UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

ACT OF 1934

 

FOR THE  QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

 

OR

 

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

ACT OF 1934

 

FOR THE  TRANSITION PERIOD FROM ____ TO ____

 

**COMMISSION  FILE NUMBER  0-21220**

 

 

**ALAMO GROUP INC.**

(EXACT  NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

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

 

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

*(Address of principal executive  offices*)

 

**830-379-1480**

(*Registrant’s telephone number,  including area code*)

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| INDICATE BY CHECK MARK  WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY  SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING  12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO  FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENT FOR  THE PAST 90 DAYS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| YES  X      NO  ___                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|  

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

 

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

  |
| AT NOVEMBER 1, 2010, 11,810,379  SHARES OF COMMON STOCK, $.10 PAR VALUE, OF THE REGISTRANT WERE OUTSTANDING.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

 

 

 

----

 

 

 

 

**Alamo Group Inc. and Subsidiaries**

** **

INDEX

**                               **

 

|                                 |                                                                           | PAGE       |
|--------------------------------------|--------------------------------------------------------------------------------|-----------------|
|                                 |                                                                           |            |
|                                 |                                                                           |            |
| PART I.                         | FINANCIAL  INFORMATION                                                    |            |
| ** **                           | ** **                                                                     | ** **      |
| Item 1.                         | Interim Condensed  Consolidated Financial Statements  (Unaudited)         |            |
|                                 |                                                                           |            |
|                                 | Interim Condensed  Consolidated Balance Sheets                                 |            |
|                                 | September 30, 2010  and December 31, 2009                                      | 3          |
|                                 |                                                                           |            |
|                                 | Interim Condensed  Consolidated Statements of Income                           |            |
|        | Three months and  Nine months ended September 30, 2010

and September 30, 2009 |  

4  |
|                                 |                                                                           |            |
|        | Interim Condensed  Consolidated Statements of Cash Flows                       |            |
|             | Nine months ended  September 30, 2010 and September 30, 2009                   | 5          |
|                                 |                                                                           |            |
|        | Notes to Interim  Condensed Consolidated Financial Statements                  | 6          |
|                                 |                                                                           |            |
| Item 2.                              | Management's  Discussion and Analysis of Financial Condition                   |            |
|                                 | and Results of  Operations                                                     | 15         |
|                                 |                                                                           |            |
| Item 3.                              | Quantitative and  Qualitative Disclosures about Market Risks                   | 23         |
|                                 |                                                                           |            |
| Item 4.                              | Controls and  Procedures                                                       | 24         |
|                                 |                                                                           |            |
| PART II.                        | OTHER INFORMATION                                                              | 25         |
|                                 |                                                                           |            |
| Item 1.                         | None                                                                           |            |
| Item 2.                         | Unregistered Sales of Equity Securities and Use of  Proceeds                   |            |
| 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 Condensed Consolidated  Balance Sheets**

**(Unaudited)**

 

|  

 

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

**September 30,**

**2010** |   |   | ** **

**December 31, 	2009** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------------------------------|--------|--------|------------------------------------|
| ** **                                                                                                                                                                  |   |   |                                    |   |   |                               |
| **ASSETS**                                                                                                                                                                  |   |   |                                    |   |   |                               |
| Current assets:                                                                                                                                                             |   |   |                                    |   |   |                               |
|       Cash and cash equivalents                                                                                                                    |   | $      | 24,382                             |   | $      | 17,774                        |
|       Accounts receivable, net                                                                                                                     |   |   | 127,610                            |   |   | 112,309                       |
|       Inventories                                                                                                                                  |   |   | 104,433                            |   |   | 124,622                       |
|       Deferred income taxes                                                                                                                        |   |   | 2,232                              |   |   | 3,118                         |
|       Prepaid expenses                                                                                                                             |   |   | 3,343                              |   |   | 3,579                         |
|       Income Tax Receivables                                                                                                                       |   |   | 1,195                              |   |   | 1,195                         |
|           Total current assets                                                                                                 |   |   | 263,195                            |   |   | 262,597                       |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
| Property, plant and equipment                                                                                                                                               |   |   | 139,784                            |   |   | 141,644                       |
|           Less:  Accumulated depreciation                                                                            |   |   | (76,896)                                |   |   | (72,162)                           |
|                                                                                                                                                                        |   |   | 62,888                             |   |   | 69,482                        |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
|     Goodwill                                                                                                                                                 |   |   | 34,598                             |   |   | 35,207                        |
|     Intangible assets                                                                                                                                        |   |   | 5,744                              |   |   | 5,803                         |
|     Deferred income taxes                                                                                                                                    |   |   | 2,899                              |   |   | 4,158                         |
|     Other assets                                                                                                                                             |   |   | 971                                |   |   | 1,201                         |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
|           Total assets                                                                                                         |   | $      | 370,295                            |   | $      | 378,448                       |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                               |   |   |                                    |   |   |                               |
| Current liabilities:                                                                                                                                                        |   |   |                                    |   |   |                               |
|       Trade accounts payable                                                                                                                       |   |   | 46,195                             |   |   | 36,786                        |
|       Income taxes payable                                                                                                                         |   |   | 244                                |   |   | 2,688                         |
|       Accrued liabilities                                                                                                                          |   |   | 32,684                             |   |   | 31,010                        |
|       Current maturities of long-term debt                                                                                                         |   |   | 2,512                              |   |   | 5,453                         |
|       Deferred income tax                                                                                                                          |   |   | 866                                |   |   | 3,164                         |
|           Total current liabilities                                                                                            |   |   | 82,501                             |   |   | 79,101                        |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
| Long-term debt, net of current maturities                                                                                                                                   |   |   | 23,122                             |   |   | 44,336                        |
| Deferred pension liability                                                                                                                                                  |   |   | 6,355                              |   |   | 7,640                         |
| Other long-term liabilities                                                                                                                                                 |   |   | 2,348                              |   |   | 3,665                         |
| Deferred income taxes                                                                                                                                                       |   |   | 6,452                              |   |   | 7,581                         |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
| Stockholders’ equity:                                                                                                                                                  |   |   |                                    |   |   |                               |
| Common  stock, $.10 par value, 20,000,000 shares authorized;

11,852,979  and 11,789,529 issued and outstanding at September 30, 2010 and 	December 31,  2009, respectively |   |   |  

 

1,185              |   |   |  

 

1,179         |
| Additional paid-in capital                                                                                                                                                  |   |   | 83,906                             |   |   | 82,721                        |
| Treasury stock, at cost; 42,600 shares at September 30, 2010  	and December 31, 2009                                                                                        |   |   |  

(426)                           |   |   |  

(426)                      |
| Retained earnings                                                                                                                                                           |   |   | 162,400                            |   |   | 147,504                       |
| Accumulated  other comprehensive income                                                                                                                                     |   |   | 2,452                              |   |   | 5,147                         |
|             Total  stockholders’ equity                                                                         |   |   | 249,517                            |   |   | 236,125                       |
|                                                                                                                                                                        |   |   |                                    |   |   |                               |
|           Total liabilities and stockholders’ equity                                                                      |   | $      | 370,295                            |   | $      | 378,448                       |
|                                                                                                                                                                             |        |        |                                         |        |        |                                    |  |  |

                                                                        

See accompanying notes.

