings and lower interest ratesin 2009. 

 

      Other income (expense) was $130,000 of incomeduring the first nine months of 2009 compared to $881,000 of income in thefirst nine months of 2008.  The gains in both 2009and 2008 are entirely from changes in exchange rates.

 

      Provision for income taxes was $4,328,000 (32.2% of income before taxes) for 2009compared to $6,490,000 (33.6% of income before taxes)in 2008.  
                        
      The Company’s net income after tax was $9,118,000or $.91 per share on a diluted basis for the first nine months of 2009 comparedto $12,850,000 or $1.29 per share on a diluted basis for the first nine monthsof 2008.  The decrease of $3,732,000 resulted from the factors described above.

                            

            

**Liquidity and Capital Resources**

 

In addition to normal operatingexpenses, the Company has ongoing cash requirements which are necessary to operatethe Company’s business, including inventory purchases and capitalexpenditures.  The Company’s inventory and accounts payable levels typicallybuild in the first half of the year and in the fourth quarter in anticipationof the spring and fall selling seasons.  Accounts receivable historically buildin the first and fourth quarters of each year as a result of fall preseasonsales programs and out of season sales in certain of our operations.  Thesesales level the Company’s production during the off season. 

 

As of September 30, 2009, the Company had working capitalof $160,232,000 which represents a decrease of $20,109,000 from working capitalof $180,341,000 as of December 31, 2008.  The decreasein working capital was primarily from reductions in current assets, mainlytrade receivables from a decrease in sales volume compared to 2008 and lowerinventory levels from reduced levels of activity.

 

Capital expenditures were $2,661,000 for the first nine months of 2009, compared to $5,052,000 during the first nine months of 2008.  Capitalexpenditures for 2009 are expected to be below 2008 levels.   The Companyexpects to fund expenditures from operating cash flows or through its revolvingcredit facility, described below.

 

17

 

 

 

 

 

 

The Company was authorized by its Board of Directorsin 1997 to repurchase up to 1,000,000 shares of the Company’s common stock tobe funded through working capital and credit facility borrowings.  There wereno shares purchased in 2008 or the nine months of 2009.  The authorization torepurchase up to 1,000,000 shares remains available less 42,600 sharespreviously repurchased.
 
      Net cash used byfinancing activities was $36,809,000 during thenine month period ending September 30, 2009, compared to net cash provided of $10,300,000for the same period in 2008.  The decrease in financing activities in 2009 wasfrom paydowns on the bank credit facility due to cash provided by operatingactivities.

 

      On August 25, 2004, theCompany entered into a five-year $70 million Amended and Restated RevolvingCredit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, andGuaranty Bank. This contractually committed, unsecured facility allows theCompany to borrow and repay amounts drawn at floating or fixed interest ratesbased upon Prime or LIBOR rates. Proceeds may be used for general corporatepurposes or, subject to certain limitations, acquisitions. The loan agreementcontains among other things the following financial covenants:  Minimum FixedCharge Coverage Ratios, Minimum Consolidated Tangible Net Worth, ConsolidatedFunded Debt to EBITDA Ratio and Minimum Asset Coverage Ratio, along withlimitations on dividends, other indebtedness, liens, investments and capitalexpenditures. 

 

      On February 3, 2006, theCompany amended and restated the credit agreement to increase the Company’sexisting credit facility from $70 million to $125 million. Pursuant to theterms of the Amended and Restated Revolving Credit Agreement, the Company hasthe ability to request an increase in commitments by $25 million. In addition,the existing credit facility was modified in other respects, including reducingthe asset coverage ratio and lowering the interest margins.

