----

	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 MARCH 31, 2011

 

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

(State or other jurisdiction of

incorporation or organization) |   | 74-1621248

(I.R.S. Employer

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 APRIL 29, 2011, 11,880,979  SHARES OF COMMON STOCK, $.10 PAR VALUE, OF THE REGISTRANT WERE OUTSTANDING.

** **

 

----

 

 

 

 

 

** **

## Alamo Group Inc. and Subsidiaries

** **

INDEX

 

**       **

 

                                                                                                                                                                              
|                |                                                                                                                           |       |
|---------------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
|                |                                                                                                                           |       |
|                |                                                                                                                           |       |
| PART I.   | FINANCIAL  INFORMATION

                                                                                                  | PAGE       |
| Item 1.             | Interim Condensed  Consolidated Financial Statements  (Unaudited)

                                                  |       |
|                | Interim Condensed  Consolidated Balance Sheets 

  March 31, 2011  and December 31, 2010                                  | 3          |
|                |  

Interim Condensed  Consolidated Statements of Income

  Three months  ended March 31, 2011 and March 31, 2010     |  

4  |
|                |  

Interim Condensed  Consolidated Statements of Cash Flows

  Three months  ended March 31, 2011 and March 31, 2010 |  

5  |
|                |  

Notes to Interim  Condensed Consolidated Financial Statements                                                          |  

6  |
|                |                                                                                                                           |       |
| Item 2              | Management's  Discussion and Analysis of Financial                                                                             | 15         |
|                |   Condition and  Results of Operations                                                                                    |       |
|  

Item 3      |  

Quantitative and  Qualitative Disclosures About Market Risks                                                           |  

21 |
|                |                                                                                                                           |       |
| Item 4              | Controls and  Procedures                                                                                                       | 23         |

 

 

 
| PART II.  | OTHER INFORMATION |
|----------------|-------------------|

 
| Item 1.  | None                              |
|---------------|-----------------------------------|
| Item 2.  | None                              |
| Item 3.       | None                              |
| Item 4.  | None                              |
| Item 5.  | Other Information                 |
| Item 6        | Exhibits and  Reports on Form 8-K |

 
| SIGNATURES |
|------------|

 

 

 

 

 

 

 

 

 

                                                                                                 

| 2 |
|---|

 

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## Alamo Group Inc. and Subsidiaries

**Interim Consolidated Balance Sheets**

**(Unaudited)**

 

|  

(in thousands, except share amounts)                                                                                                                                                                                                          |   |   | **March 31,**

**2011**     |   |   | **December 31, 	2010**      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------|--------|--------|-----------------------------|
| **ASSETS**                                                                                                                                                                                                                                            |   |   |                        |   |   |                        |
|     Current assets:                                                                                                                                                                                                                    |   |   |                        |   |   |                        |
|       Cash and cash equivalents                                                                                                                                                                                              |   | $      | 28,383                 |   | $      | 30,243                 |
|       Accounts receivable, net                                                                                                                                                                                               |   |   | 154,614                |   |   | 127,388                |
|       Inventories                                                                                                                                                                                                            |   |   | 117,460                |   |   | 99,304                 |
|       Deferred income taxes                                                                                                                                                                                                  |   |   | 3,786                  |   |   | 3,813                  |
|       Prepaid expenses                                                                                                                                                                                                       |   |   | 4,445                  |   |   | 3,864                  |
|       Income tax receivable                                                                                                                                                                                                  |   |   | 448                    |   |   | 448                    |
|           Total current assets                                                                                                                                                                           |   |   | 309,136                |   |   | 265,060                |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
|     Property, plant and equipment                                                                                                                                                                                                      |   |   | 143,065                |   |   | 139,674                |
|           Less:  Accumulated depreciation                                                                                                                                                           |   |   | (81,863)                    |   |   | (78,490)                    |
|                                                                                                                                                                                                                                                  |   |   | 61,202                 |   |   | 61,184                 |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
|     Goodwill                                                                                                                                                                                                                           |   |   | 35,281                 |   |   | 34,073                 |
|     Intangible assets                                                                                                                                                                                                                  |   |   | 5,500                  |   |   | 5,500                  |
|     Deferred income taxes                                                                                                                                                                                                              |   |   | 5,057                  |   |   | 4,311                  |
|     Other assets                                                                                                                                                                                                                       |   |   | 746                    |   |   | 855                    |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
|             Total assets                                                                                                                                                                       |   | $      | 416,922                |   | $      | 370,983                |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                         |   |   |                        |   |   |                        |
|     Current liabilities:                                                                                                                                                                                                               |   |   |                        |   |   |                        |
|       Trade accounts payable                                                                                                                                                                                                 |   | $      | 53,119                 |   | $      | 45,152                 |
|       Income taxes payable                                                                                                                                                                                                   |   |   | 1,584                  |   |   | 1,567                  |
|       Accrued liabilities                                                                                                                                                                                                    |   |   | 33,179                 |   |   | 29,813                 |
|       Current maturities of long-term debt                                                                                                                                                                                   |   |   | 1,620                  |   |   | 2,319                  |
|       Deferred income tax                                                                                                                                                                                                    |   |   | 338                    |   |   | 338                    |
|           Total current liabilities                                                                                                                                                                      |   |   | 89,840                 |   |   | 79,189                      |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
|       Long-term debt, net of current maturities                                                                                                                                                                              |   |   | 47,021                 |   |   | 23,106                 |
|       Deferred pension liability                                                                                                                                                                                             |   |   | 6,782                  |   |   | 7,151                  |
|       Other long-term liabilities                                                                                                                                                                                            |   |   | 4,079                  |   |   | 2,109                  |
|       Deferred income taxes                                                                                                                                                                                                  |   |   | 6,467                  |   |   | 6,168                  |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
| Stockholders’ equity:                                                                                                                                                                                                                            |   |   |                        |   |        |                        |
|       Common stock, $.10 par value, 20,000,000 shares  authorized;

      11,879,579  and 11,872,479 issued and outstanding at March 31, 2011  and       December 31, 2010 |   |   |  

 

1,188  |   |   |  

 

1,187  |
|       Additional paid-in capital                                                                                                                                                                                             |   |   | 84,606                 |   |   | 84,377                 |
|       Treasury  stock, at cost; 42,600 shares at March 31, 2011 and 

        December  31, 2010                                                                                               |   |   |  

(426)               |   |   |  

(426)               |
|       Retained earnings                                                                                                                                                                                                      |   |   | 171,545                |   |   | 166,589                |
|       Accumulated other comprehensive income, net                                                                                                                                                                            |   |   | 5,820                  |   |   | 1,533                  |
|           Total  stockholders’ equity                                                                                                                                                               |   |   | 262,733                |   |   | 253,260                |
|                                                                                                                                                                                                                                                  |   |   |                        |   |   |                        |
|           Total liabilities and stockholders’ equity                                                                                                                                                |   | $      | 416,922                |   | $      | 370,983                |
|                                                                                                                                                                                                                                                       |        |        |                             |        |        |                             |  |

                                                                       

See accompanying notes.