 

 

 

| 3 |
|---|

 

----

 

 

 

## Alamo Group Inc. and Subsidiaries 

**Interim Condensed Consolidated  Statements of Income **

**(Unaudited) **

 

 

 

|                                                        |   | Three Months EndedSeptember 30, |          | Nine Months EndedSeptember 30, |
|-------------------------------------------------------------|--------|---------------------------------|---------------|--------------------------------|
| (in thousands, except per share amounts)** **          |   |                            | 2010     |                           |   | 2009 |   |   | **2010** |   |   | **2009** |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Net sales:                                             |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     North American                      |   |                            |          |                           |   |   |   |   |   |   |   |   |
|         Industrial  |   | $                               | 46,846   |                           | $ | 45,547  |   | $ | 141,434  |   | $ | 134,737  |
|         Agricultural     |   |                            | 48,880   |                           |   | 20,158  |   |   | 134,009  |   |   | 63,263  |
|     European                                 |   |                            | 36,572   |                           |   | 44,613  |   |   | 119,578  |   |   | 135,704  |
| Total net  sales                                            |   |                            | 132,298  |                           |   | 110,318  |   |   | 395,021  |   |   | 333,704  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Cost of  sales                                              |   |                            | 99,908   |                           |   | 84,669  |   |   | 305,815  |   |   | 261,999  |
| Gross  profit                                          |   |                            | 32,390   |                           |   | 25,649  |   |   | 89,206  |   |   | 71,705  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expense           |   |                            | 21,273   |                           |   | 17,983  |   |   | 64,296  |   |   | 55,478  |
|     Income  from operations                  |   |                            | 11,117   |                           |   | 7,666  |   |   | 24,910  |   |   | 16,227  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Interest  expense                                           |   |                            | (888)         |                           |   | (1,005) |   |   | (3,162) |   |   | (3,248) |
| Interest  income                                       |   |                            | 418      |                           |   | 15  |   |   | 1,535  |   |   | 337  |
| Other  income (expense), net                                |   |                            | 112      |                           |   | 134  |   |   | 77  |   |   | 130  |
|     Income  before income taxes              |   |                            | 10,759   |                           |   | 6,810  |   |   | 23,360  |   |   | 13,446  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Provision  for income taxes                            |   |                            | 2,609    |                           |   | 2,227  |   |   | 6,347  |   |   | 4,328  |
|     Net  income                              |   | $                               | 8,150    |                           | $ | 4,583  |   | $ | 17,013  |   | $ | 9,118  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Net income  per common share:                               |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     Basic                                    |   | $                               | .69      |                           | $ | .46  |   | $ | 1.45  |   | $ | .91  |
|     Diluted                                  |   | $                               | .68      |                           | $ | .46  |   | $ | 1.43  |   | $ | .91  |
| Average  common shares                                 |   |                            |          |                           |   |   |   |   |   |   |   |   |
|     Basic                               |   |                            | 11,803   |                           |   | 10,047  |   |   | 11,769  |   |   | 9,988  |
|     Diluted                                  |   |                            | 11,906   |                           |   | 10,086  |   |   | 11,874  |   |   | 10,012  |
|                                                        |   |                            |          |                           |   |   |   |   |   |   |   |   |
| Dividends  declared                                         |   | $                               | 0.06     |                           | $ | 0.06  |   | $ | 0.18  |   | $ | 0.18  |

 

 

See accompanying notes.

 

 

 

 

 

 

 

| 4 |
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## Alamo Group Inc. and Subsidiaries

**Interim Condensed Consolidated  Statements of Cash Flows**

**(Unaudited)**

** **

|                                                                                                              |   | **Nine Months Ended**

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

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

**2010** | ** ** | ** ** | ** **

**2009** |
| **Operating  Activities**                                                                                         |   |                                     |   |   |   |   |
| Net  income                                                                                                       |   | $                                        | 17,013  |   | $ | 9,118  |
| Adjustment  to reconcile net income to net cash

    provided  by operating activities:            |   |                                     |   |   |   |   |
|           Provision  for doubtful accounts                           |   |                                     | 792  |   |   | 392  |
|           Depreciation                                               |   |                                     | 7,944  |   |   | 6,050  |
|           Amortization  of intangibles                               |   |                                     | 254  |   |   | 59  |
|           Amortization  of debt issuance                             |   |                                     | 281  |   |   | –  |
|           Stock-based  compensation expense                          |   |                                     | 474  |   |   | 429  |
|           Excess  tax benefits from stock-based payment arrangements |   |                                     | (46) |   |   | (43) |
|           Provision  (benefit) for deferred income tax benefit       |   |                                     | (1,166) |   |   | 529  |
|           Gain  on sale of property, plant and equipment             |   |                                     | (946) |   |   | (22) |
| Changes in  operating assets and liabilities:                                                                     |   |                                     |   |   |   |   |
|           Accounts  receivable                                       |   |                                     | (17,660) |   |   | 22,869  |
|           Inventories                                                |   |                                     | 19,506  |   |   | 22,019  |
|           Prepaid  expenses and other assets                         |   |                                     | (203) |   |   | 136  |
|           Trade  accounts payable and accrued liabilities            |   |                                     | 12,535  |   |   | (15,232) |
|           Income  taxes payable                                      |   |                                     | (2,327) |   |   | 2,211  |
|           Other  long-term liabilities                               |   |                                     | (2,105) |   |   | (784) |
| Net cash  provided by operating activities                                                                        |   |                                     | 34,346  |   |   | 47,731  |
|                                                                                                              |   |                                     |   |   |   |   |
| **Investing  Activities**                                                                                         |   |                                     |   |   |   |   |
| Acquisitions,  net of cash acquired                                                                               |   |                                     | (428) |   |   | –  |
| Purchase  of property, plant and equipment                                                                        |   |                                     | (3,579) |   |   | (2,661) |
| Proceeds  from sale of property, plant and equipment                                                              |   |                                     | 1,861  |   |   | 95  |
| Net cash  used by investing activities                                                                            |   |                                     | (2,146) |   |   | (2,566) |
|                                                                                                              |   |                                     |   |   |   |   |
| **Financing  Activities**                                                                                         |   |                                     |   |   |   |   |
| Net change  in bank revolving credit facility                                                                     |   |                                     | (20,000) |   |   | (36,000) |
| Principal  payments on long-term debt and capital leases                                                          |   |                                     | (4,147) |   |   | (1,670) |
| Proceeds  from issuance of long-term debt                                                                         |   |                                     | 196  |   |   | 1,497  |
| Dividends  paid                                                                                                   |   |                                     | (2,117) |   |   | (1,796) |
| Proceeds  from sale of common stock                                                                               |   |                                     | 717  |   |   | 1,117  |
| Excess tax  benefits from stock-based payment arrangements                                                        |   |                                     | 46  |   |   | 43  |
| Net cash  provided by financing activities                                                                        |   |                                     | (25,305) |   |   | (36,809) |
|                                                                                                              |   |                                     |   |   |   |   |
| Effect of  exchange rate changes on cash                                                                          |   |                                     | (287) |   |   | 586  |
| Net change  in cash and cash equivalents                                                                          |   |                                     | 6,608  |   |   | 8,942  |
| Cash and  cash equivalents at beginning of the period                                                             |   |                                     | 17,774  |   |   | 4,532  |
| Cash and  cash equivalents at end of the period                                                                   |   | $                                        | 24,382  |   | $ | 13,474  |
|                                                                                                              |   |                                     |   |   |   |   |
| Cash paid  during the period for:                                                                                 |   |                                     |   |   |   |   |
|         Interest                                                               |   | $                                        | 3,042  |   | $ | 3,659  |
|         Income  taxes                                                          |   | $                                        | 6,878  |   | $ | 1,906  |
|                                                                                                                   |        |                                          |  |  |  |  |  |

 

See accompanying notes.

 

 

 

| 5 |
|---|

 

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**Alamo Group Inc. and Subsidiaries**

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

## September 30, 2010

** **

**1.  Basis of Financial Statement Presentation**

 

    The accompanying unaudited interim consolidatedfinancial statements of Alamo Group Inc. and its subsidiaries (the “Company”)have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulations S-X.  Accordingly, they do 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, 2010.  The balance sheet at December 31, 2009, has beenderived from the audited financial statements at that date but does not includeall of the information and footnotes required by U.S. GAAP for completefinancial statements.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended December 31, 2009.

 

Certain changes to prior year balance sheet amountshave been made in accordance with the accounting guidance for businesscombinations to reflect adjustments made during the measurement period toprovisional amounts recorded for assets acquired and liabilities assumed from BushHog, LLC, a Delaware limited liability company (“*Bush Hog*”) on October22, 2009.

