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 JUNE 30, 2010

 

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 AUGUST 2, 2010, 11,804,829 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  Consolidated Financial Statements                                              |       |
|                                 |                                                                                    |       |
|                                 | Interim  Consolidated Balance Sheets                                                    | 3     |
|                                 | June 30, 2010 (Unaudited)  and December 31, 2009 (Audited)                              |       |
|                                 |                                                                                    |       |
|                                 | Interim  Consolidated Statements of Income                                              | 4     |
|        | Three months and Six  months ended June 30, 2010 and June 30, 2009                      |       |
|                                 |                                                                                    |       |
|        | Interim  Consolidated Statements of Cash Flows                                          | 5     |
|             | Six months ended June  30, 2010 and June 30, 2009                                       |       |
|                                 |                                                                                    |       |
|        | Notes to Interim  Consolidated Financial Statements                                     | 6     |
|                                 |                                                                                    |       |
|                                 |                                                                                    |       |
| Item 2.                              | Management's  Discussion and Analysis of Financial Condition and Results of  Operations | 16    |
|                                 |                                                                                    |       |
|                                 |                                                                                    |       |
| Item 3.                              | Quantitative and  Qualitative Disclosures about Market Risks                            | 24    |
|                                 |                                                                                    |       |
| Item 4.                              | Controls and  Procedures                                                                | 25    |
|                                 |  

                                                                           |       |
| PART II.                        | OTHER INFORMATION                                                                       | 26    |
|                                 |                                                                                    |       |
| Item 1.                         | None                                                                                    |       |
| Item 2.                         | None                                                                                    |       |
| Item 3.                              | None                                                                                    |       |
| Item 4.                         | None                                                                                    |       |
| Item 5.                         | Other Information                                                                       |       |
| Item 6.                         | Exhibits                                                                                |       |
|                                 |                                                                                    |       |
|                                 | SIGNATURES                                                                              |       |

 

| 2 |
|---|

 

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## Alamo Group Inc. and Subsidiaries

**Interim Consolidated Balance Sheets**

**(Unaudited)**

 
|  

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

**2010**

**(Unaudited)** |   |   | **December 31, 	2009**

**(Audited)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------|--------|--------|---------------------------------------|
| **ASSETS**                                                                                                                                                                                                            |   |   |                                    |   |   |                                  |
|     Current assets:                                                                                                                                                                                    |   |   |                                    |   |   |                                  |
|       Cash and cash equivalents                                                                                                                                                              |   | $      | 20,152                             |   | $      | 17,774                           |
|       Accounts receivable, net                                                                                                                                                               |   |   | 134,832                            |   |   | 111,745                          |
|       Inventories                                                                                                                                                                            |   |   | 108,944                            |   |   | 124,322                          |
|       Deferred income taxes                                                                                                                                                                  |   |   | 3,559                              |   |   | 3,118                            |
|       Prepaid expenses                                                                                                                                                                       |   |   | 3,799                              |   |   | 3,579                            |
|       Income Tax Receivable                                                                                                                                                                  |   |   | 1,195                              |   |   | 1,195                            |
|           Total current assets                                                                                                                                           |   |   | 272,481                            |   |   | 261,733                          |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
|     Property, plant and equipment                                                                                                                                                                      |   |   | 138,075                            |   |   | 142,076                          |
|           Less:  Accumulated depreciation                                                                                                                           |   |   | (74,848)                                |   |   | (72,215)                              |
|                                                                                                                                                                                                                  |   |   | 63,227                             |   |   | 69,861                           |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
|     Goodwill                                                                                                                                                                                           |   |   | 32,607                             |   |   | 35,207                           |
|     Intangible Assets                                                                                                                                                                                  |   |   | 5,763                              |   |   | 5,803                            |
|     Deferred income taxes                                                                                                                                                                              |   |   | 4,158                              |   |   | 4,158                            |
|     Other assets                                                                                                                                                                                       |   |   | 567                                |   |   | 1,201                            |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
|             Total assets                                                                                                                                       |   | $      | 378,803                            |   | $      | 377,963                          |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                         |   |   |                                    |   |   |                                  |
|     Current liabilities:                                                                                                                                                                               |   |   |                                    |   |   |                                  |
|       Trade accounts payable                                                                                                                                                                 |   | $      | 46,892                             |   | $      | 36,046                           |
|       Income taxes payable                                                                                                                                                                   |   |   | 77                                 |   |   | 2,688                            |
|       Accrued liabilities                                                                                                                                                                    |   |   | 32,639                             |   |   | 32,013                           |
|       Current maturities of long-term debt                                                                                                                                                   |   |   | 3,250                              |   |   | 5,453                            |
|       Deferred income tax                                                                                                                                                                    |   |   | 2,334                              |   |   | 3,164                            |
|           Total current liabilities                                                                                                                                      |   |   | 85,192                             |   |   | 79,364                           |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
|       Long-term debt, net of current maturities                                                                                                                                              |   |   | 44,496                             |   |   | 44,336                           |
|       Deferred pension liability                                                                                                                                                             |   |   | 7,207                              |   |   | 7,640                            |
|       Other long-term liabilities                                                                                                                                                            |   |   | 2,252                              |   |   | 3,665                            |
|       Deferred income taxes                                                                                                                                                                  |   |   | 7,517                              |   |   | 7,581                            |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
| Stockholders’ equity:                                                                                                                                                                                            |   |   |                                    |   |        |                                  |
|       Common stock, $.10 par value, 20,000,000 shares  authorized;

      11,820,429  and 11,789,529 issued and outstanding at June 30, 2010 and December 31,  2009 |   |   | 1,182                              |   |   | 1,179                            |
|       Additional paid-in capital                                                                                                                                                             |   |   | 83,385                             |   |   | 82,721                           |
|       Treasury  stock, at cost; 42,600 shares at June 30, 2010 and 

        December  31, 2009                                                                |   |   |  

(426)                           |   |   |  

(426)                         |
|       Retained earnings                                                                                                                                                                      |   |   | 154,209                            |   |   | 146,756                          |
|       Accumulated other comprehensive income, net                                                                                                                                            |   |   | (6,211)                                 |   |   | 5,147                            |
|           Total  stockholders’ equity                                                                                                                               |   |   | 232,139                            |   |   | 235,377                          |
|                                                                                                                                                                                                                  |   |   |                                    |   |   |                                  |
|           Total liabilities and stockholders’ equity                                                                                                                |   | $      | 378,803                            |   | $      | 377,963                          |
|                                                                                                                                                                                                                       |        |        |                                         |        |        |                                       |  |

 

See accompanying notes. 

| 3 |
|---|

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## Alamo Group Inc. and Subsidiaries 

**Interim Consolidated Statements of  Income **

**(Unaudited) **

** **

|                                                    |   | Three Months Ended |               | Six Months Ended |
|---------------------------------------------------------|--------|--------------------|--------------------|------------------|
|                                                    |   |               | June 30,           |             |   | **June 30,** |
| (in  thousands, except per share amounts)** **     |   |               | 2010          |             |   | 2009 |   |   | **2010** |   |   | **2009** |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Net sales:                                         |   |               |               |             |   |   |   |   |   |   |   |   |
|     North American                  |   |               |               |             |   |   |   |   |   |   |   |   |
|         Industrial   |   | $                  | 48,448        |             | $ | 46,038  |   | $ | 94,588  |   | $ | 89,190  |
|         Agricultural |   |               | 44,830        |             |   | 19,274  |   |   | 85,129  |   |   | 43,105  |
|     European                             |   |               | 41,056        |             |   | 47,931  |   |   | 83,006  |   |   | 91,091  |
| Total net  sales                                        |   |               | 134,334       |             |   | 113,243  |   |   | 262,723  |   |   | 223,386  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Cost of  sales                                          |   |               | 105,653       |             |   | 88,914  |   |   | 205,907  |   |   | 177,330  |
| Gross  profit                                           |   |               | 28,681        |             |   | 24,329  |   |   | 56,816  |   |   | 46,056  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expense            |   |               | 21,355        |             |   | 18,945  |   |   | 43,023  |   |   | 37,495  |
|     Income  from operations              |   |               | 7,326         |             |   | 5,384  |   |   | 13,793  |   |   | 8,561  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Interest  expense                                       |   |               | (1,024)            |             |   | (1,147) |   |   | (2,274) |   |   | (2,243) |
| Interest  income                                        |   |               | 305           |             |   | 162  |   |   | 1,117  |   |   | 322  |
| Other  income (expense), net                            |   |               | (25)               |             |   | (49) |   |   | (35) |   |   | (4) |
|     Income  before income taxes          |   |               | 6,582         |             |   | 4,350  |   |   | 12,601  |   |   | 6,636  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Provision  for income taxes                             |   |               | 1,712         |             |   | 1,358  |   |   | 3,738  |   |   | 2,101  |
|     Net income                           |   | $                  | 4,870         |             | $ | 2,992  |   | $ | 8,863  |   | $ | 4,535  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Net income per common share:                            |   |               |               |             |   |   |   |   |   |   |   |   |
|     Basic                                |   | $                  | 0.41 