                                                                                            

| 3 |
|---|

 

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**Alamo Group Inc. and Subsidiaries**

**Interim Consolidated Statements ofIncome**

**(Unaudited)**

 

|                                          |   | Three Months Ended |
|-----------------------------------------------|--------|--------------------|
|                                          |   |               | **March 31,** |
| (in  thousands, except per share amounts)     |   |               | **2011** |   |   | **2010** |
| Net sales:                                    |   |               |   |   |   |   |
|     North American             |   |               |   |   |   |   |
|       Industrial     |   | $                  | 49,033  |   | $ | 47,112  |
|       Agricultural   |   |               | 49,739  |   |   | 41,700  |
|     European                   |   |               | 41,943  |   |   | 42,341  |
| Total net sales                               |   |               | 140,715  |   |   | 131,153  |
| Cost of sales                                 |   |               | 108,814  |   |   | 103,018  |
| Gross profit                                  |   |               | 31,901  |   |   | 28,135  |
|                                          |   |               |   |   |   |   |
| Selling,  general and administrative expense  |   |               | 22,560  |   |   | 21,668  |
|     Income from operations     |   |               | 9,341  |   |   | 6,467  |
|                                          |   |               |   |   |   |   |
| Interest expense                              |   |               | (765) |   |   | (1,250) |
| Interest income                               |   |               | 72  |   |   | 812  |
| Other income (expense), net                   |   |               | (147) |   |   | (10) |
|     Income before income taxes |   |               | 8,501  |   |   | 6,019  |
| Provision for income taxes                    |   |               | 2,834  |   |   | 2,026  |
|     Net Income                 |   | $                  | 5,667  |   | $ | 3,993  |
|                                          |   |               |   |   |   |   |
|                                          |   |               |   |   |   |   |
| Net income per common share:                  |   |               |   |   |   |   |
|     Basic                      |   | $                  | 0.48  |   | $ | 0.34  |
|     Diluted                    |   | $                  | 0.47  |   | $ | 0.34  |
| Average common shares:                        |   |               |   |   |   |   |
|     Basic                      |   |               | 11,832  |   |   | 11,747  |
|     Diluted                    |   |               | 11,980  |   |   | 11,833  |
|                                          |   |               |   |   |   |   |
| Dividends declared                            |   | $                  | 0.06  |   | $ | 0.06  |

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

| 4 |
|---|

 

----

 

 

 

 

 

**Alamo Group Inc. and Subsidiaries**

**Interim Consolidated Statements ofCash Flows**

** (Unaudited)**

** **

** **

|                                                                                                                                      |   | **Three Months Ended** |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|
|                                                                                                                                      |   | **March 31,**          |
| (in  thousands)                                                                                                                           |   |                   | **2011** | ** ** | **2010** |
| **Operating  Activities**                                                                                                                 |   |                   |   |   |   |
| Net  income                                                                                                                               |   | $                      | 5,667  | $ | 3,993  |
| Adjustment  to reconcile net income to net cash

        used  by operating activities:                |   |                   |   |   |   |
|               Provision  for doubtful accounts                           |   |                   | 393  |   | 177  |
|               Depreciation                                               |   |                   | 2,621  |   | 2,664  |
|               Amortization  of intangibles                               |   |                   | –  |   | 86  |
|               Amortization  of debt issuance                             |   |                   | 94  |   | 94  |
|               Stock-based  compensation expense                          |   |                   | 140  |   | 189  |
|               Excess  tax benefits from stock-based payment arrangements |   |                   | (18) |   | (31) |
|               Provision  for deferred income tax (benefit) expense       |   |                   | (552) |   | 188  |
|               Loss  on sale of property, plant & equipment           |   |                   | (34) |   | 30 |
| Changes in  operating assets and liabilities:                                                                                             |   |                   |   |   |   |
|               Accounts  receivable                                       |   |                   | (25,625) |   | (26,050) |
|               Inventories                                                |   |                   | (16,410) |   | 4,200  |
|               Prepaid  expenses and other assets                         |   |                   | (1,287) |   | (1,273) |
|               Trade  accounts payable and accrued liabilities            |   |                   | 9,520  |   | 11,406  |
|               Income  taxes payable                                      |   |                   | 69  |   | (1,913) |
|               Other  long-term liabilities                               |   |                   | 1,457  |   | (365) |
| Net cash  used by operating activities                                                                                                    |   |                   | (23,965) |   | (6,605) |
|                                                                                                                                      |   |                   |   |   |   |
| **Investing  Activities**                                                                                                                 |   |                   |   |   |   |
| Acquisitions,  net of cash acquired                                                                                                       |   |                   | –  |   | (431) |
| Purchase  of property, plant and equipment                                                                                                |   |                   | (1,433) |   | (878) |
| Proceeds  from sale of property, plant and equipment                                                                                      |   |                   | 44  |   | 76  |
| Net cash  used by investing activities                                                                                                    |   |                   | (1,389) |   | (1,233) |
|                                                                                                                                      |   |                   |   |   |   |
| **Financing  Activities**                                                                                                                 |   |                   |   |   |   |
| Net  change in bank revolving credit facility                                                                                             |   |                   | 24,000  |   | 13,000  |
| Principal  payments on long-term debt and capital leases                                                                                  |   |                   | (892) |   | (908) |
| Proceeds  from issuance of long-term debt                                                                                                 |   |                   | –  |   | 542  |
| Dividends  paid                                                                                                                           |   |                   | (710) |   | (705) |
| Proceeds  from sale of common stock                                                                                                       |   |                   | 89  |   | 26  |
| Excess tax  benefits from stock-based payment arrangements                                                                                |   |                   | 18  |   | 31  |
| Net cash  provided by financing activities                                                                                                |   |                   | 22,505  |   | 11,986  |
|                                                                                                                                      |   |                   |   |   |   |
| Effect of  exchange rate changes on cash                                                                                                  |   |                   | 989  |   | (895) |
| Net change  in cash and cash equivalents                                                                                                  |   |                   | (1,860) |   | 3,253  |
| Cash and  cash equivalents at beginning of the period                                                                                     |   |                   | 30,243  |   | 17,774  |
| Cash  and cash equivalents at end of the period                                                                                           |   | $                      | 28,383  | $ | 21,027  |
|                                                                                                                                      |   |                   |   |   |   |
| Cash  paid during the period for:                                                                                                         |   |                   |   |   |   |
|           Interest                                                                           |   | $                      | 746  | $ | 1,121  |
|           Income  taxes                                                                      |   | $                      | 3,876  | $ | 2,178  |

See accompanying notes.