 

 

** 2.  Acquisitions**

On October 22, 2009 (“Closing Date”), the Company acquiredthe majority of the assets and assumed certain liabilities of Bush Hog locatedin Selma, Alabama.  The purchase included substantially all of the ongoingbusiness of *Bush Hog*, including the *Bush Hog* brand name and allrelated product names and trademarks (the “Acquisition”). The purchase priceconsideration was 1.7 million unregistered shares of Alamo Group common stockwhich represented approximately 14.5% of the outstanding stock of Alamo Group. The fair value of the 1.7 million shares was based on the public market priceof Alamo common stock less a discount for lack of marketability associated withthe 6-month holding period.  We utilized an Asian put option model to measurethe discount for lack of marketability.  An Asian put option is an option thatentitles the holder to a payoff based on the average price of an underlyingasset, over a predetermined period.  The closing price on October 22, 2009 was$16.09 per share. 

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

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

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

 

 

| 6 |
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The following table summarizes the fairvalues of the assets acquired and liabilities assumed from Bush Hog on October22, 2009. Since the acquisition, net adjustments of $1,206,000 were made to thefair value of the assets acquired and liabilities assumed with a correspondingadjustment to the gain on bargain purchase. The balance sheet at December 31,2009 has been retroactively adjusted to reflect these adjustments as requiredby the accounting guidance for business combinations. The Company continues toevaluate the purchase price allocation, including the opening fair value ofinventory, accounts receivable, property, plant & equipment, accruedliabilities and deferred taxes, which may require the Company to adjust therecorded gain. These adjustments are summarized in the table below (inthousands):

 

|                                                              |   |  

Initial

Valuation |   |   |  

 

Adjustments                     |   |  

September 30,

2010 |
|-------------------------------------------------------------------|--------|----------------------------|--------|--------|-------------------------------------------------|--------|-----------------------------|
|                                                              |   |                       |   |   |                                            |   |                        |
| Accounts  receivable                                              | $      | 25,571                |   | $      | 282          | $      | $25,853                |
| Inventory                                                         |   | 21,875                |   |   | 300          |   | 22,175                 |
| Prepaid  expenses                                                 |   | 395                   |   |   |                                            |   | 395                    |
| Property,  plant & equipment                                  |   | 12,743                |   |   | (379)             |   | 12,364                 |
| Other  liabilities                                                |   | (9,357)                    |   |   | 1,003        |   | (8,354)                     |
|    Net  assets acquired                                 |   | 51,227                |   |   | 1,206        |   | 52,433                 |
|                                                              |   |                       |   |   |                                            |   |                        |
| Intangible  assets                                                |   |                       |   |   |                                            |   |                        |
|    Bush  Hog trade name                                 |   | 1,900                 |   |   |                                            |   | 1,900                  |
|    Total  assets acquired                               |   | 53,127                |   |   | 1,206        |   | 54,333                 |
|                                                              |   |                       |   |   |                                            |   |                        |
|    Less:  Fair value of 1.7 million unregistered shares |   | 25,438                |   |   |                                            |   | 25,438                 |
|    Gain on  bargain purchase                            | $      | 27,689                |   | $      | 1,206        | $      | 28,895                 |

 

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

 

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

 

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

|                                      | **Nine Months Ended** |
|-------------------------------------------|-----------------------|
|                                      | **September 30**      |
| (In thousands, except per  share amounts) | **2010**              | ** ** | **2009** |
|                                      | ** **            |
| Net  Sales                                | $                     | 395,021  |   | $ | 408,918  |
| Net  Income                               | $                     | 17,013  |   | $ | 9,252  |
| Diluted  Earnings per Share               | $                     | 1.43  |   | $ | 0.92  |
|                                           |                       |  |  |  |  |  |  |

                                                                                                         

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

 

 

| 7 |
|---|

 

----

 

 

**3.  Accounts Receivable**

 

      Accounts Receivable is shown less allowance fordoubtful accounts of $2,819,000 and $2,548,000at September 30, 2010 and December 31, 2009, respectively.

** **

**4.  Inventories**

 

      Inventories valued atLIFO cost represented 57% and 63% of total inventory at September 30, 2010 andDecember 31, 2009, respectively.  The excess of current costs over LIFO valuedinventories was $8,016,000 at September 30, 2010 and $9,106,000 at December 31,2009.  The LIFO reserve through September 30, 2010 has been reduced by$1,090,000 due to volume reduction in U.S. inventory.  Inventory obsolescencereserves were $9,075,000 at September 30, 2010 and $9,060,000 at December 31, 2009. Net inventories consist of the following:

 

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

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

**2009** |
|------------------|--------|--------|-----------------------------|--------|----------------------------|
|             |   |   |                        |   |                       |
| Finished  goods  |   | $      | 84,154                      | $      | 102,981                    |
| Work in  process |   |   | 10,260                      |   | 10,611                     |
| Raw  materials   |   |   | 10,019                      |   | 11,030                     |
|             |   | $      | 104,433                     | $      | 124,622                    |

 

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

##  

**5.  Derivatives and Hedging**

 

            Most of the Company’s outstanding debt is advancedfrom a revolving credit facility that accrues interest at a contractual margin over current market interest rates.  TheCompany’s financing costs associated with this credit facility can materiallychange with market increases and decreases of short-term borrowing rates,specifically London Inter Bank Operating 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 which expired on March 31, 2010.  Theother swap has a four-year term and fixed the LIBOR base rate at 4.935%covering an additional $20 million of these variable rate borrowings andexpires on March 31, 2011.  On November 5, 2009, JPMorgan transferred the swaptransactions to Bank of America.  The terms of the hedging instrument remainthe same.  As of September 30, 2010, the Company had $21 million outstandingunder its revolving credit facility and one interest rate swap contractdesignated as cash flow hedge which is effectively hedging $20 million of theseborrowings from changes in underlying LIBOR base rates.  The fair market valueof this hedge, which is the amount that would have been paid or received by theCompany had it prematurely terminated this swap contract at September 30, 2010,was a $465,000 liability.  This is included in Accrued liabilities with anoffset in Accumulated other comprehensive income, net of taxes.  At September30, 2010, ineffectiveness related to the interest rate swap agreement was notmaterial.

 

**6.  Fair Value Measurements**

 

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

 

| 8 |
|---|

 

----

 

 

 

 

 

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

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

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

 

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

 

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

 

**Derivativefinancial instruments**

 

      The fair value of interest rate swapderivatives is primarily based on third-party pricing service models.  Thesemodels use discounted cash flows that utilize the appropriate market-basedforward swap curves and zero-coupon interest rates.  Interest rate swapderivatives are Level 2 measurements and have a fair value of a negative $465,000as of September 30, 2010.

 

      The fair value of foreign currency forwardcontracts is based on a valuation model that discounts cash flows resultingfrom the differential between the contract price and the market-based forwardrate and is a Level 2 measurement and has a fair value of $54,000 loss as ofSeptember 30, 2010.

** **

**7.  Common Stock and Dividends**

** **

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

** **

|                |   | Nine Months Ended |
|---------------------|--------|-------------------|
|                |   |              | **September 30,** |
|                |   |              | **2010** |   |   | **2009** |
|                |   |              |   |   |   |   |
| Dividends  declared |   | $                 | 0.18 |   | $ | 0.18 |
| Dividends  paid     |   | $                 | 0.18 |   | $ | 0.18 |

** **

**8.  Stock-Based     Compensation**

      

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

 

      The Company’s stock-basedcompensation expense was $474,000 and $429,000 for the quarter ended September30, 2010 and 2009, respectively.