  |             | $ | 0.30  |   | $ | 0.75  |   | $ | 0.46  |
|     Diluted                              |   | $                  | 0.41          |             | $ | 0.30  |   | $ | 0.75  |   | $ | 0.45  |
| Average  common shares                             |   |               |               |             |   |   |   |   |   |   |   |   |
|     Basic                                |   |               | 11,756        |             |   | 9,977  |   |   | 11,752  |   |   | 9,958  |
|     Diluted                              |   |               | 11,882        |             |   | 9,986  |   |   | 11,858  |   |   | 9,975  |
|                                                    |   |               |               |             |   |   |   |   |   |   |   |   |
| Dividends  declared                                     |   | $                  | 0.06          |             | $ | 0.06  |   | $ | 0.12  |   | $ | 0.12  |
|                                                         |        |                    |                    |                  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes.

 

 

 

 

 

 

 

| 4 |
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## Alamo Group Inc. and Subsidiaries

**Interim Consolidated Statements of Cash Flows**

**(Unaudited)**

** **

|                                                                                                              |   | **Six Months Ended**

**June 30,** |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (in thousands)                                                                                                    |   |                               | **2010** | ** ** | ** ** | **2009** |
| **Operating  Activities**                                                                                         |   |                               |   |   |   |   |
| Net  income                                                                                                       |   | $                                  | 8,863  |   | $ | 4,535  |
| Adjustment  to reconcile net income to net cash

    provided  (used) by operating activities:     |   |                               |   |   |   |   |
|           Provision  for doubtful accounts                           |   |                               | 591  |   |   | 193  |
|           Depreciation                                               |   |                               | 5,299  |   |   | 4,053  |
|           Amortization  of intangible                                |   |                               | 170  |   |   | 39  |
|           Amortization  of debt issuance                             |   |                               | 188  |   |   | –  |
|           Stock-based  compensation expense                          |   |                               | 341  |   |   | 253  |
|           Excess  tax benefits from stock-based payment arrangements |   |                               | (45) |   |   | (15) |
|           Provision  for deferred income tax benefit                 |   |                               | (1,036) |   |   | 338  |
|           Gain  on sale of equipment                                 |   |                               | (24) |   |   | (27) |
| Changes in  operating assets and liabilities:                                                                     |   |                               |   |   |   |   |
|           Accounts  receivable                                       |   |                               | (28,880) |   |   | 1,794  |
|           Inventories                                                |   |                               | 11,719  |   |   | 8,564  |
|           Prepaid  expenses and other assets                         |   |                               | (254) |   |   | (99) |
|           Trade  accounts payable and accrued liabilities            |   |                               | 15,503  |   |   | (7,628) |
|           Income  taxes payable                                      |   |                               | (2,570) |   |   | 883  |
|           Other  long term liabilities                               |   |                               | (815) |   |   | (440) |
| Net cash  provided by operating activities                                                                        |   |                               | 9,050  |   |   | 12,443  |
|                                                                                                              |   |                               |   |   |   |   |
| **Investing  Activities**                                                                                         |   |                               |   |   |   |   |
| Acquisitions,  net of cash acquired                                                                               |   |                               | (426) |   |   | –  |
| Purchase  of property, plant and equipment                                                                        |   |                               | (2,183) |   |   | (1,852) |
| Proceeds  from sale of property, plant and equipment                                                              |   |                               | 139  |   |   | 65  |
| Net cash used  by investing activities                                                                            |   |                               | (2,470) |   |   | (1,787) |
|                                                                                                              |   |                               |   |   |   |   |
| **Financing  Activities**                                                                                         |   |                               |   |   |   |   |
| Net change  in bank revolving credit facility                                                                     |   |                               | 1,000  |   |   | (8,000) |
| Principal  payments / proceeds on long-term debt and capital leases                                               |   |                               | (2,773) |   |   | (1,439) |
| Proceeds  from issuance of long term debt                                                                         |   |                               | 261  |   |   | 545  |
| Dividends  paid                                                                                                   |   |                               | (1,410) |   |   | (1,194) |
| Proceeds  from sale of common stock                                                                               |   |                               | 326  |   |   | 797  |
| Excess tax  benefits from stock-based payment arrangements                                                        |   |                               | 45  |   |   | 15  |
| Net cash used  by financing activities                                                                            |   |                               | (2,551) |   |   | (9,276) |
|                                                                                                              |   |                               |   |   |   |   |
| Effect of  exchange rate changes on cash                                                                          |   |                               | (1,651) |   |   | 162  |
| Net change  in cash and cash equivalents                                                                          |   |                               | 2,378  |   |   | 1,542  |
| Cash and  cash equivalents at beginning of the period                                                             |   |                               | 17,774  |   |   | 4,532  |
| Cash and  cash equivalents at end of the period                                                                   |   | $                                  | 20,152  |   | $ | 6,074  |
|                                                                                                              |   |                               |   |   |   |   |
| Cash paid  during the period for:                                                                                 |   |                               |   |   |   |   |
|         Interest                                                               |   | $                                  | 2,177  |   | $ | 2,538  |
|         Income  taxes                                                          |   | $                                  | 6,213  |   | $ | 1,958  |
|                                                                                                                   |        |                                    |  |  |  |  |  |

 

See accompanying notes.

 

| 5 |
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**Alamo Group Inc. and Subsidiaries**

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

## June 30, 2010

** **

**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 not includeall 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, 2010.  The balance sheet at December 31, 2009, 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, 2009.

 

    In connection with the preparation of theconsolidated financial statements and in accordance with the recently issuedStatement of Financial Standards No. (SFAS) 165, Subsequent Events, the Companyevaluated subsequent events after the balance sheet date of June 30, 2010through August 7, 2010 and had nothing to disclose.

 

**2.  Acquisitions**

On October 22, 2009 (“Closing Date”), the Company acquiredthe majority of the assets and assumed certain liabilities of Bush Hog, LLC, aDelaware limited liability company (“*Bush Hog*”) located in Selma,Alabama.  The purchase included substantially all of the ongoing business of *BushHog*, including the *Bush Hog* brand name and all related product namesand trademarks (the “Acquisition”). The purchase price consideration was 1.7million unregistered shares of Alamo Group common stock which representedapproximately 14.5% of the outstanding stock of Alamo Group.  The closing priceon October 22, 2009 was $16.09 per share. 

The Acquisition has been accountedfor in accordance with ASC Topic 805, *Business Combinations*(“ASC Topic805”).  Accordingly, the total purchase price has been allocated on aprovisional basis to assets acquired and net liabilities assumed in connectionwith the Acquisition based on their estimated fair values as of the completionof the Acquisition.  These allocations reflect various provisional estimatesthat were available at the time and are subject to change during the purchaseprice allocation period as valuations are finalized. 