 

 

 

| 5 |
|---|

 

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**Alamo Group Inc. and Subsidiaries**

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

## March 31, 2011

 

**1. Basis of Financial Statement Presentation**

 

    The accompanying unaudited interim consolidatedfinancial statements of Alamo Group Inc. and its subsidiaries (the “Company”)have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulations S-X.  Accordingly, they do notinclude all of the information and footnotes required by U.S. GAAP for completefinancial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included.  Operating results for the periods presentedare not necessarily indicative of the results that may be expected for the yearending December 31, 2011.  The balance sheet at December 31, 2010, 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, 2010.

 

    The accompanying statement of income reflects thecorrection of a misclassification of freight revenue for the priorperiod.  Freight billed to customers was previously recorded as areduction of cost of sales and has been reclassified to increase sales and costof sales in accordance with ASC 605-45-45-20.  The reclassificationresulted in an increase in net sales and cost of sales of $3.4 million for thethree months ended March 31, 2011, and was $2.8 million for the three monthsended March 31, 2010, with no impact on reported net income. Revenue and costof sales for the years ended December 31, 2010 and 2009 will be increased byapproximately $12 million and $7.4 million, respectively, in future filings. 

 

**2.  Accounts Receivable**

 

      Accounts Receivable is shown net of theallowance for doubtful accounts of $3,190,000 and $2,852,000 at March 31, 2011and December 31, 2010, respectively.

** **

**3.  Inventories**

 

      Inventories valued at LIFO cost represented 64%and 63% of total inventory at March 31, 2011 and December 31, 2010,respectively.  The excess of current cost over LIFO valued inventories was $7,654,000at March 31, 2011 and December 31, 2010.  Inventory obsolescence reserves were$7,898,000 at March 31, 2011 and $7,506,000 at December 31, 2010.  The increasein reserve for obsolescence was from the Company’s U.S. operations.  Net inventoriesconsist of the following:

 

|  

(in thousands) |   |   | **March 31,**

**2011** |   | **December 31,**

**2010** |
|------------------------|--------|--------|-------------------------|--------|----------------------------|
|                   |   |   |                    |   |                       |   |
| Finished  goods        |   | $      | 94,030                  |   | $                          | 80,102 |
| Work in  process       |   |   | 13,163                  |   |                       | 9,857 |
| Raw  materials         |   |   | 10,267                  |   |                       | 9,345 |
|                   |   | $      | 117,460                 |   | $                          | 99,304 |
|                        |        |        |                         |        |                            |  |  |

 

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

** **

**4. Derivatives and Hedging**

** **

| 6 |
|---|

 

----

 

 

 

 

 

      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 Interbank Offered Rate (“LIBOR”).  During the secondquarter of 2007, the Company entered into two interest rate swap agreementswith JPMorgan that hedge future cash flows related to its outstanding debtobligations.  One swap had a three-year term and fixed the LIBOR base rate at4.910% covering $20 million of this debt and expired on March 31, 2010.  Theother had a four-year term and fixed the LIBOR base rate at 4.935% covering anadditional $20 million of these variable rate borrowings and expired on March31, 2011.  At March 31, 2011 there was zero liability related to the expiredinterest rate swap.

** **

**5.  FairValue Measurements**

 

      The Company adopted ASC Subtopic 820-10, “FairValue Measurements and Disclosures, as amended” as of January 1, 2008.  ASCSubtopic 820-10 defines fair value as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor most advantageous market for the asset or liability in an orderlytransaction between market participants.  There is a three-tier fair valuehierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independentsources, while unobservable inputs (lowest level) reflect internally developedmarket assumptions.  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.

 

**6. Common Stock and Dividends**

** **

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

** **

|                |   | **March 31,**

**Three Months Ended** |
|---------------------|--------|---------------------------------------|
|                |   |                                  | **2011** |   |   | **2010** |
|                |   |                                  |   |   |   |   |
| Dividends  declared |   | $                                     | 0.06 |   | $ | 0.06 |
| Dividends  paid     |   |                                  | 0.06 |   |   | 0.06 |

** **

| 7 |
|---|

 

----

 

 

 

 

 

**7.  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 $140,000 and $189,000 for the quarters endedMarch 31, 2011 and 2010, respectively.

 

*Qualified Options*

 

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

 

| *For  three months ending March 31, 2011*      |   | ** **     |
|------------------------------------------------|--------|----------------|
|                                           |   |  

Shares |   |   | Exercise

Price* |
| Options  outstanding at beginning of year      |   | 360,130   |   |   |   |
|       Granted         |   | –    |   |   |   |
|       Exercised       |   | (7,100)        |   |   | $12.53 |
|       Cancelled       |   | (2,000)        |   |   | $24.69 |
|                                           |   |           |   |   |   |
| Options  outstanding at March 31, 2011         |   | 351,030   |   |   | $18.37 |
| Options  exercisable at March 31, 2011         |   | 213,030   |   |   | $19.29 |
| Options  available for grant at March 31, 2011 |   | 197,500   |   |   |   |

**WeightedAverages*

 

      Optionsoutstanding and exercisable at March 31, 2011 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                      |   | 146,030            |   |   | 5.97                               | $ 12.23  |   |   | 68,030    | $ 13.12  |
| $19.79 - $25.18                      |   | 205,000            |   |   | 5.72                               | $ 22.75  |   |   | 145,000    | $ 22.18  |
|       Total |   | 351,030            |   |   |                               |   |   |   | 213,030    |   |

**WeightedAverages*

*** ***

***Non-qualifiedOptions***

 

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

 

| *For  three months ending March 31, 2011*      |   | ** **         |
|------------------------------------------------|--------|--------------------|
|                                           |   | Shares             |   |   | Exercise

Price* |
| Options  outstanding at beginning of year      |   | 102,400       |   |   |   |
|       Granted         |   | –   |   |   |   |
|       Exercised       |   | –   |   |   |   |
|       Cancelled       |   | –   |   |   |   |
|                                           |   |               |   |   |   |
| Options  outstanding at March 31, 2011         |   | 102,400       |   |   | $15.62  |
| Options  exercisable at March 31, 2011         |   | 30,300        |   |   | $20.79  |
| Options  available for grant at March 31, 2011 |   | 364,000       |   |   |   |

**WeightedAverages*

 

| 8 |
|---|

 

----

 

 

 

 