 

 

|                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

9

 

----

 

 

 

 

*Qualified Options*

 

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

 

| *For  nine months ending September 30, 2010*       |   | ** **     |
|----------------------------------------------------|--------|----------------|
|                                               |   |  

Shares |   |   | Exercise

Price* |
| Options  outstanding at beginning of year          |   | 345,480   |   |   |   |
|       Granted             |   | 19,000    |   |   | $24.69  |
|       Exercised           |   | (4,350)        |   |   | $12.98  |
|       Cancelled           |   | –    |   |   |   |
|                                               |   |           |   |   |   |
| Options  outstanding at September 30, 2010         |   | 360,130   |   |   | $18.29  |
| Options  exercisable at September 30, 2010         |   | 212,080   |   |   | $18.78  |
| Options  available for grant at September 30, 2010 |   | 195,500   |   |   |   |

**WeightedAverages*

 

     Optionsoutstanding and exercisable at September 30, 2010 were as follows:

 

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

 

Shares  |   |   | Remaining

Contractual

Life(yrs)* |  

Exercise

Price* |   |   |  

 

Shares |  

Exercise

Price* |
| Range of Exercise Price              |   |                    |   |   |                               |   |   |   |   |   |
| $11.45 -  $17.85                     |   | 153,130            |   |   | 6.80                               | $ 12.24  |   |   | 77,680    | $ 13.02  |
| $19.79 -  $25.18                     |   | 207,000            |   |   | 6.75                               | $ 22.77  |   |   | 134,400    | $ 22.10  |
|       Total |   | 360,130            |   |   |                               |   |   |   | 212,080    |   |

**WeightedAverages*

*** ***

***Non-qualifiedOptions***

 

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

| *For  nine months ending September 30, 2010*       |   | ** **    |
|----------------------------------------------------|--------|---------------|
|                                               |   | Shares        |   |   | Exercise

Price* |
| Options  outstanding at beginning of year          |   | 186,000  |   |   |   |
|       Granted             |   | –   |   |   |   |
|       Exercised           |   | (59,100)      |   |   | $  12.01  |
|       Cancelled           |   | –   |   |   |   |
|                                               |   |          |   |   |   |
| Options  outstanding at September 30, 2010         |   | 126,900  |   |   | $  15.76  |
| Options exercisable  at September 30, 2010         |   | 81,500   |   |   | $  16.27  |
| Options  available for grant at September 30, 2010 |   | 364,000  |   |   |   |

**WeightedAverages*

* *

      Options outstanding and exercisable at September 30, 2010were as follows:

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

 

Shares  |   |   | Remaining

Contractual

Life(yrs)* |  

Exercise  

Price*    |   |   |  

 

Shares   |  

Exercise

Price* |
| Range of Exercise Price              |   |                    |   |   |                               |   |   |   |   |   |
| $11.45 -  $12.10                     |   | 80,900             |   |   | 8.70                               | $11.48  |   |   | 48,000    | $11.87  |
| $13.96 -  $19.79                     |   | 13,500             |   |   | 4.26                               | $18.71  |   |   | 13,500    |  $18.71  |
| $25.02 -  $25.18                     |   | 32,500             |   |   | 6.92                               | $25.17  |   |   | 20,000    |  $25.16  |
|       Total |   | 126,900            |   |   |                               |   |   |   | 81,500    |   |

**Weighted Averages*

 

| 10 |
|----|

 

----

 

 

 

***Restricted Stock Units***

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

 

*                   For nine months ending September 30, 2010*

|                                      |   |  

 

 

 

Shares |   |  

Weighted- average remaining

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

** **

** **

**9.  Earnings Per Share**

** **

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

 

|                                                                                                                                                                                                                                                                                                              | **Three Months Ended**

**September 30,** |        | Nine Months Ended
**September 30,** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------|-------------|-------------------------------------|
| (In thousands, except per share amounts)                                                                                                                                                                                                                                                                          | **2010**                                  |        | **2009**                            |   | **2010** |   | **2009** |
|                                                                                                                                                                                                                                                                                                              |                                      |        |                                |   |   |   |   |
| Net  Income                                                                                                                                                                                                                                                                                                       | $                                         | 8,150       |                                | $ | 4,583 | ** ** | $ | 17,013 | ** ** | $ | 9,118 |
|                                                                                                                                                        |                                      |        |                                |   |   | ** ** |   |   | ** ** |   |   |
| Average  Common Shares:                                                |                                      |        |                                |   |   | ** ** |   |   | ** ** |   |   |
|       Basic  (weighted-average outstanding shares)                                                                                                                                                                                                                                       |                                      | 11,803      |                                |   | 10,047 | ** ** |   | 11,769 | ** ** |   | 9,988 |
|                                                                                                                                                                                                                                                                                                              |                                      |        |                                |   |   | ** ** |   |   | ** ** |   |   |
|       Dilutive  potential common shares from stock 

      options  and warrants                                                                                                                                                                                |                                      |  

103 |                                |   |  

39 |   |   |  

105 |   |   |  

24 |
|        Diluted (weighted-average outstanding shares)                                                                                                                                                                                                                                          |                                      | 11,906      |                                |   | 10,086 |   |   | 11,874 |   |   | 10,012 |
|                                                                                                                                                                                                                                                                                                              |                                      |        |                                |   |   | ** ** |   |   | ** ** |   |   |
| Basic  earnings per share                                                                                                                                                                                                                                                                                         | $                                         | 0.69        |                                | $ | 0.46 | ** ** | $ | 1.45 | ** ** | $ | 0.91 |
|                                                                                                                                                                                                                                                                                                              |                                      |        |                                |   |   | ** ** |   |   | ** ** |   |   |
| Diluted  earnings per share                                                                                                                                                                                                                                                                                       | $                                         | 0.68        |                                | $ | 0.46 | ** ** | $ | 1.43 | ** ** | $ | 0.91 |

 

| 11 |
|----|

 

----

 

 

 

 

 

 

**10.  Segment Reporting**

** **

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

|                                                    |   | **Three Months Ended**

**September 30,** | ** ** | ** ** | **Nine Months Ended**

**September 30,** |
|---------------------------------------------------------|--------|-------------------------------------------|------------|------------|------------------------------------------|
| (in  thousands)                                         |   | **2010**  ****                  | ** ** | ** ** | **2009**                       | ** ** | ** ** | **2010**   | ** ** | **2009**   |
|                                                    |   |                                      |       |       |                                     |   |   |   |   |   |
| Net Revenue                                             |   |                                      |       |       |                                     |   |   |   |   |   |
|         Industrial   | $      | 46,846                               |       | $          | 45,547                              |   | $ | 141,434  | $ | 134,737  |
|         Agricultural |   | 48,880                               |       |       | 20,158                              |   |   | 134,009  |   | 63,263  |
|         European     |   | 36,572                               |       |       | 44,613                              |   |   | 119,578  |   | 135,704  |
| Consolidated                                            | $      | 132,298                              |       | $          | 110,318                             |   | $ | 395,021  | $ | 333,704  |
|                                                    |   |                                      |       |       |                                     |   |   |   |   |   |
| **Income  From Operations**                             |   |                                      |       |       |                                     |   |   |   |   |   |
|         Industrial   | $      | 2,454                                |       | $          | 947                                 |   | $ | 6,354  | $ | 415  |
|         Agricultural |   | 5,216                                |       |       | 1,528                               |   |   | 8,140  |   | 2,988  |
|         European     |   | 3,447                                |       |       | 5,191                               |   |   | 10,416  |   | 12,824  |
| Consolidated                                            | $      | 11,117                               |       | $          | 7,666                               |   | $ | 24,910  | $ | 16,227  |
| ** **                                              |   |                                      |       |       |                                     |   |   |   |   |   |
| **Goodwill**                                            |   |                                      |       |       |                                     |   |   |   |   |   |
|         Industrial   | $      | 13,525                               |       | $          | 27,168                              |   | $ | 13,525  | $ | 27,168  |
|         Agricultural |   | –                               |       |       | –                              |   |   | –  |   | –  |
|         European     |   | 21,073                               |       |       | 22,281                              |   |   | 21,073  |   | 22,281  |
| Consolidated                                            | $      | 34,598                               |       | $          | 49,449                              |   | $ | 34,598  | $ | 49,449  |
|                                                    |   |                                      |       |       |                                     |   |   |   |   |   |
| **Total  Identifiable Assets**                          |   |                                      |       |       |                                     |   |   |   |   |   |
|         Industrial   | $      | 120,036                              |       | $          | 151,226                             |   | $ | 120,036  | $ | 151,226  |
|         Agricultural |   | 114,309                              |       |       | 61,859                              |   |   | 114,309  |   | 61,859  |
|         European     |   | 135,950                              |       |       | 140,853                             |   |   | 135,950  |   | 140,853  |
| Consolidated                                            | $      | 370,295                              |       | $          | 353,938                             |   | $ | 370,295  | $ | 353,938  |

 

 

**11.  Off-Balance Sheet Arrangements**

** **

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

 