 

      On March 30, 2006 the Company entered into the Fourth Amendment ofthe Amended and Restated Revolving Credit Agreement, dated March 30, 2006 (the“Amended and Restated Revolving Credit Agreement”), between the Company andBank of America, N.A., JPMorgan Chase Bank and Guaranty Bank, as its lenders.Pursuant to the terms of the Amended and Restated Revolving Credit Agreement,the Company added *Gradall* Industries, Inc., formerly Alamo Group (OH)Inc., and N.P. Real Estate Inc. as members of the Obligated Group. TheAmendment also allows for capital expenditures not to exceed $14 million forthe fiscal year ending 2006 and $10 million in the aggregate during each fiscalyear thereafter.

 

     OnMay 7, 2007, the Company entered into the Fifth Amended and Restated RevolvingCredit Agreement with Bank of America, N.A., JPMorgan Chase Bank, Guaranty Bankand Rabobank, as its lenders. The Amended and Restated Revolving CreditAgreement provides for a $125 million unsecured revolving line of credit forfive years with the ability to expand the facility to $175 million, subject tobank approval. In addition to the extended term of the loan to 2012, othermajor changes were improvements in the leverage ratio, minimum asset coverageratio and increase in annual allowable capital expenditures up to $17.5million. The banks agreed to eliminate the fixed charge coverage ratio andminimum net worth requirement along with a reduction in the applicable interestrate margin. The applicable interest margin fluctuates quarterly either up ordown based upon the Company’s leverage ratio.

 

      OnOctober 14, 2008, the Company entered into the Sixth Amendment and Waiver underthe Amended and Restated Revolving Credit Agreement.  The purpose of theamendment and waiver was to clarify company names within the obligated groupafter merging or dissolving some subsidiaries, to define operating cash flowand defining quarterly operating cash flow for *Rivard* through March 31,2009.  Beginning June 30, 2009, *Rivard*’s actual operating cash flow willbe used in the calculation of consolidated operating cash flow.

 

      OnNovember 6, 2009, the Company entered into the Seventh Amendment of the Amendedand Restated Revolving Credit Agreement with Bank of America, N.A., Wells FargoBank, N.A., BBVA Compass Bank, and Rabobank, as its lenders.  Prior to theexecution of this Amendment, BBVA Compass Bank acquired certain assets ofGuaranty Bank which included this credit facility and JPMorgan Chase Bankassigned its interest to Well Fargo Bank, N.A.  The purpose of the amendmentwas to add Bush Hog as a member of the Obligated Group and pledge a firstpriority security interest in certain U.S. assets (accounts receivable,inventory, equipment, trademarks and trade names) of the Borrower and eachmember of the Obligated Group.  The Lenders agreed to increase the operatingleverage ratio during the next three quarters and to add a new EBIT to InterestExpense covenant in exchange for a commitment fee and an increase in theApplicable Interest Margin over LIBOR or Prime Rate advances.  

 

18

 

 

 

 

 

 

      On May13, 2008, Alamo Group Europe Limited entered into a £5.5 million overdraftfacility with Lloyd’s TSB Bank plc.  The facility expires on October 31, 2009and is in the process of being renewed.  Outstandings bear interest at Lloyd’sBase Rate plus 1.1% per annum.  The facility is unsecured but guaranteed by the  U.K. subsidiaries of Alamo Group Europe Limited.  As of September 30, 2009,there was no outstanding balance borrowed against the U.K. overdraft facility.

 

As of September 30, 2009, there was $59,000,000borrowed under the Revolving Credit Facility.  At September 30, 2009, $917,000of the revolver capacity was committed to irrevocable standby letters of creditissued in the ordinary course of business as required by vendors’ contractsresulting in approximately $42,000,000 in available borrowings.

 

      Thereare additional lines of credit, for the Company’s French operations in theamount of 9,300,000 Euros, which includes the *Rivard* credit facilities,for our Canadian operation in the amount of 3,500,000 Canadian dollars, and forour Australian operation in the amount of 800,000 Australian dollars.  As of September30, 2009, 1,233,000 Euros were borrowed against the French line of credit,2,593,000 Canadian dollars were outstanding on the Canadian line of credit and500,000 Australian dollars were outstanding under its facility.  The Canadianand Australian revolving credit facilities are guaranteed by the Company. 