* *

      Options outstanding and exercisable at March 31, 2011were 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                     |   | 68,900             |   |   | 8.00                               | $11.45  |   |   | 7,300    | $11.45  |
| $13.96 - $19.79                      |   | 6,000              |   |   | 4.00                               | $19.79  |   |   | 6,000    |  $19.79  |
| $25.02 -  $25.18                     |   | 27,500             |   |   | 5.91                               | $25.17  |   |   | 17,000    |  $25.16  |
|       Total |   | 102,400            |   |   |                               |   |   |   | 30,300    |   |

**Weighted Averages*

* *

***Restricted Stock Units***

 

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

 
|                                                   |   |  

 

 

 

Shares |   |   |  

 

 

 

Price |  

Weighted- average remaining

contractual term (in years) |
|--------------------------------------------------------|--------|----------------------------------------|--------|--------|---------------------------------------|------------------------------------------------------------------|
| Options  outstanding at beginning of year              |   | 9,000                             |   | $      | 15.86                            | 2.33                                                             |
|       Granted                 |   | —                            |   |   | —                           | —                                                           |
|       Vested                  |   | —                            |   |   | —                           | —                                                           |
|       Forfeited  or Cancelled |   | —                            |   |   | —                           | —                                                           |
| Options  outstanding at end of year                    |   | 9,000                             |   | $      | 15.86                            |                                                             |

 

**8.  Earnings Per Share**

** **

      The following table sets forth thereconciliation from basic to diluted average common shares and the calculationsof net income per common share.  Net income for basic and diluted calculationsdo not differ. 

 

|                              | **Three Months Ended**                         |
|-----------------------------------|------------------------------------------------|
|                              | March 31,                                      |
| (In  thousands, except per share) | 2011        | 2010  |  
Net  Income

$

5,667

 

$

3,993

 
       

 

 

 

 

 

Average  Common Shares:

 

 

 

 

 

    Basic  (weighted-average outstanding shares)

 

11,832

 

 

11,747

    Dilutive  potential common shares from stock options 

 

148

 

 

86

     Diluted (weighted-average outstanding shares)

 

11,980

 

 

11,833

  

 

 

 

 

 

Basic  earnings per share

$

0.48

 

$

0.34

  

 

 

 

 

 

Diluted  earnings per share

$

0.47

 

$

0.34

	 

	 

	 

9

 

 

 

 

 

 

**9.  Segment Reporting**

** **

      At March 31, 2011 the following includes a summary ofthe unaudited financial information by reporting segment:  

 

 

 

**Three Months Ended**

 

 

**March 31,**

(in  thousands)

 

**2011**

** **

** **

**2010**

 

 

 

 

 

 
Net Revenue
 

 

 

 

 

        Industrial

$

49,033 

 

$

47,112 

        Agricultural

 

49,739 

 

 

41,700 

        European

 

41,943 

 

 

42,341 

Consolidated

$

140,715 

 

$

131,153 

 

 

 

 

 

 

**Operating  Income**

 

 

 

 

 

        Industrial

$

3,427

 

$

1,840

        Agricultural

 

2,940 

 

 

985 

        European

 

2,974 

 

 

3,642 

Consolidated

$

9,341 

 

$

6,467 

 

 

 

 

 

 

**Goodwill**

 

 

 

 

 

        Industrial

$

13,422 

 

$

13,555 

        Agricultural

 

– 

 

 

– 

        European

 

21,859 

 

 

20,786 

Consolidated

$

35,281 

 

$

34,341 

 

 

 

 

 

 

**Total  Identifiable Assets**

 

 

 

 

 

        Industrial

$

123,408 

 

$

128,094 

        Agricultural

 

146,562 

 

 

132,765 

        European

 

146,952 

 

 

137,105 

Consolidated

$

416,922 

 

$

397,964 

** **

**10.  Off-Balance Sheet Arrangements**

      TheCompany does not have any obligation under any transaction, agreement or othercontractual arrangement to which an entity unconsolidated with the Company isparty, that has or is reasonably likely to have a material effect on theCompany’s financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

 

**11.  Comprehensive Income**

      Duringthe first quarter of 2011 and 2010, Comprehensive Income (Loss) amounted to $9,954,000and ($743,000) respectively.

      

      The components of Comprehensive Income are as follows:**

 

 

 

 

**Three Months Ended**

 

 

 

**March 31,**

(in  thousands)

 

 

**2011** 

** **

** **

**2010** 

Net Income

 

$

5,667 

 

$

3,993 

Cash flow  derivative, net of taxes

 

 

144 

 

 

233 

Amortization  of actuarial net gain (loss) 

 

 

(1,147)

 

 

19 

Foreign  currency translations adjustment

 

 

5,290

 

 

(4,988)

 

 

 

 

 

 

 

Comprehensive  Income (Loss)

 

$

9,954

 

$

(743)

 

 

 

10

 

 

 

 

 

 

 

** **

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

 

 

 

**March 31,**

**December 31,**

(in  thousands)

** **

** **

**2011**

** **

** **

**2010**

 

 

 

 

 

 

 

Foreign  currency translation

 

$

9,752 

 

$

   4,489 

Derivatives,  net of taxes

 

 

– 

 

 

(171)

Actuarial  gains (losses) related to defined benefit plans

 

 

(3,932)

 

 

(2,785)

Total  Accumulated other comprehensive income

 

$

5,820 

 

$

1,533 

**                                                                                                                                                                                   **

** **

**12.  Contingent Matters**

 

      Likeother manufacturers, the Company is subject to a broad range of federal, state,local and foreign laws and requirements, including those concerning airemissions, discharges into waterways, and the generation, handling, storage,transportation, treatment and disposal of hazardous substances and wastematerials, as well as the remediation of contamination associated with releasesof hazardous substances at the Company’s facilities and offsite disposallocations, workplace safety and equal employment opportunities. These laws andregulations are constantly changing, and it is impossible to predict withaccuracy the effect that changes to such laws and regulations may have on the Companyin the future. Like other industrial concerns, the Company’s manufacturingoperations entail the risk of noncompliance, and there can be no assurance thatthe Company will not incur material costs or other liabilities as a resultthereof. 

 

      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 monitoringexisting wells, an unconditional “no further action” letter will be requested.

 

      OnMarch 31, 2011, the Company had an environmental reserve in the amount of $1,474,000related to the acquisition of *Gradall’s* facility in New Philadelphia, Ohio. Three specific remediation projects that were identified prior to the acquisition arein process of remediation with a remaining reserve balance of $9,000. TheCompany has a reserve of $277,000 concerning a potential asbestos issue that isexpected to be remediated over time. The balance of the reserve, $1,188,000, ismainly for potential ground water contamination/remediation that was identifiedbefore the acquisition and believed to have been generated by a third partycompany located near the *Gradall* facility. 