The fair value of the net assetsacquired was approximately $53.1 million, which exceeds the preliminaryestimated purchase price of $25.4 million.  Accordingly, the Company recognizedthe excess of the fair value of the net assets over the purchase price ofapproximately $27.7 million as a gain on bargain purchase. The gain on bargainpurchase of $27.7 million was shownseparately within income from operations in the Consolidated Statements ofIncome in the third quarter of 2009. The recorded amounts are provisional andsubject to change. The Company continues to evaluate the purchase priceallocation, including the opening fair value of inventory, accounts receivable,property, plant & equipment, accrued liabilities and deferred taxes, whichmay require the Company to adjust the recorded gain. 

The Company believes that it wasable to acquire *Bush Hog* for less than the fair value of its assetsbecause of (i) the Company’s unique position as a market leader in thisindustry segment and (ii) the seller’s intent to exit its *Bush Hog*operations. *Bush Hog* was an unprofitable venture, and the sellerapproached the Company in an effort to sell *Bush Hog* and exit theagricultural equipment manufacturing business that no longer fit its strategy.With the seller's intent to exit the agricultural manufacturing businesssegment and the Company’s position as a market leader, the Company was able toagree on a favorable purchase price.

 

 

| 6 |
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The primary reason for the *BushHog* acquisition was to help the Company further the goal of becoming thelargest manufacturer of agricultural mowers in the world. This acquisitionenabled the Company to expand its market presence, and product offerings. 

The following table summarizes the provisionalamounts recognized for assets acquired and liabilities assumed as of the ClosingDate. A single estimate of fair value results from a complex series ofjudgments about future events and uncertainties and relies heavily on estimatesand assumptions. The Company’s judgments used to determine the estimated fairvalue assigned to each class of assets acquired and liabilities assumed, aswell as asset lives, can materially impact the Company’s results of operations.Certain estimated values are not yet finalized and are subject to change, whichcould be significant. The Company will finalize the amounts recognized asinformation necessary to complete the analyses is obtained. The Company expectsto finalize these amounts as soon as possible but no later than one year fromthe acquisition date. The following are estimated fair value of assets acquiredand liabilities assumed as of the Acquisition date (in thousands):

 

| Accounts receivable                                              |   | $      | 25,571  |   |
|------------------------------------------------------------------|--------|--------|--------------|--------|
| Inventory                                                        |   |   | 21,875  |   |
| Prepaid expenses              |   |   | 395     |   |
| Property, plant  & equipment                                 |   |   | 12,743  |   |
| Other liabilities                                                |   |   | (9,357)      |   |
|       Net assets acquired               |   |   | 51,227  |   |
| Intangible asset                                                 |   |   |         |   |
|       *Bush Hog* trade name             |   |   | 1,900   |   |
|    Total assets acquired                               |   |   | 53,127  |   |
|                                                             |   |   |         |   |
|    Less: Fair value of 1.7 million unregistered shares |   |   | 25,438  |   |
| .. Gain on Bargain  purchase                                     |   | $      | 27,689  |   |

 

 

In accordance with the closingdocuments, the Company received a 50% undivided interest in the AccountsReceivable of *Bush Hog*, subject to any net working capital adjustment. The post closing net working capital adjustment was $3.8 million whichincreased accounts receivable and the gain on bargain purchase. The Companywill collect payments on the acquired accounts receivable and remit 50% of thecollections to the seller less the $3.8 million. The *Bush Hog* accountsreceivable were recorded at 50% of the fair value, plus the working capitaladjustment.

 

As of the acquisition date, the fair value of accountsreceivable was $25.6 million. The gross contractual amount receivable was $34.6million of which $9.0 million was not expected to be collected.  

 

The intangible asset relates to the appraised value of the *BushHog* name at closing and has an indefinite life.

Under 805-10, acquisition relatedcosts (i.e., advisory, legal, valuation and other professional fees) are notincluded as a component of consideration transferred, but are accounted for asexpenses in the periods in which the costs are incurred.  The Company incurred$828,000 of acquisition related costs.  The Company will incur integrationexpenses during 2010 relating to manufacturing process changes and computerconversion, but it is expected to be immaterial.

 

In the period between the Closing Date and December 31,2009, *Bush Hog* generated approximately $10.9 million of net revenue and $1.5million net loss. The Company has included the operating results of *Bush Hog*in its consolidated financial statements since the Closing Date.

 

| 7 |
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      The unaudited pro formastatement of income of the Company assuming this transaction occurred atJanuary 1, 2009 is as follows:

|                                      | **Six Months Ended** |
|-------------------------------------------|----------------------|
|                                      | **June 30**          |
| (In thousands, except per  share amounts) | **2010**             | ** ** | **2009** |
|                                      | ** **           |
| Net  Sales                                | $                    | 262,723  |   | $ | 276,893  |
| Net  Income                               | $                    | 8,863  |   | $ | 1,151  |
| Diluted  Earnings per Share               | $                    | 0.75  |   | $ | 0.12  |
|                                           |                      |  |  |  |  |  |  |

 

      The unaudited pro forma financial informationis presented for informational purposes only and is not intended to representor be indicative of the consolidated results of operations of the Company thatwould have been reported had the acquisition been completed as of the beginningof the periods presented, and should not be taken as being representative ofthe future consolidated results of operations of the Company. 

**3.  Accounts Receivable**

 

      Accounts Receivable is shown less allowance fordoubtful accounts of $2,675,000 and $2,548,000at June 30, 2010 and December 31, 2009, respectively.

 

**4.  Inventories**

 

      Inventories valued at LIFO cost represented 61%and 63% of total inventory at June 30, 2010 and December 31, 2009, respectively. The excess of current cost over LIFO valued inventories was $7,839,000 at June30, 2010 and $9,106,000 at December 31, 2009.  The LIFO reserve was reduced by$429,000 in the first quarter of 2010 and $838,000 in the second quarter of2010, due to the volume reductions in U.S. inventory.  Inventory obsolescencereserves were $8,495,000 at June 30, 2010 and $9,060,000 at December 31, 2009. The decrease in reserve for obsolescence was mainly due to inventory dispositionsin the Company’s U.S. and European operations.  Net inventories consist of thefollowing:

 

|  

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

**2010** |   | **December 31,**

**2009** |
|------------------------|--------|--------|------------------------|--------|----------------------------|
|                   |   |   |                   |   |                       |   |
| Finished  goods        |   | $      | 89,971                 |   | $                          | 102,681 |
| Work in  process       |   |   | 9,709                  |   |                       | 10,611 |
| Raw  materials         |   |   | 9,264                  |   |                       | 11,030 |
|                   |   | $      | 108,944                |   | $                          | 124,322 |

 

      An actual valuation of inventory under the LIFOmethod can be made only at the end of each year based on the inventory levelsand costs at that time.  Accordingly, interim LIFO must necessarily be based onmanagement's estimates. 

 

 

**5.  Derivatives and Hedging**

 

Most of the Company’s outstanding debt is advancedfrom a revolving credit facility that accrues interest at a contractual margin over current market interest rates. The Company’s financing costs associated with this credit facility canmaterially change with market increases and decreases of short-term borrowingrates, specifically London Inter Bank Operating Rate (“LIBOR”).  During thesecond quarter of 2007, the Company entered into two interest rate swapagreements with JPMorgan that hedge future cash flows related to itsoutstanding debt obligations.  One swap had a three-year term and fixed the LIBORbase rate at 4.910% covering $20 million of this debt which expired on March31, 2010.  The other has a four-year term and fixed the LIBOR base rate at4.935% covering an additional $20 million of these variable rate borrowings andexpires on March 31, 2011.  On November 5, 2009, JPMorgan transferred the swaptransactions to Bank of America.  The terms of the hedging instrument remainthe same.  As of June 30, 2010, the Company had $42 million outstanding underits revolving credit facility and one interest rate swap contract designated ascash flow hedge which is effectively hedging $20 million of these borrowingsfrom changes in underlying LIBOR base rates.  The fair market value of thishedge, which is the amount that would have been paid or received by the Companyhad it prematurely terminated this swap contract at June 30, 2010, was a $648,000liability.  This is included in Accrued liabilities with an offset inAccumulated other comprehensive income, net of taxes.  At June 30, 2010,ineffectiveness related to the interest rate swap agreement was not material.