**12.   ComprehensiveIncome**

** **

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

|                                           |   |   | **Three Months Ended** | ** ** | ** ** | **Nine Months Ended** |
|------------------------------------------------|--------|--------|------------------------|------------|------------|-----------------------|
|                                           |   |   | **September 30,**      | ** ** | ** ** | **September 30,**     |
| (in  thousands)                                |   |   | **2010**               | ** ** | ** ** | **2009**              | ** ** | ** ** | **2010** | ** ** | ** ** | **2009** |
| Net  Income                                    |   | $      | 8,150             |       | $          | 4,583            |   | $ | 17,013  |   | $ | 9,118  |
| Cash  flow derivatives, net of taxes           |   |   | 114               |       |       | 142              |   |   | 497  |   |   | 476  |
| Amortization  of actuarial net gain            |   |   | 19                |       |       | 38               |   |   | 57  |   |   | 116  |
| Foreign  currency  translation adjustment |   |   | 8,530             |       |       | 2,568            |   |   | (3,249) |   |   | 7,109  |
|                                           |   |   |                   |       |       |                  |   |   |   |   |   |   |
| Comprehensive  Income                          |   | $      | 16,813            |       | $          | 7,331            |   | $ | 14,318  |   | $ | 16,819  |

 

 

| 12 |
|----|

 

----

 

 

 

      The components of Accumulated other comprehensive incomeas shown on the Balance Sheet are as follows:

|                                            |       |       | September 30,2010(Unaudited) |       |       | December 31,		2009
**(Audited)** |
|-------------------------------------------------|------------|------------|------------------------------|------------|------------|----------------------------------|
| (in  thousands)                                 | ** ** | ** ** | **2010**                     | ** ** | ** ** | **2009**                         |
| Foreign  currency translation adjustment        |       | $          | 4,940                   |       | $          |    8,148          |
| Derivatives,  net of taxes                      |       |       | (288)                        |       |       | (744)                            |
| Actuarial  gain on defined benefit pension plan |       | $          | (2,200)                      |       | $          | (2,257)                          |
|                                            |       |       |                         |       |       |                             |
| Accumulated  other comprehensive income         |       | $          | 2,452                   |       | $          | 5,147                       |

** **

**13.   ContingentMatters**

** **

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

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

 

      TheCompany knows that its Indianola, Iowa property is contaminated with chromiumwhich most likely resulted from chrome plating operations which werediscontinued before the Company purchased the property. Chlorinated volatileorganic compounds have also been detected in water samples on the property,though the source is unknown at this time. The Company voluntarily worked withan environmental consultant and the state of Iowa with respect to these issuesand believes it completed its remediation program in June 2006. The work wasaccomplished within the Company’s environmental liability reserve balance. Werequested a “no further action” classification from the state.  We received aconditional “no further action” letter in January of 2009.  When we demonstratestable or improving conditions below residential standards by future monitoringof existing wells, an unconditional “no further action” letter will berequested.

                   

      AtSeptember 30, 2010, the Company had an environmental reserve in the amount of$1,602,000 related to the acquisition of *Gradall’s* facility in NewPhiladelphia, Ohio.  Three specific remediation projects that were identifiedprior to the acquisition are in process of remediation with a remaining reservebalance of $137,000.  The Company has a reserve of $277,000 concerning apotential asbestos issue that is expected to be abated over time.  The balanceof the reserve, $1,188,000, is mainly for potential ground watercontamination/remediation that was identified before the acquisition and believed to have been generated by a third party companylocated near the *Gradall* facility.  

 

| 13 |
|----|

 

----

 

 

 

 

 

      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 1960’s 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 is administering the cleanup and will monitor the sites onan ongoing basis.

 

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

 

      TheCompany is subject to various other federal, state, and local laws affectingits business, as well as a variety of regulations relating to such matters asworking conditions, equal employment opportunities, and product safety. Avariety of state laws regulate the Company’s contractual relationships with itsdealers, some of which impose restrictive standards on the relationship betweenthe Company and its dealers, including events of default, grounds fortermination, non-renewal of dealer contracts and equipment repurchaserequirements. The Company believes it is currently in material compliance withall such applicable laws and regulations.

 

**      14. Pension Benefits**

 

      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 $50,000 and pension income was $138,000 for the threemonths ended September 30, 2010 and 2009, respectively.  The Company isrequired to make contributions in the amount of $1,561,000 to the pension plansfor 2010 of which $1,344,000 has beenpaid through September 30, 2010.

 

**15.  Income Taxes**

** **

      We are subject to U.S. federal income tax and variousstate, local, and international income taxes in numerous jurisdictions. Ourdomestic and international tax liabilities are subject to the allocation ofrevenue and expenses in different jurisdictions and the timing of 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 taxeshave been made. If actual outcomes differ materially from these estimates, theycould have a material impact on our financial condition and results ofoperations. Differences between actual results and assumptions, or changes inassumptions in future periods are recorded in the period they become known. Tothe extent additional information becomes available prior to resolution, suchaccruals are adjusted to reflect probable outcomes. Our effective tax rate isimpacted by earnings being realized in countries where we have lower statutoryrates.

 

 

| 14 |
|----|

 

----

 

 

 

 

 

      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.

 

**16.    Recent Accounting Pronouncements**

** **

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

** **

      InDecember 2009, the Financial Accounting Standards Board (FASB) issued AccountingStandard Update (ASU) 2009-17, which codified Statement of Financial AccountingStandard (SFAS) 167, Amendments to FASB Interpretation No. 46(R), issuedin June 2009. This guidance amends FASB Interpretation No. 46 (revisedDecember 2003) to address the elimination of the concept of a qualifyingspecial purpose entity. ASU 2009-17 also replaces the quantitative-based risksand rewards calculation for determining which enterprise has a controllingfinancial interest in a variable interest entity with an approach focused onidentifying which enterprise has the power to direct the activities of avariable interest entity and the obligation to absorb losses of the entity orthe right to receive benefits from the entity. Additionally, ASU 2009-17 providesmore timely and useful information about an enterprise’s involvement with avariable interest entity. ASU 2009-17 became effective for the Company onJanuary 1, 2010.  This ASU did not have a material impact on our consolidatedfinancial statements.

 

***      FairValue Measurements and Disclosures***

 

      InJanuary 2010, the FASB issued ASU 2010-06, “Fair Value Measurements andDisclosures,” which amends the disclosure requirements related to recurring andnonrecurring fair value measurements.  The guidance requires new disclosures onthe transfers of assets and liabilities between Level 1 (quoted prices inactive market for identical assets or liabilities) and Level 2 (significantother observable inputs) of the fair value measurement hierarchy, including thereasons and the timing of the transfers. Additionally, the guidance requires aroll forward of activities on purchases, sales, issuance, and settlements ofthe assets and liabilities measured using significant unobservable inputs(Level 3 fair value measurements). ASU 2010-06 became effective for us onJanuary 1, 2010, except for the disclosure on the roll forward activities forLevel 3 fair value measurements, which will become effective for us in thefirst annual reporting period that begins after December 15, 2010 and forinterim periods within that first annual reporting period. Other than requiringadditional disclosures, adoption of this new guidance will not have a materialimpact on our financial statements.

 

 

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

 

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

 
|   | **Three Months Ended**

**September 30,** |   | **Nine Months Ended**

**September 30,** |   |  
(As  Percentages of Net Sales)

**2010**   

 

 

**2009**  

 

 

**2010**  

 

 

**2009**  

 

North American

 

 

 

 

 

 

 

 

 

    Industrial 

35.4

%

41.3

%

35.8

%

 

40.4

%

    Agricultural 

37.0

%

18.3

%

33.9

%

 

18.9

%

European 

27.6

%

40.4

%

30.3

%

 

40.7

%

    Total sales, net

100.0

%

100.0

%

100.0

%

 

100.0

%

 

 

**Three Months Ended**

**September 30,**

 

**Nine Months Ended**

**September 30,**

 

(Cost  Trends and Profit Margin, as

Percentages  of Net Sales)

** **

**2010**  

 

** **

**2009**  

 

** **

**2010**  

 

** **

**2009**  

 

 

 

 

 

 

 

 

 

 

Gross margin 

24.5

%

23.3

%

22.6

%

21.5

%

Income from operations

8.4

%

6.9

%

6.3

%

4.9

%

Income before income taxes 

8.1

%

6.2

%

5.9

%

4.0

%

Net income 

6.2

%

4.2

%

4.3

%

2.7

%

 

15

 

 

 

 

**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 third quarter of 2010 the Company’s net income was up 78% compared to thethird quarter of 2009 due to the Company’s continued efforts with cost controlinitiatives, tax credits related to prior years’ research and development, andthe acquisition of Bush Hog which was accretive to our sales and net incomeduring the third quarter.  The weakness in the worldwide economy remains aconcern as market conditions in our European operations, specifically inFrance, have continued to be soft.