 

      As of September 30, 2009,the Company was in compliance with the terms and conditions of its creditfacilities.

 

      Management believes the bank credit facilities and the Company’sability to internally generate funds from operations should be sufficient tomeet the Company’s cash requirements for the foreseeable future.  However, thechallenges affecting the banking industry and credit markets in general canpotentially cause changes to credit availability which creates a level ofuncertainty.

 

**Critical Accounting Estimates**

Management’s Discussion and Analysisof Financial Condition and Results of Operations are based upon ourConsolidated Financial Statements, which have been prepared in accordance withGAAP.  The preparation of these financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenue and expenses, and related disclosure of contingent assetsand liabilities.  Management bases its estimates on historical experience andon various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results may differ from these estimates underdifferent assumptions or conditions.

 

**Critical Accounting Policies**

An accounting policy is deemed to becritical if it requires an accounting estimate to be made based on assumptionsabout matters that are highly uncertain at the time the estimate is made, andif different estimates that reasonably could have been used, or changes in theaccounting estimates that are reasonably likely to occur periodically, couldmaterially impact the financial statements.  Management believes the followingcritical accounting policies reflect its more significant estimates andassumptions used in the preparation of the Consolidated Financial Statements. For further information on the critical accounting policies, see Note 1 of ourNotes to Consolidate Financial Statements.

 

***Allowancefor Doubtful Accounts***

 

The Company evaluates thecollectibility of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer’s inability to meetits financial obligations, it records a specific reserve to reduce the amountsrecorded to what it believes will be collected.  For all other customers, itrecognizes reserves for bad debt based on historical experience of bad debts asa percent of revenues for each business unit, adjusted for relativeimprovements or deteriorations in the agings and changes in current economicconditions.

 

19

 

 

 

 

 

 

The Company evaluates all agedreceivables that are over 60 days old and reserves specifically on a 90-daybasis.  The Company’s U.S. operations have Uniform Commercial Code (“UCC”)filings on practically all wholegoods each dealer purchases.  This allows theCompany in times of a difficult economy when the customer is unable to pay orhas filed for bankruptcy (usually Chapter 11), to repossess the customer’sinventory.  This also allows Alamo Group to maintain a reserve over its costwhich usually represents the margin on the original sales price.

 

      Thebad debt reserve balance was $2,506,000 at September 30, 2009 and $2,430,000 atDecember 31, 2008.  

 

***SalesDiscounts***

* *

      At September30, 2009 the Company had $3,957,000 in reserves for sales discounts compared to$6,849,000 at December 31, 2008 on products shipped to our customers undervarious promotional programs.  The decrease was due primarily from loweradditional discounts reserved on the Company’s agricultural**productsduring the pre-season, which runs from September to December of each year andorders are shipped through the first quarter of 2010.  The Company reviews thereserve quarterly based on analysis made on each program outstanding at the time. 

 

      TheCompany bases its reserves on historical data relating to discounts taken bythe customer under each program.  Historically between 85% and 95% of theCompany’s customers who qualify for each program, actually take the discountthat is available.

* *

***Inventories– Obsolescence and Slow Moving***

* *

The Company had $8,829,000 at September 30, 2009 and$8,978,000 at December 31, 2008 in reserve to cover obsolescence and slowmoving inventory.  The decrease in reserve for obsolescence was mainly due toinventory written off in the Company’s European operations.  The obsolescenceand slow moving policy states that the reserve is to be calculated on a basisof: 1) no inventory usage over a three year period and inventory with quantityon hand is deemed obsolete and reserved at 100 percent and 2) slow movinginventory with little usage requires a 100 percent reserve on items that have aquantity greater than a three year supply.  There are exceptions to theobsolete and slow moving classifications if approved by an officer of theCompany based on specific identification of an item or items that are deemed tobe either included or excluded from this classification. 