 

| 8 |
|---|

 

----

 

 

**6.  Fair Value Measurements**

 

The Company adopted SFAS 157, “Fair ValueMeasurements” as of January 1, 2008.  FSAS 157 defines fair value as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants.  SFAS157 also specifies a fair value hierarchy based upon the observability ofinputs used in valuation techniques.  Observable inputs (highest level) reflectmarket data obtained from independent sources, while unobservable inputs(lowest level) reflect internally developed market assumptions.  In accordancewith SFAS 157, fair value measurements are classified under the followinghierarchy:

 

**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

 

When available, the Company uses quoted market pricesto determine fair value, and the Company classifies such measurements withinLevel 1.  In some cases where market prices are not available, the Companymakes use of observable market based inputs to calculate fair value, in whichcase the measurements are classified with Level 2.  If quoted or observablemarket prices are not available, fair value is based upon internally developedmodels that use, where possible, current market-based parameters such asinterest rates, yield curves, currency rates, etc.  These measurements areclassified within Level 3.

 

Fair value measurements are classified to the lowestlevel 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 swap derivatives isprimarily based on third-party pricing service models.  These models usediscounted cash flows that utilize the appropriate market-based forward swapcurves and zero-coupon interest rates.  Interest rate swap derivatives areLevel 2 measurements and have a fair value of a negative $648,000 as of June30, 2010.

 

The fair value of foreign currency forward contractsis based on a valuation model that discounts cash flows resulting from thedifferential between the contract price and the market-based forward rate andis a Level 2 measurement and has a fair value of $1,000 as of June 30, 2010.

** **

**7.  Common Stock and Dividends**

** **

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

 

|                |   | Six Months Ended |
|---------------------|--------|------------------|
|                |   |             | **June 30,** |
|                |   |             | **2010** |   |   | **2009** |
|                |   |             |   |   |   |   |
| Dividends  declared |   | $                | 0.12 |   | $ | 0.12 |
| Dividends  paid     |   | $                | 0.12 |   | $ | 0.12 |

 

 

| 9 |
|---|

 

----

 

**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’sstock-based compensation expense was $341,000 and $253,000 for the quarterended June 30, 2010 and 2009, respectively.

 

*Qualified Options*

 

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

 

| *For  six months ending June 30, 2010*        |   | ** **     |
|-----------------------------------------------|--------|----------------|
|                                          |   |  

Shares |   |   | Exercise

Price* |
| Options  outstanding at beginning of year     |   | 345,480   |   |   |   |
|       Granted        |   | 19,000    |   |   | $24.69 |
|       Exercised      |   | (3,800)        |   |   | $12.95 |
|       Cancelled      |   | –    |   |   |   |
|                                          |   |           |   |   |   |
| Options  outstanding at June 30, 2010         |   | 360,680   |   |   | $18.28  |
| Options  exercisable at June 30, 2010         |   | 212,080   |   |   | $18.78  |
| Options  available for grant at June 30, 2010 |   | 195,500   |   |   |   |
| **WeightedAverages*                           |   |           |   |   |   |

 

 

      Optionsoutstanding and exercisable at June 30, 2010 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                     |   | 153,680            |   |   | 6.80                               | $ 12.25  |   |   | 77,680    | $ 13.02  |
| $19.79 -  $25.18                     |   | 207,000            |   |   | 6.75                               | $ 22.77  |   |   | 134,400    | $ 22.10  |
|       Total |   | 360,680            |   |   |                               |   |   |   | 212,080    |   |

**WeightedAverages*

| 10 |
|----|

 

----

 

***Non-qualifiedOptions***

 

      Followingis a summary of activity in the Non-Qualified Stock Option Plans for the periodindicated:

 

| *For  six months ending June 30, 2010*        |   | ** **         |
|-----------------------------------------------|--------|--------------------|
|                                          |   | Shares             |   |   | Exercise

Price* |
| Options  outstanding at beginning of year     |   | 186,000       |   |   |   |
|       Granted        |   | –   |   |   |   |
|       Exercised      |   | (27,100)           |   |   | $12.03  |
|       Cancelled      |   | –   |   |   |   |
|                                          |   |               |   |   |   |
| Options  outstanding at June 30, 2010         |   | 158,900       |   |   | $15.00  |
| Options  exercisable at June 30, 2010         |   | 81,500        |   |   | $16.27  |
| Options  available for grant at June 30, 2010 |   | 364,000       |   |   |   |
| **WeightedAverages*                           |   |               |   |   |   |

 

* *

      Options outstanding and exercisable at June 30, 2010were 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                     |   | 112,900            |   |   | 7.35                               | $11.63  |   |   | 48,000    | $11.87  |
| $13.96 -  $19.79                     |   | 13,500             |   |   | 4.26                               | $18.71  |   |   | 13,500    |  $18.71  |
| $25.02 -  $25.18                     |   | 32,500             |   |   | 6.92                               | $25.17  |   |   | 20,000    |  $25.16  |
|       Total |   | 158,900            |   |   |                               |   |   |   | 81,500    |   |
| **Weighted Averages*                 |   |                    |   |   |                               |   |   |   |   |   |

 

* *

***Restricted Stock Units***

 

Following is a summary of activity in theRestricted Stock Units for the periods indicated:

 

*        For six months ending June 30, 2010*

|                                      |   |  

Shares |   |  

Weighted- average remaining

contractual term (in years) |
|-------------------------------------------|--------|----------------|--------|------------------------------------------------------------------|
| Options  outstanding at beginning of year |   | 8,000     |   | 4.00                                                             |
|       Granted    |   | 3,000     |   |                                                             |
|       Exercised  |   | (2,000)        |   |                                                             |
|       Cancelled  |   | —    |   |                                                             |
| Options  outstanding at end of year       |   | 9,000     |   | 3.33                                                             |

 

| 11 |
|----|

 

----

 

 

**9.  Earnings Per Share**

** **

The following table sets forth the reconciliationfrom basic to diluted average common shares and the calculations of net incomeper common share.  Net income is the same for basic and diluted per sharecalculations. 

 
|   | **Three Months Ended** |       | Six Months Ended |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|------------------------|------------|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **June 30,**           | ** ** | June 30,         |  
(In  thousands, except per share amounts)

**2010**

** **

**2009**

** **

**2010**

** **

**2009**

 
 

** **

Net  Income 

$

4,870

 

$

2,992

** **

$

8,863

 

$

4,535

** **

 
                               	

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Average  Common Shares:                                               	

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
      Basic  (weighted-average outstanding shares) 

 

11,756

 

 

9,977

** **

 

11,752

** **

 

9,958

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
      Dilutive potential common shares from stock	

      options 

 

 

126

** **

 

 

9

** **

 

 

106

** **

 

 

17

** **

 
       Diluted (weighted-average outstanding shares) 

 

11,882

 

 

9,986

** **

 

11,858

** **

 

9,975

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Basic  earnings per share 

$

0.41

 

$

0.30

** **

$

0.75

** **

$

0.46

** **

 
 

 

 

 

 

 

** **

 

 

** **

 

 

** **

 
Diluted  earnings per share 

$

0.41

 

$

0.30

** **

$

0.75

** **

$

0.45

** **

 

 

12

 

 

 

   **10.  SegmentReporting**

** **

At June 30, 2010 and June 30, 2009 thefollowing unaudited financial information is segmented:  

 

 

 

**Three Months Ended**

** **

** **

**Six Months Ended**

 

 

**June 30,**

** **

** **

**June 30,**

(In  thousands)

 

**2010**

** **

** **

**2009**

** **

** **

**2010**

** **

**2009**

 

 

 

 

 

 

 

 

 

 

 
Net Revenue
 

 

 

 