 

The Industrial Division sales increased 3% during the thirdquarter of 2010 due to increases in the replacement parts business; however,budgets of governmental entities and related contractors continue to beconstrained.  

 

The Agricultural Division saw a 142% increase in salesversus the third quarter of 2009, most of it relating to the Bush Hogacquisition along with some improvement in market conditions due to highercommodity prices and growth in farm income.  We expect some gradual improvementin this Division for the remainder of the year and into 2011.  

 

European Division sales were down 18% in U.S. dollars and 13%in local currency compared to the third quarter of 2009 as their marketsreflected the overall decline in the European economy.  We expect this declinein the European Division will continue to impact our results for the remainderof the year.  Offsetting some of these declines for the Company were benefitsfrom cost controls and restructuring measures implemented in 2009 as thesesavings have contributed to steady improvements in our profits for 2010.

 

           TheCompany is concerned that our markets for the remainder of 2010 could continueto be negatively affected by a variety of factors such as continued weakness inthe overall economy, credit availability, increased levels of governmentregulations; changes in farm incomes due to commodity prices or governmentalaid programs; adverse situations that could affect our customers includingweather conditions such as droughts and floods; budget constraints or revenueshortfalls in governmental entities, and changes in our customer buying habitsdue to lack of confidence in the economic outlook.

** **

**Results of Operations**

*Three Months Ended September 30, 2010 vs. Three Months EndedSeptember 30, 2009*

 

      Net sales for the third quarter of 2010 were $132,298,000,an increase of $21,980,000 or 19.9% compared to $110,318,000 for the thirdquarter of 2009.  The increase was attributable to the acquisition of Bush Hog,offset by the continued weakness in the worldwide economy which affects themarkets which the Company serves.

 

Net North AmericanIndustrial sales increased during the third quarter by $1,299,000 or 2.9% to$46,846,000 for 2010 compared to $45,547,000 during the same period in 2009.The majority of the increase came primarily from higher sales of replacementparts to governmental entities and related contractors.  Governmental buyerscontinue to cope with budget constraints as market conditions remained weak. Compared to 2009, sales to state agencies remained steadier than those tocities and counties.

 

Net North AmericanAgricultural sales for the third quarter were $48,880,000 in 2010 compared to $20,158,000 for thesame period in 2009, an increase of $28,722,000 or 142.5%.  The increase wasprimarily from the acquisition of Bush Hog in the amount of $25,659,000 andsome improvement in market conditions over 2009.

 

 

	16

 

 

 

NetEuropean Sales for the third quarter of 2010 were $36,572,000, a decrease of$8,041,000 or 18.0% compared to $44,613,000 during the third quarter of 2009. The majority of the decrease was primarily due to continued softness in Frenchmarkets offset somewhat by the weaker U.S. dollar.

 

      Gross profit for the third quarter of 2010 was $32,390,000(24.5% of net sales) compared to $25,649,000 (23.3% of net sales) during thesame period in 2009, an increase of $6,741,000.  The increase in gross marginwas from the acquisition of Bush Hog in the amount of $6,793,000.  The increasein gross margin percentage was a result of higher sales of replacement partsand ongoing cost saving initiatives.
 
      Selling, general and administrative expense(“SG&A”) was $21,273,000 (16.1% of net sales) during the third quarter of2010 compared to $17,983,000 (16.3% of net sales) during the same period of2009, an increase of $3,290,000.  The acquisition of Bush Hog added $3,776,000to SG&A expenses.  Excluding Bush Hog, SG&A expenses were lower due toongoing cost control initiatives.

 

      Interest expense was $888,000 for the third quarter of 2010 comparedto $1,005,000 during the same period in 2009, a decrease of $117,000.  Thedecrease was from lower borrowings in 2010 compared to 2009.  The 2010 interestexpense includes $94,000 in amortization of bank fees from the amendment to ourCompany’s revolving credit agreement in November of 2009.

 

      Other income (expense) was $112,000 of income during the third quarter of 2010 compared to $134,000 of income in the third quarter of 2009.  The gains inboth 2010 and 2009 are entirely from changes in exchange rates.
 
      Provision for income taxes was $2,609,000 (24.2% of income before taxes) for thethird quarter of 2010 compared to $2,227,000 (32.7% of income before taxes) inthe third quarter of 2009.  Included in the 2010 taxprovision is an $898,000 tax credit related to prior years’ research anddevelopment expenses.

 

      The Company’s net income after tax was $8,150,000or $.68 per share on a diluted basis for the third quarter of 2010 compared to$4,583,000 or $.46 per share on a diluted basis for the third quarter of 2009. The increase of $3,567,000 resulted from the factors described above.

 

*Nine Months Ended September 30, 2010 vs. NineMonths Ended September 30, 2009*

 

      Net sales for the first nine months of 2010were $395,021,000, an increase of $61,317,000 or 18.4% compared to $333,704,000for the first nine months of 2009.  The increase was mainly from theacquisition of Bush Hog.  Sales in the Company’s core business were negativelyaffected by the weakness in the worldwide economy.

 

NetNorth American Industrial sales increased during the first nine months by$6,697,000 or 5.0% to $141,434,000 for 2010 compared to $134,737,000 during thesame period in 2009. The increase was due from higher sales of replacementparts and to a lesser extent a slight improvement in sales of excavator, vacuumtruck, sweeper and mowing equipment products.  Governmental entities continueto be affected by budget constraints and revenue shortfalls. 

 

Net North American Agriculturalsales were $134,009,000 in 2010 compared to $63,263,000 for the same period in2009, an increase of $70,746,000 or 111.8%.  The increase was mainly from theacquisition of Bush Hog in the amount of $69,763,000.   The agricultural marketwas soft during the first six months of 2010 due to the weakness in the overalleconomy, thus leading to dealer reluctance to stock farm equipment.  During thethird quarter of 2010, market conditions reflected some improvement due tohigher commodity prices and growing farm income.

 

NetEuropean Sales for the first nine months of 2010 were $119,578,000, a decreaseof $16,126,000 or 11.9% compared to $135,704,000 during the same period of 2009. The decrease was mainly from weak market conditions caused by the slowdown inthe European economy, specifically in France offset somewhat by the weaker U.S.dollar. 

 

 

	17

 

 

 

 

      Gross profit for the first nine months of 2010was $89,206,000 (22.6% of net sales) compared to $71,705,000 (21.5% of netsales) during the same period in 2009, a increase of $17,501,000. The increasewas mainly due to the acquisition of Bush Hog in the amount of $15,619,000. Increases in replacement part sales supported higher margins as well asimproved margin percentages.  Gross margin percentages also improved over 2009as a result of ongoing control initiatives which helped lower manufacturingcosts.
 
      Selling, general and administrative expense(“SG&A”) were $64,296,000 (16.3% of net sales) during the first nine monthsof 2010 compared to $55,478,000 (16.6% of net sales) during the same period of2009, an increase of $8,818,000.  The increase in SG&A for the nine monthsof 2010 was due to the acquisition of Bush Hog which added $10,999,000. Without Bush Hog, SG&A declined $2,181,000 mainly from the benefit of the2009 reductions in workforce along with other cost saving initiatives. 

 

      Interest expense was $3,162,000 for the firstnine months of 2010 compared to $3,248,000 during the same period in 2009, adecrease of $86,000.  The decrease was due to reduced borrowings in 2010compared to 2009.  The 2010 interest expense also includes $281,000 inamortization of bank fees from the amendment to our Company’s revolving creditagreement in November of 2009. 