 

      In cases where there is no historical data, managementmakes a judgment based on a specific review of the inventory in question todetermine what reserves, if any are appropriate.  New products or parts aregenerally excluded from the reserve policy until a three year history has beenestablished.

 

The reserve is reviewed and if necessary, adjustments made,on a quarterly basis.  The Company relies on historical information to supportits reserve.  Once the inventory is written down, the Company does not adjustthe reserve balance until the inventory is sold.

*** ***

***Warranty***

* *

The Company’s warranty policy is generally to provide itscustomers warranty for up to one year on all equipment and 90 days for parts,though some products or components may have extended terms.

 

Warranty reserve, as a percent of sales, iscalculated by taking the current twelve months of expenses and prorating thatbased on twelve months of sales with a six month lag period.  The Company’shistorical experience is that a customer takes approximately ninety days to sixmonths from the time the unit is received and put into operation to file any warranty claim.  A warranty reserve is established for each different marketing group. Reserve balances are evaluatedon a quarterly basis and adjustments are made when required.  

 

The current warranty reserve balance was $5,186,000 at September30, 2009 and $5,409,000 at December 31, 2008.  The majority of the decreasecame from lower reserves in the Company’s U.S. Industrial Division.  The Companyhas a long-term liability for extended warranty policies sold to customers inthe amount of $299,000 at September 30, 2009 and $331,000 at December 31, 2008with a life expectancy of 1 to 5 years. 

*** ***
 
***Product Liability***

 

 

 

At September 30, 2009 the Companyhad accrued $387,000 in reserves for product liability cases compared to$85,000 at December 31, 2008.  The Company accrues primarily on a case by casebasis and adjusts the balance quarterly.

 

20

 

 

 

 

 

 

During most of 2009, the selfinsured retention (S.I.R.) for U.S. product liability coverage for all productswas at $100,000 per claim.  On September 30, 2009 the Company renewed itsinsurance coverage and the S.I.R. for all products remained at $100,000.  TheCompany also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.’s or deductibles.
***Goodwill***
      UnderASC 350, Intangible-Goodwill and Other, goodwillis no longer amortized; however, it must be tested for impairment at leastannually. In the fourth quarter of each year, or when events and circumstances warrant such a review, the Company tests the goodwill of all of its reporting units forimpairment. The goodwill impairment test is determined using a two-stepprocess.  The first step is to identify if a potential impairment exists bycomparing the fair value of a reporting unit with its carrying amount, includinggoodwill (Step 1).  If the fair value of a reporting unit exceeds its carryingvalue amount, goodwill of the reporting unit is not considered to have apotential impairment and the second step is not necessary.  However, if thecarrying amount of the reporting unit exceeds its fair value, the second step(Step 2) is performed to determine if goodwill is impaired and to measure theamount of impairment loss to recognize, if any. Step 2 compares the impliedfair value of goodwill with the carrying amount of goodwill.  If the impliedvalue of goodwill is less than the carrying amount of goodwill, then a chargeis recorded to reduce goodwill to the implied goodwill. The implied goodwill iscalculated based on a hypothetical purchase price allocation similar to therequirements of Statement of Financial Accounting Standards No.141R, BusinessCombinations, in that it takes the implied fair value of the reporting unit andallocates such fair value to the fair value of the assets and liabilities ofthe reporting unit.  

                   

      TheCompany estimated the fair value of its reporting units using various valuationtechniques, with one technique being a discounted cash flow analysis. Thisanalysis requires the Company to make significant assumptions and estimatesabout the extent and timing of future cash flows, discount rates and growthrates. The cash flows are estimated over a significant future period of time,which makes those estimates and assumptions subject to an even higher degree ofuncertainty. The Company also utilizes market valuation models and otherfinancial ratios, which require the Company to make certain assumptions andestimates regarding the applicability of those models to its assets andbusinesses. The Company believes that the assumptions and estimates used todetermine the estimated fair values of each of its reporting units arereasonable. However, different assumptions could materially affect theestimated fair value. The Company recognized goodwill impairment of $5,010,000in the Agricultural segment in 2008.  No goodwill impairment was recorded in2007 or 2006.  As of September 30, 2009, the Company had $49,449,000 ofgoodwill, which represents 14% of total assets.