 

 

 

 

 

 

        Industrial

$

48,448

 

$

46,038

 

$

94,588

$

89,190 

        Agricultural

 

44,830

 

 

19,274

 

 

85,129

 

43,105 

        European

 

41,056

 

 

47,931

 

 

83,006

 

91,091 

Consolidated

 

134,334

 

 

113,243

 

 

262,723

 

223,386 

 

 

 

 

 

 

 

 

 

 

 

**Income  from Operations**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

2,060

 

$

576

 

$

3,900

$

(532)

        Agricultural

 

1,939

 

 

219

 

 

2,924

 

1,460 

        European

 

3,327

 

 

4,589

 

 

6,969

 

7,633 

Consolidated

 

7,326

 

 

5,384

 

 

13,793

 

8,561 

 

 

 

 

 

 

 

 

 

 

 

**Goodwill**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

13,363

 

$

26,895

 

$

13,363

$

26,895 

        Agricultural

 

– 

 

 

– 

 

 

– 

 

– 

        European

 

19,244

 

 

21,801

 

 

19,244

 

21,801 

Consolidated

 

32,607

 

 

48,696

 

 

32,607

 

48,696 

 

 

 

 

 

 

 

 

 

 

 

**Total  Identifiable Assets**

 

 

 

 

 

 

 

 

 

 

        Industrial

$

124,544

 

$

160,887

 

$

124,544

$

160,887 

        Agricultural

 

130,025

 

 

80,779

 

 

130,025

 

80,779 

        European

 

124,234

 

 

137,207

 

 

124,234

 

137,207 

Consolidated

 

378,803

 

 

378,873

 

 

378,803

 

378,873 

 

 

**      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.  Comprehensive Income**

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

 

 

 

 

**Three Months Ended**

** **

** **

**Six Months Ended**

 

 

 

**June 30,**

** **

** **

**June 30,**

(in  thousands)

 

 

**2010**

** **

** **

**2009**

** **

** **

**2010**

** **

** **

**2009**

Net  Income 

 

$

4,870 

 

$

2,992

 

$

8.863 

 

$

4,535

Cash  flow derivatives, net of taxes

 

 

150 

 

 

173

 

 

383 

 

 

334

Amortization  of actuarial net gain 

 

 

19 

 

 

39

 

 

38 

 

 

78

Foreign  currency  translation adjustment 

 

 

(6,791)

 

 

8,371

 

 

(11,779)

 

 

4,541

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive  Income 

 

$

(1,752)

 

$

11,575

 

$

(2,495)

 

$

9,488

 

13

 

 

 

 

 

 

The components of Accumulated Other ComprehensiveIncome as shown on the Balance Sheet, are as follows:

** **

 

 

 

**June 30,**

**December 31,**

(in  thousands)

** **

** **

**2010**

** **

** **

**2009**

 

 

 

 

 

 

 

Foreign  currency translation

 

$

(3,590)

 

$

   8,148 

Derivatives,  net of taxes

 

 

(402)

 

 

(744)

Actuarial  gains related to defined benefit plans

 

 

(2,219)

 

 

(2,257)

Total  Accumulated other comprehensive income

 

$

(6,211)

 

$

5,147 

** **

** **

**13.  Contingent Matters**

** **

      The Company is subject to various unresolved legalactions that arise in the ordinary course of its business.  The most prevalentof such actions relate 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.  

 

      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 voluntarily worked withan environmental consultant and the state of Iowa with respect to these issuesand believes it completed its remediation program in June 2006. The work wasaccomplished within the Company’s environmental liability reserve balance. Werequested a “no further action” classification from the state.  We received aconditional “no further action” letter in January of 2009.  When we demonstratestable or improving conditions below residential standards by future monitoringof existing wells, an unconditional “no further action” letter will berequested.

                   

      AtJune 30, 2010, the Company had an environmental reserve in the amount of$1,608,000 related to the acquisition of *Gradall’s* facility in NewPhiladelphia, Ohio.  Three specific remediation projects that were identifiedprior to the acquisition are in process of remediation with a remaining reservebalance of $143,000.  The Company has a reserve of $277,000 concerning apotential asbestos issue that is expected to be abated over time.  The balanceof the reserve, $1,188,000, is mainly for potential ground watercontamination/remediation that was identified before the acquisition and believed to have been generated by a third party companylocated near the *Gradall* facility.  

 

      Thecompany knows that *Bush Hog*’s main manufacturing property in Selma, Alabama is contaminated with chlorinated volatile compounds which most likelyresulted from painting and cleaning operations during the 1960’s and ‘70s. The contaminated areas are primarily in the location of underground storagetanks and underneath the former waste storage area. Under the Asset PurchaseAgreement, *Bush Hog*’s prior owner agreed to remove the undergroundstorage tanks at its cost and is liable for remediating the identifiedcontamination in accordance with the regulations of the Alabama Department ofEnvironmental Management. An environmental consulting firm has been retainedby the prior owner and is administering the cleanup.

 

14

 

 

      Certainother assets of the Company contain asbestos that may have to be remediatedover time.  Management has made its best estimate of the cost to remediatethese environmental issues.  However, such estimates are difficult to estimateincluding the timing of such costs.  The Company believes that any subsequentchange in the liability associated with the asbestos removal will not have amaterial adverse effect on the Company’s consolidated financial position orresults of operations.

 

      TheCompany is subject to various other federal, state, and local laws affectingits business, as well as a variety of regulations relating to such matters asworking conditions, equal employment opportunities, and product safety. Avariety of state laws regulate the Company’s contractual relationships with itsdealers, some of which impose restrictive standards on the relationship betweenthe Company and its dealers, including events of default, grounds fortermination, non-renewal of dealer contracts and equipment repurchaserequirements. The Company believes it is currently in material compliance withall 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 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 $50,000and $138,000 for the three months ended June 30, 2010 and 2009, respectively. The Company is required to contribute $1,561,000 to the pension plans for 2010.

 

**15.  Income Taxes**

** **

      We are subject to U.S. federal income tax and variousstate, local, and international income taxes in numerous jurisdictions. Ourdomestic and international tax liabilities are subject to the allocation ofrevenue and expenses in different jurisdictions and the timing of recognizing revenueand expenses. Additionally, the amount of income taxes paid is subject to ourinterpretation of applicable tax laws in the jurisdictions in which we file.

      Wecurrently file income tax returns in the U.S., and all foreign jurisdictions inwhich we have entities, which are periodically under audit by federal, state,and international tax authorities. These audits can involve complex mattersthat may require an extended period of time for resolution. There are no incometax examinations currently in process. 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.

 

 

 

 

 

15

 

 

 

 

 

 

**16.  RecentAccounting Pronouncements**

 

***Amendmentsto FASB Interpretation No. 46(R)***

** **

      InDecember 2009, the Financial Accounting Standards Board (FASB) issuedAccounting Standard Update (ASU) 2009-17, which codified Statement of FinancialAccounting Standard (SFAS) 167, Amendments to FASB InterpretationNo. 46(R), issued in June 2009. This guidance amends FASB InterpretationNo. 46 (revised December 2003) to address the elimination of theconcept of a qualifying special purpose entity. ASU 2009-17 also replaces thequantitative-based risks and rewards calculation for determining which enterprisehas a controlling financial interest in a variable interest entity with anapproach focused on identifying which enterprise has the power to direct theactivities of a variable interest entity and the obligation to absorb losses ofthe entity or the right to receive benefits from the entity. Additionally, ASU2009-17 provides more timely and useful information about an enterprise’sinvolvement with a variable interest entity. ASU 2009-17 became effective forthe Company on January 1, 2010.  This ASU did not have a material impact on ourconsolidated financial statements.