 

      TheCompany knows that *Bush Hog*’s main manufacturing property in Selma, Alabama was contaminated with chlorinated volatile organic compounds which mostlikely resulted from painting and cleaning operations during the 1960s and ‘70s.The contaminated areas were 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 and has removed theunderground storage tanks at its cost and has remedied the identifiedcontamination in accordance with the regulations of the Alabama Department ofEnvironmental Management. An environmental consulting firm was retained bythe prior owner and administered the cleanup and will monitor the site on anongoing basis until the remediation program is complete and approved by theapplicable authorities.

 

 

11

 

 

 

 

 

 

 

      Certainother assets of the Company contain asbestos that may have to be remediatedover time. Management has made its best estimate of the cost to remediate theseenvironmental issues. However, such estimates are difficult to determine, includingthe timing of such costs. The Company believes that any subsequent change inthe liability associated with the asbestos removal will not have a materialadverse effect on the Company’s consolidated financial position or results ofoperations.

 

      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.

 

**13.  Retirement Benefit Plans**

** **

***Defined Benefit Plan***

** **

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

 

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

 

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

 

      TheCompany’s pension expense was $22,000 and $50,000 for the three months endedMarch 31, 2011 and 2010, respectively.  The Company is required to contribute $1,085,000to the pension plans for 2011, of which $342,000 was contributed during thefirst quarter of 2011.

 

***SupplementalRetirement Plan***

 

      TheBoard of Directors of the Company adopted the Alamo Group Inc. SupplementalExecutive Retirement Plan (the “SERP”), effective as of January 3, 2011.  TheSERP will benefit certain key management or other highly compensated employeesof the Company and/or certain subsidiaries who are selected by the CompensationCommittee and approved by the Board to participate.

 

12

 

 

 

 

 

 

      TheSERP is intended to provide a benefit from the Company upon retirement, deathor disability, or a change in control of the Company.  Accordingly, the SERPobligates the Company to pay to a participant a Retirement Benefit (as definedin the SERP) upon the occurrence of certain payment events to the extent aparticipant has a vested right thereto.  A participant’s right to hisRetirement Benefit becomes vested in the Company’s contributions upon 10 yearsof Credited Service (as defined in the SERP) or a change in control of theCompany.  The Retirement Benefit is based on 20% of the final three yearaverage salary of each participant on or after his or her Normal Retirement Age(65 years of age).  In the event of the participant’s death or a change incontrol, the participant’s vested Retirement Benefit will be paid in a lump sumto the participant or his estate, as applicable, within 90 days after theparticipant’s death or a change in control, as applicable.  In the event theparticipant is entitled to a benefit from the SERP due to disability,retirement or other termination of employment, the benefit will be paid inmonthly installments over a period of fifteen years.

 

      TheCompany records amounts relating to the SERP based on calculations thatincorporate various actuarial and other assumptions, including discount rates,rate of compensation increases, retirement dates and life expectancies.  Thenet periodic costs are recognized as employees render the services necessary toearn the SERP benefits.

 

      Inconnection with the initiation of the SERP, the Company recorded an unfundedlong-term liability of $1,964,301 a deferred tax asset of $746,000 and $1,218,301in accumulated other comprehensive income.  The $1,964,301 represents priorservice cost which will be amortized over the average remaining service periodsof the employees.  The prior service cost is included as a component of netperiodic pension cost.  The prior service cost expected to be amortized for theyear ended December 31, 2011 is $263,665.

 

   The components of net period pension cost were asfollows:

 

**Three Months Ended March 31, 2011**

Service Cost

$

  26,926

Interest Cost

 

  25,881

Amortization of Prior Service Cost

 

  65,916

Net Periodic Benefit Cost

$

118,723

 

 

 

 

      TheNet Periodic Pension Cost is based on the following assumptions determined atJanuary 1, 2011:

 

Discount  Rate

5.28%

Rate of  compensation increases

3.0%

Amortization  Period

7.45 years

 

**14.  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 recognizingrevenue and expenses. Additionally, the amount of income taxes paid is subjectto our interpretation of applicable tax laws in the jurisdictions in which wefile. 

      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 taxes havebeen 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 which have lower statutoryrates.

      Duringthe third quarter of 2010, the Company completed a research and developmentcredit study (R&D study) related to prior year tax returns.  The R&Dstudy resulted in tax credits of approximately $1,100,000.  The Company hasrecorded an unrecognized tax benefit in the amount of approximately $190,000.

** **

**15.  RecentAccounting Pronouncements andLegislative Changes**

 

      InMarch 2010, President Obama signed into law the Patient Protection andAffordable Care Act (the “Act”), which is a comprehensive health care reformbill for the United States. In addition, on March 30, 2010, PresidentObama signed into law the reconciliation measure (“Heath Care and EducationReconciliation Act of 2010”), which modifies certain provisions of the Act.Although the new legislation did not have an impact on our consolidatedfinancial position, results of operation or cash flows in 2010, the Company iscontinuing to assess the potential impacts on our future obligations, costs andcash flows related to our health care benefits. 

 

 

** **

13

 

 

 

 

 

 

 

      InApril 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition (ASCTopic 605): Milestone Method” (“ASU No. 2010-17”). ASU No. 2010-17recognizes the milestone method as an acceptable revenue recognition method forsubstantive milestones in research or development transactions. A milestone issubstantive when the consideration earned from achievement of the milestone iscommensurate with either (a) the vendor’s performance to achieve themilestone or (b) the enhancement of the value of the delivered item(s) asa result of a specific outcome resulting from the vendor’s performance toachieve the milestone and the consideration earned from the achievement of amilestone relates solely to past performance and is reasonable relative to allof the deliverables and payment terms (including other potential milestoneconsideration) within the arrangement. This new guidance will be effective forour fiscal year 2011 and its interim periods, with early adoption permitted.This guidance will not have a material impact on our consolidated financialposition, results of operations or cash flows. 

 

      InJanuary 2010, the provisions of ASC Topic 820 were modified to requireadditional disclosures, including transfers in and out of Level 1 and 2 fairvalue measurements and the gross basis presentation of the reconciliation ofLevel 3 fair value measurements. This guidance is effective for interim andannual reporting periods beginning after December 15, 2009, except fordisclosures related to Level 3 fair value measurements, which are effective forfiscal years beginning after December 15, 2010 (including interimperiods). Early adoption is permitted. We have adopted all of these provisionsof ASC Topic 820 effective December 31, 2009. Since only disclosures areaffected by these requirements, the adoption of these provisions will notaffect our financial position or results of operations.