 

      Managementbelieves that the valuations arrived at are reasonable and consistent with whatother marketplace participants would currently use in valuing the Company’scomponents.  However, management cannot give any assurance that market valueswill not change in the future.  For example, if higher discount rates are demandedby the market increase, this could lead to a reduction under the incomeapproach. If the Company’s projections are not achieved in the future, thiscould lead management to reassess their assumptions and lead to a reductionunder the income approach.  If the current market price of the Company’s stockdecreases, this could cause the Company to reassess the reasonableness of thecontrol premium, which might cause management to assume a higher discount rateunder the income approach. If future similar transactions exhibit lowermultiples than those observed in the past, this could lead to a reduction underthe similar transactions approach.  The Company’s next regularly scheduledannual impairment test is scheduled for the year ending December 31, 2009,however if there are further triggering events, the Company may be required toperform additional testing at other dates.
** ****Forward-LookingInformation**
      Part I of this Quarterly Report onForm 10‐Q and the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in Part II of this QuarterlyReport contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934.  In addition, forward-looking statementsmay be made orally or in press releases, conferences, reports or otherwise, inthe future by or on behalf of the Company.

	21

 

 

 

 

 

 

      Statements that are not historical areforward-looking.  When used by or on behalf of the Company, the words“estimate,” “believe,” “intend” and similar expressions generally identifyforward-looking statements made by or on behalf of the Company.

      Forward-looking statements involve risks anduncertainties.  These uncertainties include factors that affect all businessesoperating in a global market, as well as matters specific to the Company andthe markets it serves.  Particular risks and uncertainties facing the Companyinclude changes in market conditions; increased competition; decreases in theprices of agricultural commodities, which could affect our customer’s incomelevels; budget constraints or income shortfalls which could affect thepurchases of our type of equipment by governmental customers; creditavailability for both the Company and its customers, adverse weather conditionssuch as droughts and floods which can affect buying patterns of the Company’scustomers and related contractors; the price and availability of critical rawmaterials, particularly steel and steel products; energy cost; increased costof new governmental regulations which effect corporations; the potentialeffects on the buying habits of our customers due to diseases such as mad cow;the Company’s ability to develop and manufacture new and existing productsprofitably; market acceptance of new and existing products; the Company’sability to maintain good relations with its employees; and the ability to hireand retain quality employees.

      In addition, the Company is subjectto risks and uncertainties facing the industry in general, including changes inbusiness and political conditions and the economy in general in both domesticand international markets; weather conditions affecting demand; slower growthin the Company’s markets; financial market changes including increases ininterest rates and fluctuations in foreign exchange rates; actions ofcompetitors; the inability of the Company’s suppliers, customers, creditors,public utility providers and financial service organizations to deliver orprovide their products or services to the Company; seasonal factors in theCompany’s industry; unforeseen litigation; government actions including budgetlevels, regulations and legislation, primarily relating to the environment,commerce, infrastructure spending, health and safety; and availability ofmaterials.

     TheCompany wishes to caution readers not to place undue reliance on anyforward-looking statements and to recognize that the statements are notpredictions of actual future results.  Actual results could differ materiallyfrom those anticipated in the forward-looking statements and from historicalresults, due to the risks and uncertainties described above, as well as othersnot now anticipated.  The foregoing statements are not exclusive and furtherinformation concerning the Company and its businesses, including factors thatcould potentially materially affect the Company’s financial results, may emerge from time to time.  It isnot possible for management to predict all risk factors or to assess the impactof such risk factors on the Company’s businesses.