 

***FairValue Measurements and Disclosures***

 

      In January 2010, the FASB issuedASU 2010-06, “Fair Value Measurements and Disclosures,” which amends thedisclosure requirements related to recurring and nonrecurring fair valuemeasurements.  The guidance requires new disclosures on the transfers ofassets and liabilities between Level 1 (quoted prices in active market foridentical assets or liabilities) and Level 2 (significant other observableinputs) of the fair value measurement hierarchy, including the reasons and thetiming of the transfers. Additionally, the guidance requires a roll forward ofactivities on purchases, sales, issuance, and settlements of the assets andliabilities measured using significant unobservable inputs (Level 3 fair valuemeasurements). ASU 2010-06 became effective for us on January 1, 2010, except for the disclosure on the roll forward activities for Level 3fair value measurements, which will become effective for us in the first annualreporting period that begins after December 15, 2010 and for interim periodswithin that first annual reporting period. Other than requiring additionaldisclosures, adoption of this new guidance will not have a material impact onour financial statements.

 

**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

The following tables set forth, forthe periods indicated, certain financial data:

 

 

 

**Three Months Ended**

 

**Six Months Ended**

 

 
** **

 

**June 30,**

 

 

**June 30,**

 

**As Percentages of Net Sales**

 

**2010**

 

 

**2009**

 

 

**2010**

 

 

**2009**

 

North American

 

 

 

 

 

 

 

 

 

 

    Industrial 

 

36.1

%

40.7

%

36.0

%

 

39.9

%

    Agricultural 

 

33.4

%

17.0

%

32.4

%

 

19.3

%

European 

 

30.5

%

42.3

%

31.6

%

 

40.8

%

    Total sales, net 

 

100.0

%

100.0

%

100.0

%

 

100.0

%

 

 

 

**Three Months Ended**

 

**Six Months Ended**

 

** **

 

**June 30,**

 

**June 30,**

 

**Cost  Trends and Profit Margin,**

** as  Percentages of Net Sales**

 

** **

**2010**

 

** **

**2009**

 

** **

**2010**

 

** **

**2009**

 

 

 

 

 

 

 

 

 

 

 

Gross profit 

 

21.4

%

21.5

%

21.6

%

20.6

%

Income from operations 

 

5.5

%

4.8

%

5.3

%

3.8

%

Income before income taxes 

 

4.9

%

3.8

%

4.8

%

3.0

%

Net income 

 

3.6

%

2.6

%

3.4

%

2.0

%

** **

16

 

 

**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.*

 

            Inthe second quarter of 2010 the Company’s net income was up compared to the secondquarter of 2009 due to the Company’s continued efforts with cost controlinitiatives and the acquisition of Bush Hog, which was accretive to our salesand net income during the second quarter.  The continued weakness in theworldwide economy remains a concern as market conditions have shown littleimprovement.  The Industrial Division sales increased 5% during the secondquarter of 2010 due to increases in the replacement parts business, and to alesser extent, an increase in sweeper sales, specifically to dealers; however,budgets of governmental entities and related contractors continue to beconstrained.  The Agricultural Division saw a 133% increase in sales versus thesecond quarter of 2009, most of it relating to the Bush Hog acquisition. Overall, agricultural market conditions remained soft but we expect somegradual improvement for the balance of 2010.  European Division sales were down14% in U.S. dollars and 11% in local currency in the second quarter of 2010compared to the previous year as their markets reflected the overall decline inthe European economy.  We expect this decline in the European Division willcontinue to impact our results for the remainder of the year.  Offsetting someof these declines for the Company were benefits from cost controls andrestructuring measures implemented in 2009 as these savings have contributed tosteady improvements in our profits for 2010.

 

            TheCompany is concerned that our markets for 2010 could continue to be negativelyaffected by a variety of factors such as continued weakness in the overalleconomy, tightened credit availability, increased levels of governmentregulations; changes in farm incomes due to commodity prices or governmentalaid programs; adverse situations that could affect our customers such as animaldisease epidemics, weather conditions such as droughts and floods; budgetconstraints or revenue shortfalls in governmental entities and changes in ourcustomer buying habits due to lack of confidence in the economic outlook.

 

**Results of Operations**

*Three Months Ended June 30, 2010 vs. Three Months Ended June30, 2009*

 

Net sales for the second quarter of 2010 were $134,334,000,an increase of $21,091,000, or 18.6% compared to $113,243,000 for the secondquarter of 2009.  The increase was almost entirely from the acquisition of BushHog. 

 

Net North American Industrial sales increased duringthe second quarter by $2,410,000 or 5.2% to $48,448,000 for 2010 compared to$46,038,000 during the same period in 2009. The increase came primarily fromhigher sales of replacement parts to governmental entities and relatedcontractors and, to a lesser extent, increased sweeper and mowing equipmentsales.  Sales to cities and counties were down compared to 2009, though salesto states held up better.

 

Net North American Agricultural sales were$44,830,000 in 2010 compared to $19,274,000 for the same period in 2009, anincrease of $25,556,000 or 132.6%.  The increase was mainly due to theacquisition of Bush Hog and a slight improvement in market conditions over2009.  While there continues to be dealer reluctance to buy at historicallevels due to market uncertainty and tighter credit, the market appears to begradually improving.

 

Net European Sales for the second quarter of 2010were $41,056,000, a decrease of $6,875,000 or 14.4% compared to $47,931,000during the second quarter of 2009.  The decrease was primarily the result ofweakening market conditions for the Company’s products in Europe and to alesser extent changes in exchange rates.

 

 

17

 

 

 

 

 

 

 

Gross profitfor the second quarter of 2010 was $28,681,000 (21.4% of net sales) compared to$24,329,000 (21.5% of net sales) during the same period in 2009, an increase of $4,352,000.  The increase in gross margin was fromthe acquisition of Bush Hog in the amount of $4,677,000.  Margins werenegatively affected by lower sales volume in the Company’s core businesses dueto soft market conditions.
 
Selling,general and administrative expense (“SG&A”) was $21,355,000 (15.9% of netsales) during the second quarter of 2010 compared to $18,945,000 (16.7% of netsales) during the same period of 2009, an increase of $2,410,000.  Theacquisition of Bush Hog added $3,657,000 to SG&A expenses.  Excluding BushHog, the 2010 SG&A expenses were lower due to the cost control measuresimplemented during 2009. 

 

            Interest expensewas $1,024,000 for the second quarter of 2010 compared to $1,147,000 during thesame period in 2009, a decrease of $123,000.  The decrease was from reducedborrowings in 2010 compared to 2009.  The 2010 interest expense also includes$94,000 in amortization of bank fees from the amendment to our Company’srevolving credit agreement in November of 2009. 

 

            Other income(expense), net was $25,000 of expense during the second quarter of 2010compared to $49,000 of expense in the second quarter of 2009.  The amount inthe second quarters of 2010 and 2009 are from changes in exchange rates.  

 

            Provision forincome taxes was $1,712,000 (26.0%) in the second quarter of 2010 compared to$1,358,000 (31.2%) during the same period in 2009. 
                        
            The Company’s netincome after tax was $4,870,000 or $.41 per share on a diluted basis for thesecond quarter of 2010 compared to $2,992,000 or $.30 per share on a dilutedbasis for the second quarter of 2009.  The increase of $1,878,000 resulted fromthe factors described above.

 

*Six Months Ended June 30, 2010 vs. Six Months Ended June 30,2009*

 

Net sales for the first six months of 2010 were $262,723,000,an increase of $39,337,000 or 17.6% compared to $223,386,000 for the first sixmonths of 2009.  The increase was mainly from the acquisition of Bush Hog. Sales in the Company’s core business were affected by weakness in the worldwideeconomy which has continued since the third quarter of 2008.

 

Net North American Industrial sales increased duringthe first six months by $5,398,000 or 6.1% to $94,588,000 for 2010 compared to$89,190,000 during the same period in 2009.  The increase was mainly due tohigher sales in replacement parts and to a lesser extent some improved sales inthe excavator, vacuum truck, sweepers and mowing equipment products. Governmental authorities, continue to be affected by budget shortfalls.  