 

      InOctober 2009, the FASB issued ASU No. 2009-14 “Software (ASC Topic 985):Certain Revenue Arrangements That Include Software Elements” (“ASUNo. 2009-14”). ASU No. 2009-14 modifies the scope of the softwarerevenue recognition guidance to exclude (i) non-software components oftangible products and (ii) software components of tangible products thatare sold, licensed or leased with tangible products when the softwarecomponents and non-software components of the tangible product functiontogether to deliver the tangible product’s essential functionality. ASUNo. 2009-14 is effective for fiscal years beginning on or afterJune 15, 2010 with early adoption permitted. The guidance may be appliedretrospectively or prospectively for new or materially modified arrangements.This guidance will not have a material impact on our consolidated financial position,results of operations or cash flows. 

 

      InOctober 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (ASCTopic 605): Multiple-Deliverable Revenue Arrangements” (“ASUNo. 2009-13”). ASU No. 2009-13 addresses how to determine whether anarrangement involving multiple deliverables contains more than one unit ofaccounting and how the arrangement consideration should be allocated among theseparate units of accounting. ASU No. 2009-13 is effective for fiscalyears beginning on or after June 15, 2010 with early adoption permitted.The guidance may be applied retrospectively or prospectively for new ormaterially modified arrangements. This guidance will not have a material impacton our consolidated financial position, results of operations or cash flows.

 

 

 

14

 

 

 

 

 

 

** **

**Item 2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

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

 

 

 

**Three Months Ended**

 

** **

 

**March 31,**

 

**As a**

**Percent of Net Sales**

 

** **

**2011**

 

** **

**2010**

 

 

North American

 

 

 

 

 

    Industrial

 

34.8

%

35.9

%

    Agricultural

 

35.4

%

31.8

%

European

 

29.8

%

32.3

%

   Total sales, net

 

100.0

%

100.0

%

 

 

 

 

**Three Months Ended**

 

** **

 

**March 31,**

 

**Cost Trends and Profit Margin, as**

**Percentages of Net Sales**

 

** **

**2011**

 

** **

**2010**

 

 

 

 

 

 

 

Gross margin

 

22.7

%

21.5

%

Income from operations

 

6.6

%

4.9

%

Income before income taxes

 

6.0

%

4.6

%

Net income

 

4.0

%

3.0

%

** **

**Overview**

** **

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

 

      Inthe first quarter of 2011 the Company’s net income was up due to the Company’simproved sales primarily in its Agricultural Division and continued effortswith cost control initiatives.  While the agricultural sector has shownimprovement, the Company’s governmental markets remain tight reflecting theoverall weakness in the global economy.  The Industrial Division salesincreased 4% during the first quarter of 2011 due to increases in the excavatorand snow equipment markets, however; budgets of governmental entities continueto be soft.  The Agricultural Division saw a 19% increase in sales versus thefirst quarter of 2010 primarily from increased pre-season sales from its BushHog and Rhino product lines.  Overall agricultural market conditions haveimproved as both commodity prices and farm incomes have continued to increasesince the third quarter of 2010.  European sales declined 1% in U.S. dollarsand 4% in local currency compared to the first quarter of 2010 as their marketsreflected soft conditions caused by the general slowdown in the Europeaneconomy.  In general, margin percentage improved from higher proprietary partsales in the first quarter of 2011 compared to the same time in 2010.

 

      TheCompany is concerned that our markets for 2011 could continue to be negativelyaffected by a variety of factors such as a continued weakness in the overalleconomy, credit availability, increased levels of government regulations;changes in farm incomes due to commodity prices or governmental aid programs;adverse situations that could affect our customers such as animal diseaseepidemics, weather conditions such as droughts, floods, snowstorms, etc.;budget constraints or revenue shortfalls in governmental entities and changesin our customer’s buying habits due to lack of confidence in the economicoutlook.

 

 

 

15

 

 

 

 

 

 

**Resultsof Operations**

 

*Three Months Ended March 31, 2011 vs. Three Months EndedMarch 31, 2010*

 

Net sales for the first quarter of 2011 were $140,715,000, an increaseof $9,562,000 or 7.3% compared to $131,153,000 for the first quarter of 2010. The majority of the increase was from improved sales in the North AmericanAgricultural segment.  Also included in these sales is the effect of areclassification of freight revenue.  Freight billed to customers had beenpreviously recorded net of cost of sales and has been reclassified to sales. This change resulted in an increase in net sales of $3,361,000 in the firstquarter of 2011 and $2,764,000 in the first quarter of 2010, with no impact onreported earnings.

 

NetNorth American Industrial sales increased during the first quarter by $1,921,000or 4.1% to $49,033,000 for 2011 compared to $47,112,000 during the same periodin 2010.  The increase came primarily from higher sales of excavators and snowequipment as sales of mowing equipment and sweepers to governmental entitiesremained flat.  

 

Net North American Agriculturalsales were $49,739,000 in 2011 compared to $41,700,000 for the same period in2010, an increase of $8,039,000 or 19.3%.  The increase was due to improvedagricultural market conditions, specifically from increased commodity pricesand farm income which supported higher sales of mowing equipment for both BushHog and Rhino product lines.

 

NetEuropean Sales for the first quarter of 2011 were $41,943,000, a decrease of $398,000or 1.0% compared to $42,341,000 during the first quarter of 2010.  The decreasewas primarily from continued soft market conditions caused by the economic slowdownthroughout Europe.

 

Gross profitfor the first quarter of 2011 was $31,901,000 (22.7% of net sales) compared to$28,135,000 (21.5%) during the same period in 2010, an increase of $3,766,000. The increase was mainly attributable to the agricultural market, which began toshow improvement beginning in the third quarter of 2010, and lower manufacturingcosts.  Increases in the Company’s replacement part business also supportedhigher margins as well as improved margin percentages.
 
Selling,general and administrative expenses (“SG&A”) were $22,560,000 (16.0% of netsales) during the first quarter of 2011 compared to $21,668,000 (16.5% of netsales) during the same period of 2010, an increase of $892,000.  The increasewas mainly from higher sales commissions on increased sales and $119,000 inexpense relating to the supplemental retirement plan that was adopted onJanuary 3, 2011.

 

Interestexpense was $765,000 for the first quarter of 2011 compared to $1,250,000during the same period in 2010, a decrease of $485,000.  The decrease came fromreduced borrowings in 2011 compared to 2010.  

 

Other Incomewas a $147,000 loss for the first quarter of 2011 compared to a $10,000 loss in2010.  Other income in 2011 and 2010 was all a result of transactional exchangerate changes.

                                          

Provisionfor income taxes was $2,834,000 (33.3%) in the first quarter of 2011 comparedto $2,026,000 (33.7%) during the same period in 2010.
     
TheCompany’s net income after tax was $5,667,000 or $0.47 per share on a dilutedbasis for the first quarter of 2011 compared to 3,993,000 or $0.34 per share ona diluted basis for the first quarter of 2010.  The increase of $1,674,000resulted from the factors described above.