 

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risks**

 

      The Company is exposed to variousmarkets risks.  Market risks are the potential losses arising from adverse changes in market prices and rates.  The Company does not enter into derivative or other financial instruments fortrading or speculative purposes.

** **

**Foreign Currency Risk**

* *

*International Sales*

 

      A portion of the Company’s operations consistsof manufacturing and sales activities in international jurisdictions. TheCompany primarily manufactures its products in the United States, the U.K., France, Canada and Australia.  The Company sells its products primarily within the marketswhere the products are produced, but certain of the Company’s sales from its U.K. operations are denominated in other European currencies.  As a result, the Company’sfinancials, specifically the value of its foreign assets, could be affected byfactors such as changes in foreign currency exchange rates or weak economicconditions in the other markets in which the subsidiaries of the Company distributetheir products.

 

	22

 

 

 

 

 

 

      To mitigate the short-term affect of changes incurrency exchange rates on the Company’s functional currency-based sales, theCompany’s U.K. subsidiaries regularly hedge by entering into foreign exchangeforward contracts to hedge approximately 80% of its future net foreign currencysales transactions over a period of nine months.  As of September 30, 2009, theCompany had $3,041,000 outstanding in forward exchange contracts related toaccounts receivables.  A 15% fluctuation in exchange rates for these currencieswould change the fair value by approximately $456,000.  However, since thesecontracts hedge foreign currency denominated transactions, any change in thefair value of the contracts should be offset by changes in the underlying valueof the transaction being hedged.

*Exposure to Exchange Rates*

 

      The Company’s earnings are affected by fluctuations inthe value of the U.S. dollar as compared to foreign currencies, predominatelyin European countries, as a result of the sales of its products ininternational markets.  Foreign currency options and forward contracts are usedto hedge against the earnings effects of such fluctuations.  At September 30, 2009,the result of a uniform 10% strengthening in the value of the dollar relativeto the currencies in which the Company’s sales are denominated would result ina decrease in gross profit of $3,781,000 for the period ending September 30, 2009. Comparatively, the result of a uniform 10% strengthening in the value of thedollar relative to the currencies in which the Company’s sales are denominatedwould have resulted in a decrease in gross profit of approximately $3,769,000for the period ended September 30, 2008.  This calculation assumes that eachexchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes inexchange rates, which are a changed dollar value of the resulting sales,changes in exchange rates may also affect the volume of sales or the foreigncurrency sales price as competitors’ products become more or less attractive. The Company’s sensitivity analysis of the effects of changes in foreigncurrency exchange rates does not factor in a potential change in sales levelsor local currency prices.  The translation adjustment during the third quarterof 2009 was a gain of $2,568,000.  On September 30, 2009, the British poundclosed at .6258 relative to 1.00 U.S. dollar, and the Euro dollar closed at .6833relative to 1.00 U.S. dollar.  At December 31, 2008 the British pound closed at..6853 relative to 1.00 U.S. dollar and the Euro dollar closed at .7159 relativeto 1.00 U.S. dollar.  By comparison, on September 30, 2008, the British poundclosed at .5625 relative to 1.00 U.S. dollar, and the Euro dollar closed at .7104relative to 1.00 U.S. dollar.  No assurance can be given as to future valuationof the British pound or Euro or how further movements in those or othercurrencies could affect future earnings or the financial position of theCompany.

**Interest Rate Risk**

      The Company’s long-term debt bears interest atvariable rates.  Accordingly, the Company’s net income is affected by changesin interest rates.  Assuming the current level of borrowings at variable ratesand a two percentage point change in the 2009 average interest rate under theseborrowings, the Company’s interest expense would have changed by approximately $885,000. In the event of an adverse change in interest rates, management could takeactions to mitigate its exposure.  However, due to the uncertainty of theactions that would be taken and their possible effects this analysis assumes nosuch actions.  Further this analysis does not consider the effects of thechange in the level of overall economic activity that could exist in such anenvironment.