 

Net North American Agricultural sales were $85,129,000in 2010 compared to $43,105,000 for the same period in 2009, an increase of$42,024,000 or 97.5%.  The increase was from the acquisition of Bush Hog in theamount of $44,104,000.  The agricultural market remains soft mainly due todealer reluctance to stock farm equipment at historical levels as a result ofthe slowdown in the agricultural sector and concerns about the overall economy.

 

Net European sales for the first six months of 2010were $83,006,000, a decrease of $8,085,000 or 8.9% compared to $91,091,000during the same period of 2009.  The decrease was mainly from weak marketconditions caused by the slowdown in the European economy. 

 

 

18

 

 

 

 

 

 

 

Gross profitfor the first six months of 2010 was $56,816,000 (21.6% of net sales) comparedto $46,056,000 (20.6% of net sales) during the same period in 2009, an increaseof $10,760,000.  The increase was mainly from the acquisition of Bush Hog inthe amount of $8,826,000.  Increases in replacement part sales supported highermargins as well as improved margin percentages.  Gross margin percentages alsoimproved over 2009 as a result of continued improvements from efficiencyinitiatives which helped to lower manufacturing costs.

 

Selling,general and administrative expenses (“SG&A”) were $43,023,000 (16.4% of netsales) during the first six months of 2010 compared to $37,495,000 (16.8% ofnet sales) during the same period of 2009, an increase of $5,528,000.  Theincrease in SG&A for the first six months of 2010 was due to theacquisition of Bush Hog which added $7,224,000.  Without Bush Hog, SG&Adeclined $1,696,000 mainly from the benefit of the 2009 reductions in workforcealong with other cost savings initiatives and reduced commissions on lowersales volumes.

 

            Interest expensewas $2,274,000 for the first six months of 2010 compared to $2,243,000 duringthe same period in 2009, an increase of $31,000.  The increase was due to$188,000 in amortization of bank fees from the amendment to our Company’srevolving credit agreement in November of 2009 partially offset by the effectof reduced borrowings during 2010.

 

            Other income (expense),net was $35,000 of expense during the first six months of 2010 compared to$4,000 of expense in the first six months of 2009.  The expense in 2010 and2009 were from changes in exchange rates. 

 

           Provision for income taxes was $3,738,000 (29.7%) in the first six months of2010 compared to $2,101,000 (31.7%) during the same period in 2009.
                        
            The Company’s netincome after tax was $8,863,000 or $0.75 per share on a diluted basis for thefirst six months of 2010 compared to $4,535,000 or $0.45 per share on a dilutedbasis for the first six months of 2009.  The increase of $4,328,000 resultedfrom the factors described above.

 

**Liquidity and Capital Resources**

 

In addition to normal operatingexpenses, the Company has ongoing cash requirements which are necessary tooperate the 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, particularly related to ouragricultural products.  Accounts receivable historically build in the first andfourth quarters of each year as a result of fall preseason sales programs andout of season sales though with the soft economy this affect is less pronounced. These sales level the Company’s production during the off season. 

 

As of June 30, 2010, the Company had working capitalof $187,289,000 which represents an increase of $4,920,000 from working capitalof $182,369,000 as of December 31, 2009.  The increase in working capital wasprimarily from higher levels of accounts receivable due to seasonality. 

 

Capital expenditures were $2,183,000 for the firstsix months of 2010, compared to $1,852,000 during the first six months of2009.  Capital expenditures for 2010 are expected to be higher than 2009 levelsthough still below depreciation levels.   The Company expects to fundexpenditures from operating cash flows or through its revolving creditfacility, described below.

 

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 2009 or the first half of 2010.  The authorization torepurchase up to 1,000,000 shares remains available less 42,600 sharespreviously repurchased.

 

 

19

 

 

 

 

 

 

 

      Net cash used byfinancing activities was $2,551,000 during the six month period ending June 30,2010, compared to net cash used of $9,276,000 for the same period in 2009.  Thedecrease in financing activities in 2009 was from paydowns on the bank creditfacility due to cash provided by operating activities.

 

      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 June 30,2010.  Beginning June 30, 2010, *Rivard*’s actual operating cash flow willbe used in the calculation of consolidated operating cash flow.

 

On November 6, 2009, the Companyentered into the Seventh Amendment of the Amended and Restated Revolving CreditAgreement with Bank of America, N.A., Wells Fargo Bank, N.A., BBVA CompassBank, and Rabobank, as its lenders.  Prior to the execution of this Amendment,BBVA Compass Bank acquired certain assets of Guaranty Bank which included thiscredit facility and JPMorgan Chase Bank assigned its interest to Well FargoBank, N.A.  The purpose of the amendment was to add Bush Hog as a member of theObligated Group and pledge a first priority security interest in certain U.S.assets (accounts receivable, inventory, equipment, trademarks and trade names)of the Borrower and each member of the Obligated Group.  The Lenders agreed toincrease the operating leverage ratio during the next three quarters and to adda new EBIT to Interest Expense covenant in exchange for a commitment fee and anincrease in the Applicable Interest Margin over LIBOR or Prime Rate advances.

 

20

 

 

 

 

 

 

As of June 30, 2010, there was$42,000,000 borrowed under the revolving credit facility.  At June 30, 2010,$1,000,000 of the revolver capacity was committed to irrevocable standby lettersof credit issued in the ordinary course of business as required by vendors’contracts resulting in approximately $82,000,000 in available borrowings.

 

      OnMay 13, 2008, Alamo Group Europe Limited expanded its overdraft facility withLloyd’s TSB Bank plc from 1,000,000 British pounds to 5,500,000 million Britishpounds.  The facility was renewed on November 1, 2009 and outstandingscurrently bear interest at Lloyd’s Base Rate plus 1.4% per annum.  The facilityis unsecured but guaranteed by the U.K. subsidiaries of Alamo Group EuropeLimited.  As of June 30, 2010, there were no British pounds borrowed againstthe U.K. overdraft facility.

 

      Thereare additional lines of credit, for the Company’s French operations in theamount of 6,200,000 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 ofJune 30, 2010, no Euros were borrowed against the French line of credit,1,040,000 Canadian dollars were outstanding on the Canadian line of credit and400,000 Australian dollars were outstanding under its facility.  The Canadianand Australian revolving credit facilities are guaranteed by the Company. 

 

As of June 30, 2010, theCompany is 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 Consolidated 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.

 

 

21

 

 

 

 

 

 

 

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 $2,675,000 at June 30, 2010 and $2,548,000 atDecember 31, 2009.  

 

***SalesDiscounts***

* *

      At June30, 2010 the Company had $11,064,000 in reserves for sales discounts comparedto $3,803,000 at December 31, 2009 on products shipped to our customers undervarious promotional programs.  The increase was due primarily from additionaldiscounts reserved on the Company’s agricultural**products during thepre-season, which runs from September to December of each year and orders are generallyshipped through the first quarter of 2010.  The Company reviews the reservequarterly 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 $8,495,000 at June 30, 2010 and $9,060,000at December 31, 2009 in reserve to cover obsolescence and slow movinginventory.  The decrease in reserve for obsolescence was mainly due toinventory disposition in the Company’s U.S. and European operations.  Theobsolescence and slow moving policy states that the reserve is to be calculatedon a basis of: 1) no inventory usage over a three year period and inventorywith quantity on hand is deemed obsolete and reserved at 100 percent and 2)slow moving inventory with little usage requires a 100 percent reserve on itemsthat have a quantity greater than a three year supply.  There are exceptions tothe obsolete 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 nohistorical data, management makes a judgment based on a specific review of theinventory in question to determine what reserves, if any are appropriate.  Newproducts or parts are generally excluded from the reserve policy until a threeyear history has been established.

 

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 partsthough there are exceptions.

 

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 an end-user takes approximately 90 days to sixmonths from the receipt of the unit to file a warranty claim.  A warrantyreserve is established for each different marketing group.  Reserve balancesare evaluated on aquarterly basis and adjustments are made when required.  

 

The current warranty reserve balance was $6,347,000 at June30, 2010 and $6,337,000 at December 31, 2009.  