 

 

 

16

 

 

 

 

 

 

**Liquidity and Capital Resources**

 

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

 

As of March 31, 2011, the Companyhad working capital of $219,296,000 which represents an increase of $33,425,000from working capital of $185,871,000 of December 31, 2010.  The increase inworking capital was primarily from higher levels of accounts receivable andinventory due to seasonality.

 

Capital expenditures were $1,433,000for the first three months of 2011, compared to $878,000 during the first threemonths of 2010.  Capital expenditures for 2011 are expected to be higher than2010 levels.   The Company expects to fund expenditures from operating cashflows or through its revolving credit facility, described below.

 

The Company was authorized by itsBoard of Directors in 1997 to repurchase up to 1,000,000 shares of theCompany’s common stock to be funded through working capital and credit facilityborrowings.  There were no shares purchased in 2010 or the first quarter of 2011. The authorization to repurchase up to 1,000,000 shares remains available less42,600 shares previously repurchased.

 

Net cash provided by financingactivities was $22,505,000 during the three month period ending March 31, 2011,compared to $11,986,000 for the same period in 2010.  The increase was mainlydue to increased borrowings on the Company’s credit facility to support higherlevels of accounts receivable and inventory.

 

      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. 

 

      OnOctober 14, 2008, the Company entered into the Sixth Amendment and Waiver underthe Amended and Restated Revolving Credit Agreement. The purpose of the amendmentand waiver was to clarify company names within the Obligated Group aftermerging or dissolving some subsidiaries, to define operating cash flow anddefining quarterly operating cash flow for Rivard through March 31, 2010.Beginning June 30, 2009, Rivard’s actual operating cash flow was used in thecalculation of consolidated operating flow.

 

      OnNovember 6, 2009, the Company entered into the Seventh Amendment of the Amendedand Restated Revolving Credit Agreement with Bank of America, N.A., Wells FargoBank, N.A., BBVA Compass Bank, and Rabobank, as its lenders. The revolvingcredit line remained at $125.0 million.  The purpose of the amendment was toadd Bush Hog as a member of the Obligated Group and pledge a first prioritysecurity interest in certain U.S. assets (accounts receivable, inventory,equipment, trademarks and trade names) of the Borrower and each member of theObligated Group. 

 

17

 

 

 

 

 

 

      OnMarch 28, 2011, the Company entered into the Eighth Amendment of Amended andRestated Revolving Credit Agreement (the “Eighth Credit Agreement Amendment”),by and among the Company, the lenders party thereto and Bank of America, N.A.as administrative agent.  The Eighth Credit Agreement Amendment amends certainprovisions of the Company’s existing credit facility to, among other things,(i) release the previously pledged security interest in certain assets of theCompany and its specified subsidiaries which secured any indebtedness under theexisting credit facility, (ii) extend the termination date of the Company’scredit facility to March 28, 2016, (iii) reduce the aggregate commitments to$100,000,000, (iv) provide the Company the option to request an increase inaggregate commitments under the existing credit facility of up to $50,000,000,subject to the conditions set forth therein (v) lower the applicable leverageratio, subject to certain exceptions and conditions, (vi) modify the limitationon capital expenditure, (vii) modify the limitation on other indebtedness and(viii) decrease the applicable interest margin for specified advances.

 

      As ofMarch 31, 2011, there was $45,000,000 borrowed under the revolving creditfacility. On March 31, 2011, $884,000 of the revolver capacity was committed toirrevocable standby letters of credit issued in the ordinary course of businessas required by vendors’ contracts resulting in approximately $54,000,000 inavailable borrowings.

 

      OnOctober 29, 2010, Lloyd TSB Bank plc renewed its £5.5 million overdraft facility to Alamo Group Europe Limited throughOctober 31, 2011.  The facility is unsecured but guaranteed by the borrowers U.K. subsidiaries.  Interest will be payable on amounts owing at 1.40% per annum over theBank’s Base Rate.  At March 31, 2011, there were no amounts outstanding underthis facility.

 

      Thereare additional lines of credit: for the Company’s French operations in theamount of 7,300,000 Euros, which includes the Rivardcredit facilities; for our Canadian operation in the amount of 4,000,000Canadian dollars; and for our Australian operation in the amount of 800,000Australian dollars. As of March 31, 2011, no Euros were borrowed against theFrench line of credit; no Canadian dollars were outstanding on the Canadianline of credit; and 100,000 Australian dollars were outstanding under itsfacility. The Canadian and Australian revolving credit facilities areguaranteed by the Company. 

 

      As ofMarch 31, 2011, the Company is in compliance with the terms and conditions ofits credit facilities.

 

      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.

 

 

 

18

 

 

 

 

 

 

**Critical Accounting Policies**

** **

***Allowancefor Doubtful Accounts***

 

The Company evaluates the collectabilityof its accounts receivable based on a combination of factors.  In circumstanceswhere it is aware of a specific customer’s inability to meet its financialobligations, it records a specific reserve to reduce the amounts recorded towhat it believes will be collected.  For all other customers, it recognizesreserves for bad debt based on historical experience of bad debts as a percentof revenues for each business unit, adjusted for relative improvements ordeteriorations in the agings and changes in current economic conditions.

 

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.

 

The bad debt reserve balance was$3,190,000 at March 31, 2011 and $2,852,000 at December 31, 2010.  The increasewas mainly from changes in exchange rates.

 

***SalesDiscounts***

* *

At March 31, 2011 the Company had $15,768,000 in reservesfor sales discounts compared to $11,903,000 at December 31, 2010 on productsshipped to our customers under various promotional programs.  The increase wasdue primarily to increased sales volume on the Company’s agricultural**productsduring the pre-season program, which runs from September to December of eachyear on orders that are shipped through the first quarter of 2011.  The Companyreviews the reserve quarterly based on analysis made on each programoutstanding at the time.  

 

The Company bases its reserves on historical data relatingto discounts taken by the customer under each program.  Historically between85% and 95% of the Company’s customers who qualify for each program, actuallytake the discount that is available.

 

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

* *

The Company had $7,898,000 at March 31, 2011 and $7,506,000at December 31, 2010 in reserve to cover obsolescence and slow movinginventory.  The increase in reserve for obsolescence was from the Company’s U.S. operations.  The obsolescence and slow moving policy states that the reserve is to becalculated on a basis of: 1) no inventory usage over a three year period andinventory with quantity on hand is deemed obsolete and reserved at 100 percentand 2) slow moving inventory with little usage requires a 100 percent reserveon items that have a quantity greater than a three year supply.  There areexceptions to the obsolete and slow moving classifications if approved by anofficer of the Company based on specific identification of an item or itemsthat are deemed to be 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 parts.