 

**Item 4. Controls and Procedures**

 

      **Disclosure Controls and Procedures**.  An evaluation was carried out underthe supervision and with the participation of Alamo’s management, including ourPresident and Chief Executive Officer, Executive Vice President and ChiefFinancial Officer (Principal Financial Officer) and Vice-President andCorporate Controller, (Principal Accounting Officer), of the effectiveness ofthe design and operation of our disclosure controls and procedures (as definedin Rule 13A-15(e) under the Securities Exchange Act of 1933).  Based upon theevaluation, the President and Chief Executive Officer, Executive Vice Presidentand Chief Financial Officer (Principal Financial Officer) and Vice-President,Corporate Controller, (Principal Accounting Officer) concluded that theCompany’s design and operation of these disclosure controls and procedures wereeffective at the end of the period covered by this report.

 

 

 

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** **

** **

**PART II.     OTHER INFORMATION**

** **

**Item 1. - None**

** **

**Item 2. - Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

On October 22, 2009, Alamo Group Inc. (the“Company”) completed the acquisition of the majority of the assets of Bush Hog,LLC (“Bush Hog”) according to the terms and conditions of an Asset PurchaseAgreement, dated September 4, 2009, between the Company and Bush Hog.  Asconsideration for the assets acquired, the Company issued 1.7 millionunregistered shares of Alamo Group Inc. common stock ($.10 par value) andassumed certain operating liabilities, though no funded debt.  The shares ofcommon stock were issued to Bush Hog without registration under the SecuritiesAct of 1933 (the “Securities Act”) in reliance on an exemption provided by Section4(2) of the Securities Act.

** **

**Item 3. - None**

** **

**Item 4. - None**

 

**Item 5. OtherInformation**

 

(a)   Reports on Form 8-K

 

September 4, 2009 - Press Releaseannouncing, the signing of an agreement to acquire the majority of the assetsand assume certain liabilities of Bush Hog LLC

 

September 9, 2009 – Asset PurchaseAgreement dated September 4, 2009, with Bush Hog, LLC

 

October 22, 2009 – Press Releaseannouncing completion of Bush Hog LLC acquisition

 

November 4, 2009 – Press Release announcing third quarterfiscal 2009 earnings

 

(b)   Other Information

 

None

 

**Item 6. Exhibitsand Reports on Form 8-K**

 

(a)   Exhibits

 

10.1 

 

Seventh  Amendment of Amended and Restated Revolving Credit Agreement dated November  5, 2009.

 

Filed  Herewith 

31.1 

 

Certification  by Ronald A. Robinson under Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed  Herewith 

31.2 

 

Certification  by Dan E. Malone under Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed  Herewith 

31.3 

 

Certification  by Richard J. Wehrle under Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed  Herewith

32.1 
   
Certification  by Ronald A. Robinson under Section 906 of the  Sarbanes-Oxley Act of 2002

 

Filed  Herewith

32.2 
   
Certification  by Dan E. Malone under Section 906 of the  Sarbanes-Oxley Act of 2002

 

Filed  Herewith

32.3 
   
Certification  by Richard J. Wehrle under Section 906 of the  Sarbanes-Oxley Act of 2002

 

Filed  Herewith

 

(b)      Reports on Form 8-K

 

 

 

 

	24

 

 

 

 

 

 

 
Alamo Group Inc. and Subsidiaries
** **

** **

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

Alamo  Group Inc.

(Registrant)

 

 

 

 

 

/s/  Ronald A. Robinson
   
Ronald  A. Robinson

President  & CEO

 

/s/  Dan E. Malone
   
Dan  E. Malone

Executive Vice  President & Chief Financial Officer

(Principal  Financial Officer)

 

 

/s/  Richard J. Wehrle
   
Richard  J. Wehrle

Vice  President & Corporate Controller

(Principal  Accounting Officer)

 

 

 

 

 

 

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