 

      Other income (expense) was $77,000 of incomeduring the first nine months of 2010 compared to $130,000 of income in thefirst nine months of 2009.  The gains in both2010 and 2009 are entirely from changes in exchangerates.

 

      Provision for income taxes was $6,347,000 (27.2% of income before taxes) for 2010compared to $4,328,000 (32.2% of income before taxes)in 2009.  Included in the 2010 tax provision is an $898,000 tax credit relatedto prior years’ research and development expenses.

 

**     **The Company’s net income after tax was $17,013,000 or $1.43per share on a diluted basis for the first nine months of 2010 compared to$9,118,000 or $.91 per share on a diluted basis for the first nine months of2009.  The increase of $7,895,000 resulted from the factors described above.

                            

**Liquidity and Capital Resources**

 

In addition to normal operatingexpenses, the Company has ongoing cash requirements which are necessary tooperate the Company’s business, including inventory purchases and capitalexpenditures.  The Company’s inventory and accounts payable levels typicallybuild in the first half of the year and in the fourth quarter in anticipationof the spring and fall selling seasons, particularly related to ouragricultural products.  Accounts receivable historically build in the first andfourth quarters of each year as a result of fall preseason sales programs andout of season sales though with the soft economy this affect is less pronounced. These sales level the Company’s production during the off season. 

 

As of September 30, 2010, the Company had workingcapital of $180,694,000 which represents a decrease of $2,802,000 from workingcapital of $183,496,000 as of December 31, 2009.  The decrease in workingcapital was primarily from lower inventory levels from reduced levels ofactivity and higher trade payables.

 

Capital expenditures were $3,579,000 for the firstnine months of 2010, compared to $2,661,000 during the first nine months of2009.  Capital expenditures for 2010 are expected to be above 2009 though stillbelow depreciation levels.  The Company expects to fund expenditures fromoperating cash flows or through its revolving credit facility, described below.

 

The Company was authorized by its Board of Directorsin 1997 to repurchase up to 1,000,000 shares of the Company’s common stock tobe funded through working capital and credit facility borrowings.  There wereno shares purchased in 2009 or the nine months of 2010.  The authorization torepurchase up to 1,000,000 shares remains available less 42,600 sharespreviously repurchased.
 
      During the third quarterof 2010, the Company closed its manufacturing facility located in Orleans,France and incurred $924,000 in redundancy and closure costs.  The Company alsosold the Orleans facility and recorded a gain of $885,000.  Production wasrelocated to the manufacturing facility in Lyon, France.

 

 

	18

 

 

 

 

 

 

 

      Net cash used byfinancing activities was $25,305,000 during thenine month period ending September 30, 2010, compared to net cash used of $36,809,000for the same period in 2009.  The decrease in financing activities in 2010 wasfrom paydowns on the bank credit facility due to cash provided by operatingactivities.

 

      On August 25, 2004, theCompany entered into a five-year $70 million Amended and Restated RevolvingCredit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, andGuaranty Bank. This contractually committed, unsecured facility allows theCompany to borrow and repay amounts drawn at floating or fixed interest rates basedupon Prime or LIBOR rates. Proceeds may be used for general corporate purposesor, subject to certain limitations, acquisitions. The loan agreement containsamong other things the following financial covenants:  Minimum Fixed ChargeCoverage Ratios, Minimum Consolidated Tangible Net Worth, Consolidated FundedDebt to EBITDA Ratio and Minimum Asset Coverage Ratio, along with limitationson dividends, other indebtedness, liens, investments and capital expenditures. 

 

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

 

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

 

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

 

      OnOctober 14, 2008, the Company entered into the Sixth Amendment and Waiver underthe Amended and Restated Revolving Credit Agreement.  The purpose of theamendment and waiver was to clarify company names within the obligated groupafter merging or dissolving some subsidiaries, to define operating cash flowand defining quarterly operating cash flow for *Rivard* through June 30,2010.  Beginning June 30, 2010, *Rivard*’s actual operating cash flow willbe used in the calculation of consolidated operating cash flow.

 

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

 

	19

 

 

 

 

 

 

As of September 30, 2010, there was$21,000,000 borrowed under the revolving credit facility.  At September 30,2010, $926,000 of the revolver capacity was committed to irrevocable standby lettersof credit issued in the ordinary course of business as required by vendors’contracts resulting in approximately $103,000,000 in available borrowings.

 

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

 

      Thereare additional lines of credit, for the Company’s French operations in theamount of 6,200,000 Euros, which includes the *Rivard* credit facilities,for our Canadian operation in the amount of 3,500,000 Canadian dollars, and forour Australian operation in the amount of 800,000 Australian dollars.  As ofSeptember 30, 2010, no Euros were borrowed against the French line of credit, noCanadian dollars were outstanding on the Canadian line of credit and 400,000Australian dollars were outstanding under its facility.  The Canadian andAustralian revolving credit facilities are guaranteed by the Company. 

 

      As ofSeptember 30, 2010, the Company is in compliance with the terms and conditionsof its 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 our ConsolidatedFinancial Statements, which have been prepared in accordance with GAAP.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenue and expenses, and related disclosure of contingent assets andliabilities.  Management bases its estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual results may differ from these estimates underdifferent assumptions or conditions.

 

**Critical Accounting Policies**

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

 

***Allowancefor Doubtful Accounts***

 

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

 

	20

 

 

 

 

 

 

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

 

      Thebad debt reserve balance was $2,819,000 at September 30, 2010 and $2,548,000 atDecember 31, 2009.  

 

***SalesDiscounts***

* *

     At September30, 2010 the Company had $11,536,000 in reserves for sales discounts comparedto $3,803,000 at December 31, 2009 on products shipped to our customers undervarious promotional programs.  The increase was due primarily from additionaldiscounts reserved on the Company’s agricultural**products during thepre-season, which runs from September to December of each year and orders aregenerally shipped through the first quarter of 2010.  The Company reviews thereserve quarterly based on analysis made on each program outstanding at thetime.  

 

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

* *

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

* *

The Company had $9,075,000 at September 30, 2010 and$9,060,000 at December 31, 2009 in reserve to cover obsolescence and slowmoving inventory.  The obsolescence and slow moving policy states that thereserve is to be calculated on a basis of: 1) no inventory usage over a three yearperiod and inventory with quantity on hand is deemed obsolete and reserved at100 percent and 2) slow moving inventory with little usage requires a 100percent reserve on items that have a quantity greater than a three yearsupply.  There are exceptions to the obsolete and slow moving classificationsif approved by an officer of the Company based on specific identification of anitem or items that are deemed to be either included or excluded from thisclassification.  Incases where there is no historical data, management makes a judgment based on aspecific review of the inventory in question to determine what reserves, if anyare appropriate.  New products or parts are generally excluded from the reservepolicy until a three year history has been established.

 

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

*** ***

***Warranty***

* *

The Company’s warranty policy is generally to provide itscustomers warranty for up to one year on all equipment and 90 days for partsthough there are exceptions.

 

Warranty reserve, as a percent of sales, iscalculated by taking the current twelve months of expenses and prorating thatbased on twelve months of sales with a six month lag period.  The Company’shistorical experience is that an end-user takes approximately 90 days to sixmonths from the receipt of the unit to file a warranty claim.  A warrantyreserve is established for each different marketing group.  Reserve balancesare evaluated on aquarterly basis and adjustments are made when required.  

 

The current warranty reserve balance was $5,977,000 at September30, 2010 and $5,973,000 at December 31, 2009.  

*** ***

***Product Liability***

At September 30, 2010 the Companyhad accrued $440,000 in reserves for product liability cases compared to $387,000at December 31, 2009.  The Company accrues primarily on a case by case basisand adjusts the balance quarterly.