*** ***

22

 

 

 

 

 

 

***Product Liability***

At June 30, 2010 the Company had accrued$441,000 in reserves for product liability cases compared to $387,000 atDecember 31, 2009.  The Company accrues primarily on a case by case basis andadjusts the balance quarterly.

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 U.S. products remained at $100,000 perclaim.  The S.I.R. for all Bush Hog products was set at the date of acquisitionat $250,000 per claim.  The Company also carries product liability coverage inEurope, Canada and Australia which contain substantially lower S.I.R.’s ordeductibles.
***Goodwill***
      Goodwill must be tested for impairment atleast annually. In the fourth quarter of each year, or when events andcircumstances warrant such a review, the Company tests the goodwill of all ofits reporting units for impairment. The goodwill impairment test is determinedusing a two-step process.  The first step is to identify if a potentialimpairment exists by comparing the fair value of a reporting unit with itscarrying amount, including goodwill (Step 1).  If the fair value of a reportingunit exceeds its carrying value amount, goodwill of the reporting unit is notconsidered to have a potential impairment and the second step is notnecessary.  However, if the carrying amount of the reporting unit exceeds itsfair value, the second step (Step 2) is performed to determine if goodwill isimpaired and to measure the amount of impairment loss to recognize, if any.Step 2 compares the implied fair value of goodwill with the carrying amount ofgoodwill.  If the implied value of goodwill is less than the carrying amount ofgoodwill, then a charge is recorded to reduce goodwill to the implied goodwill.The implied goodwill is calculated based on a hypothetical purchase priceallocation similar to the requirements for purchase accounting, in that ittakes the implied fair value of the reporting unit and allocates such fairvalue to the fair value of the assets and liabilities of the reporting unit. 

      TheCompany estimates the fair value of its reporting units using a discounted cashflow analysis. This analysis requires the Company to make significantassumptions and estimates about the extent and timing of future cash flows,discount rates and growth rates. The cash flows are estimated over asignificant future period of time, which makes those estimates and assumptionssubject to an even higher degree of uncertainty. The Company also utilizes marketvaluation models andother financial ratios, which require the Company to make certain assumptionsand estimates 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 in the NorthAmerican Industrial segment of $14,104,000 in 2009 and $5,010,000 in the NorthAmerican Agricultural segment in 2008.  During the 2009 impairment analysis review, it was notedthat even though the *Schwarze* reporting unit’s fair value was abovecarrying value it was not materially different. At December 31, 2009, there wasapproximately $6.8 million of goodwill related to the *Schwarze* reportingunit. This reporting unit would be most likely affected by changes in theCompany’s assumptions and estimates. As of June 30, 2010, Goodwill was $32,607,000, whichrepresents 8.6% of total assets. The calculation of fair value could increase or decreasedepending on changes in the inputs and assumptions used, such as changes in thereporting unit’s future growth rates, discount rates, etc. 

 
**Forward-Looking Information**
 

      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-lookingstatements may be made orally or in press releases, conferences, reports orotherwise, in the future by or on behalf of the Company.

      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.

23

 

 

 

 

 

 

      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 the purchasesof our type of equipment by governmental customers; credit availability forboth the Company and its customers, adverse weather conditions such as droughtsand floods which can affect buying patterns of the Company’s customers; theprice and availability of critical raw materials, particularly steel and steelproducts; energy cost; increased cost of new governmental regulations whicheffect corporations; the potential effects on the buying habits of ourcustomers due to diseases such as mad cow; the Company’s ability to develop andmanufacture new and existing products profitably; market acceptance of new andexisting products; the Company’s ability to maintain good relations with itsemployees; and the ability to hire and 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; weakness in theCompany’s markets; financial market changes including increases in interestrates and fluctuations in foreign exchange rates; actions of competitors; theinability of the Company’s suppliers, customers, creditors, public utilityproviders and financial service organizations to deliver or provide theirproducts or services to the Company; seasonal factors in the Company’sindustry; unforeseen litigation; government actions including budget levels,regulations and legislation, primarily relating to the environment, commerce,infrastructure spending, health and safety; and availability of materials.

      TheCompany wishes to caution readers not to place undue reliance on anyforward-looking statements and to recognize that the statements are not predictionsof actual future results.  Actual results could differ materially from thoseanticipated in the forward-looking statements and from historical results, dueto the risks and uncertainties described above, as well as others not nowanticipated.  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 About Market Risks**

 

The Company is exposed to various markets 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 consists ofmanufacturing and sales activities in international jurisdictions. The Companyprimarily 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.

 

24

 

 

 

 

 

 

To mitigate the short-term affect ofchanges in currency exchange rates on the Company’s functional currency-basedsales, the Company’s U.K. subsidiaries regularly hedge by entering into foreignexchange forward contracts to hedge approximately 80% of its future net foreigncurrency sales transactions over a period of six months.  As of June 30, 2010,the Company had $2,872,000 outstanding in forward exchange contracts related toaccounts receivables.  A 15% fluctuation in exchange rates for these currencieswould change the fair value by approximately $431,000.  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 affectedby fluctuations in the value of the U.S. dollar as compared to foreigncurrencies, predominately in European countries, as a result of the sales ofits products in international markets.  Foreign currency options and forwardcontracts are used to hedge against the earnings effects of such fluctuations. At June 30, 2010, the result of a uniform 10% strengthening in the value of the dollar relative to the currenciesin which the Company’s sales are denominated would result in a decrease ingross profit of $2,269,000 for the period ending June 30, 2010.  Comparatively,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 haveresulted in a decrease in gross profit of approximately $2,476,000 for theperiod ended June 30, 2009.  This calculation assumes that each exchange ratewould change in the same direction relative to the U.S. dollar.  In addition tothe direct effects of changes in exchange rates, which are a changed dollarvalue of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive.  The Company’s sensitivityanalysis of the effects of changes in foreign currency exchange rates does notfactor in a potential change in sales levels or local currency prices.  The translation adjustment during the second quarter of 2010 was a loss of $6,791,000. On June 30, 2010, the British pound closed at .6694 relative to 1.00 U.S.dollar, and the Euro closed at .8177 relative to 1.00 U.S. dollar.  At December31, 2009 the British pound closed at .6187 relative to 1.00 U.S. dollar and theEuro closed at .6985 relative to 1.00 U.S. dollar.  By comparison, on June 30, 2009,the British pound closed at .6078 relative to 1.00 U.S. dollar, and the Euroclosed at .7128 relative to 1.00 U.S. dollar.  No assurance can be given as tofuture valuation of the British pound or Euro or how further movements in thoseor other currencies could affect future earnings or the financial position ofthe Company.

**InterestRate Risk**

 

      TheCompany’s long-term debt bears interest at variable rates.  Accordingly, theCompany’s net income is affected by changes in interest rates.  Assuming thecurrent level of borrowings at variable rates and a two percentage point changein the 2010 average interest rate under these borrowings, the Company’sinterest expense would have changed by approximately $420,000.  In the event ofan adverse change in interest rates, management could take actions to mitigateits exposure.  However, due to the uncertainty of the actions that would betaken and their possible effects this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the levelof overall economic activity that could exist in such an environment.

 

**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 of thedesign and operation of our disclosure controls and procedures (as defined inRule 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.

 

 

 

25

 

 

 

 

**PART II.     OTHER INFORMATION**

**Item 1. - None**

** **

**Item 2 - None**

** **

**Item 3 - None**

** **

**Item 4 - None**

 

**Item 5. OtherInformation**

 

(a)     Reports on Form 8-K

 

August 5, 2010 – Press Release announcing second quarter fiscal 2010earnings

 

(b)     Other Information

 

None

** **

**Item 6. Exhibits**

 

(a)   Exhibits

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

	 

	 

	 

	 

	 

	 

	 

26

 

 

 

 

 

 

 
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 & Chief Executive Officer

 

 

 

/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)

 

	 

	 

	 

	 

	 

	 

	 

	 

	 

	 

27
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