 

 

19

 

 

 

 

 

 

 

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 liability warranty reserve balance was$5,424,000 at March 31, 2011 and $5,554,000 at December 31, 2010.  

 

***ProductLiability***

*** ***

At March 31, 2011 the Company hadaccrued $379,000 in reserves for product liability cases compared to $374,000at December 31, 2010.  The Company accrues primarily on a case by case basisand adjusts the balance quarterly.

During most of 2010, the selfinsured retention (S.I.R.) for U.S. product liability coverage for all productswas at $100,000 per claim.  The S.I.R. for the majority of 2010 on all Bush Hogproducts was at $250,000 per claim.  On September 30, 2010 the Company renewedits insurance coverage and the S.I.R. for all U.S. products (including BushHog) was $100,000 per claim.  The Company also carries product liabilitycoverage in Europe, Canada and Australia which contain substantially lowerS.I.R.’s or deductibles.
***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 potential impairmentexists by comparing the fair value of a reporting unit with its carryingamount, including goodwill (Step 1).  If the fair value of a reporting unitexceeds 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 utilizesmarket valuation modelsand other financial ratios, which require the Company to make certainassumptions and estimates regarding the applicability of those models to itsassets and businesses. The Company believes that the assumptions and estimatesused to determine the estimated fair values of each of its reporting units arereasonable. However, different assumptions could materially affect theestimated fair value. The Company recognized no goodwill impairment in 2010.  TheNorth American Industrial segment had a goodwill impairment of $14,104,000 in2009.  During the 2010impairment analysis review, it was noted that even though the *Schwarze*reporting unit’s fair value was above carrying value it was not materiallydifferent. At December 31, 2010, there was approximately $6.8 million ofgoodwill related to the *Schwarze* reporting unit. This reporting unitwould be most likely affected by changes in the Company’s assumptions andestimates.  As of March31, 2011, the Company had $35,281,000 of goodwill, which represents 8% of totalassets.  Thecalculation of fair value could increase or decrease depending on changes inthe inputs and assumptions used, such as changes in the reporting unit’s futuregrowth rates, discount rates, etc.

 

 

 20

 

 

 

 

 

 

 
***Forward-LookingInformation***
      Part I of this Quarterly Report onForm 10‐Q and the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in Part II of this QuarterlyReport contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934.  In addition, forward-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.

      Forward-looking statements involve risks anduncertainties.  These uncertainties include factors that affect all businessesoperating in a global market, as well as matters specific to the Company andthe markets it serves.  Particular risks and uncertainties facing the Companyinclude changes in market conditions; increased competition; decreases in theprices of agricultural commodities, which could affect our customer’s incomelevels; budget constraints or income shortfalls which could affect thepurchases of our type of equipment by governmental customers; creditavailability for both the Company and its customers, adverse weather conditionssuch as droughts, floods, snowstorms, etc. which can affect buying patterns ofthe Company’s customers and related contractors; the price and availability ofcritical raw materials, particularly steel and steel products; energy cost;increased cost of new governmental regulations which effect corporations; thepotential effects on the buying habits of our customers due to animal diseaseoutbreaks such as mad cow and other epidemics; the Company’s ability to developand manufacture 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; slower growthin the Company’s markets; financial market changes including increases ininterest rates and fluctuations in foreign exchange rates; actions ofcompetitors; the inability of the Company’s suppliers, customers, creditors,public utility providers and financial service organizations to deliver orprovide their products or services to the Company; seasonal factors in theCompany’s industry; unforeseen litigation; government actions including budgetlevels, regulations and legislation, primarily relating to the environment,commerce, infrastructure spending, health and safety; and availability ofmaterials.

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

** **

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

 

The Company is exposed to various marketsrisks.  Market risks are the potential losses arising from adverse changes inmarket prices and rates.  The Company does not enter into derivative or otherfinancial instruments for trading or speculative purposes.

21

 

 

 

 

 

 

***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.

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 enter into foreign exchangeforward contracts to hedge approximately 80% of its future net foreign currencycollections over a period of six months.  As of March 31, 2011, theCompany had $2,840,000 outstanding in forward exchange contracts related toaccounts receivables.  A 15% fluctuation in exchange rates for these currencieswould change the fair value by approximately $426,000.  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. The result of a uniform 10% strengthening in the value of the dollar relativeto the currencies in which the Company’s sales are denominated would result ina decrease in gross profit of $1,188,000 for the three month period endingMarch 31, 2011.  Comparatively, the result of a uniform 10% strengthening inthe value of the dollar relative to the currencies in which the Company’s salesare denominated would have resulted in a decrease in gross profit of approximately$1,143,000 for the three month period ended March 31, 2010.  This calculationassumes that each exchange rate would change in the same direction relative tothe U.S. dollar.  In addition to the direct effects of changes in exchangerates, which are a changed dollar value of the resulting sales, changes inexchange rates may also affect the volume of sales or the foreign currencysales price as competitors’ products become more or less attractive.  TheCompany’s sensitivity analysis of the effects of changes in foreign currencyexchange rates does not factor in a potential change in sales levels or localcurrency prices.  The translation adjustment during the first quarter of 2011was a gain of $5,290,000.  On March 31, 2011, the British pound closed at .6233relative to 1.00 U.S. dollar, and the Euro closed at .7055 relative to 1.00 U.S.dollar.  At December 31, 2010 the British pound closed at .6411 relative to1.00 U.S. dollar and the Euro closed at .7479 relative to 1.00 U.S. dollar.  Bycomparison, on March 31, 2010, the British pound closed at .6591 relative to1.00 U.S. dollar, and the Euro closed at .7402 relative to 1.00 U.S. dollar. No assurance can be given as to future valuation of the British pound or Euroor how further movements in those or other currencies could affect futureearnings or the financial position of the Company.

***Interest Rate Risk***

The Company’s long-term debt bearsinterest at variable rates.  Accordingly, the Company’s net income is affectedby changes in interest rates.  Assuming the current level of borrowings atvariable rates and a two percentage point change in the first quarter 2011average interest rate under these borrowings, the Company’s interest expensewould have changed by approximately $225,000.  In the event of an adversechange in interest rates, management could take actions to mitigate itsexposure.  However, due to the uncertainty of the actions that would be takenand their possible effects this analysis assumes no such actions.  Further thisanalysis does not consider the effects of the change in the level of overalleconomic activity that could exist in such an environment.

 

 

22

 

 

 

 

 

 

**Item 4. Controls and Procedures**

 

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

 

 

**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

 

May 4, 2011 – Press Release announcing First Quarter 2011 earnings.

 

(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

	 

	 

23

 

 

 

 

 

 

 
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)

 

24

 

 
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