	21

 

 

 

 

 

 

During most of 2010, the self insured retention (S.I.R.) forU.S. product liability coverage for all products was at $100,000 per claim.  TheS.I.R. for all Bush Hog products was set at the date of acquisition at $250,000per claim.  On September 30, 2010 the Company renewed its insurance coverageand the S.I.R. for all U.S. products was $100,000 per claim.  The Company alsocarries product liability coverage in Europe, Canada and Australia whichcontain substantially lower S.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 potentialimpairment exists by comparing the fair value of a reporting unit with itscarrying amount, including goodwill (Step 1).  If the fair value of a reportingunit exceeds its carrying value amount, goodwill of the reporting unit is notconsidered to have a potential impairment and the second step is notnecessary.  However, if the carrying amount of the reporting unit exceeds itsfair value, the second step (Step 2) is performed to determine if goodwill isimpaired and to measure the amount of impairment loss to recognize, if any.Step 2 compares the implied fair value of goodwill with the carrying amount ofgoodwill.  If the implied value of goodwill is less than the carrying amount ofgoodwill, then a charge is recorded to reduce goodwill to the implied goodwill.The implied goodwill is calculated based on a hypothetical purchase priceallocation similar to the requirements for purchase accounting, in that ittakes the implied fair value of the reporting unit and allocates such fairvalue to the fair value of the assets and liabilities of the reporting unit. 

      TheCompany estimates the fair value of its reporting units using a discounted cashflow analysis. This analysis requires the Company to make significantassumptions and estimates about the extent and timing of future cash flows,discount rates and growth rates. The cash flows are estimated over asignificant future period of time, which makes those estimates and assumptionssubject to an even higher degree of uncertainty. The Company also utilizesmarket valuation modelsand other financial ratios, which require the Company to make certain assumptionsand estimates regarding the applicability of those models to its assets andbusinesses. The Company believes that the assumptions and estimates used todetermine the estimated fair values of each of its reporting units arereasonable. However, different assumptions could materially affect theestimated fair value. The Company recognized goodwill impairment in the NorthAmerican Industrial segment of $14,104,000 in 2009 and $5,010,000 in the NorthAmerican Agricultural segment in 2008.  During the 2009 impairment analysis review, it was notedthat even though the *Schwarze* reporting unit’s fair value was abovecarrying value it was not materially different. At December 31, 2009, there wasapproximately $6.8 million of goodwill related to the *Schwarze* reportingunit. This reporting unit would be most likely affected by changes in theCompany’s assumptions and estimates.  As of September 30, 2010, the Company had $34,598,000 ofgoodwill, which represents 9% of total assets.  The calculation of fair value could increase ordecrease depending on changes in the inputs and assumptions used, such aschanges in the reporting unit’s future growth rates, discount rates, etc.

 
**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.

	22

 

 

 

 

 

 

      Forward-looking statements involve risks anduncertainties.  These uncertainties include factors that affect all businessesoperating in a global market, as well as matters specific to the Company andthe markets it serves.  Particular risks and uncertainties facing the Companyinclude changes in market conditions; increased competition; decreases in theprices of agricultural commodities, which could affect our customer’s incomelevels; budget constraints or income shortfalls which could affect thepurchases of our type of equipment by governmental customers; creditavailability for both the Company and its customers, adverse weather conditionssuch as droughts and floods which can affect buying patterns of the Company’scustomers; the price and availability of critical raw materials, particularlysteel and steel products; energy cost; increased cost of new governmentalregulations which effect corporations; the potential effects on the buyinghabits of our customers due to diseases such as mad cow; the Company’s abilityto develop and manufacture new and existing products profitably; marketacceptance of new and existing products; the Company’s ability to maintain goodrelations with its employees; and the ability to hire and retain qualityemployees.

      In addition, the Company is subjectto risks and uncertainties facing the industry in general, including changes inbusiness and political conditions and the economy in general in both domesticand international markets; weather conditions affecting demand; weakness in theCompany’s markets; financial market changes including increases in interestrates and fluctuations in foreign exchange rates; actions of competitors; theinability of the Company’s suppliers, customers, creditors, public utilityproviders and financial service organizations to deliver or provide theirproducts or services to the Company; seasonal factors in the Company’sindustry; unforeseen litigation; government actions including budget levels,regulations and legislation, primarily relating to the environment, commerce,infrastructure spending, health and safety; and availability of materials.

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

 

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

 

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

** **

**Foreign Currency Risk**

* *

*International Sales*

 

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

      To mitigate the short-term affect of changes incurrency exchange rates on the Company’s functional currency-based sales, theCompany’s U.K. subsidiaries regularly hedge by entering into foreign exchangeforward contracts to hedge approximately 80% of its future net foreign currencysales transactions over a period of nine months.  As of September 30, 2010, theCompany had $3,845,000 outstanding in forward exchange contracts related toaccounts receivables.  A 15% fluctuation in exchange rates for these currencieswould change the fair value by approximately $385,000.  However, since thesecontracts hedge foreign currency denominated transactions, any change in the fairvalue of the contracts should be offset by changes in the underlying value ofthe transaction being hedged.

*Exposure to Exchange Rates*

 

	23

 

 

 

 

 

 

           TheCompany’s earnings are affected by fluctuations in the value of the U.S. dollaras compared to foreign currencies, predominately in European countries, as aresult of the sales of its products in international markets.  Foreign currencyoptions and forward contracts are used to hedge against the earnings effects ofsuch fluctuations.  At September 30, 2010, the result of a uniform 10%strengthening in the value of the dollar relative to the currencies in whichthe Company’s sales are denominated would result in a decrease in gross profitof $3,425,000 for the period ending September 30, 2010.  Comparatively, the resultof a uniform 10% strengthening in the value of the dollar relative to thecurrencies in which the Company’s sales are denominated would have resulted ina decrease in gross profit of approximately $3,781,000 for the period endedSeptember 30, 2009.  This calculation assumes that each exchange rate wouldchange in the same direction relative to the U.S. dollar.  In addition to the direct effects of changes in exchange rates, whichare a changed dollar value of the resulting sales, changes in exchange ratesmay also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive.  The Company’s sensitivityanalysis of the effects of changes in foreign currency exchange ratesdoes not factor in a potential change in sales levels or local currency prices.  The translation adjustment during the third quarter of 2010 was a gain of $8,530,000. On September 30, 2010, the British pound closed at .6365 relative to 1.00 U.S.dollar, and the Euro dollar closed at .7335 relative to 1.00 U.S. dollar.  AtDecember 31, 2009 the British pound closed at .6187 relative to 1.00 U.S.dollar and the Euro dollar closed at .6985 relative to 1.00 U.S. dollar.  Bycomparison, on September 30, 2009, the British pound closed at .6258 relativeto 1.00 U.S. dollar, and the Euro dollar closed at .6833 relative to 1.00 U.S.dollar.  No assurance can be given as to future valuation of the British poundor Euro or how further movements in those or other currencies could affectfuture earnings or the financial position of the Company.

 

**Interest Rate Risk**

      The Company’s long-term debt bears interest atvariable rates.  Accordingly, the Company’s net income is affected by changesin interest rates.  Assuming the current level of borrowings at variable ratesand a two percentage point change in the 2010 average interest rate under theseborrowings, the Company’s interest expense would have changed by approximately $315,000. In the event of an adverse change in interest rates, management could takeactions to mitigate its exposure.  However, due to the uncertainty of theactions that would be taken and their possible effects this analysis assumes nosuch actions.  Further this analysis does not consider the effects of thechange in the level of overall economic activity that could exist in such anenvironment.

 

**Item 4. Controls and Procedures**

 

      **Disclosure Controls and Procedures**.  An evaluation was carried out underthe supervision and with the participation of Alamo’s management, including theChief Executive Officer, the Chief Financial Officer and the Vice-President,Corporate Controller, of the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to paragraph (b) of Exchange ActRules 13a – 15 or 15d -15.  Based upon the evaluation, the Chief ExecutiveOfficer, the Chief Financial Officer and the Vice-President, CorporateController, concluded that the Company’s disclosure controls and procedureswere effective at the end of the period covered by this report.

 

 

 

	24

 

 

 

 

 

 

** **

**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

 

November 2, 2010 – Announced Retirement of David H. Morrisfrom the Board

November 5, 2010 – Press Release announcing third quarterfiscal 2010 earnings

 

(b)     Other Information

 

None

 

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

 

(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

 

(b)      Reports on Form 8-K

 

 

 

 

	25

 

 

 

 

 

 

 
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)
 

 

	26

 

 

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