# Alamo Group Inc: Form 10-Q for the period ended Mar 31, 2012

- Company: [Alamo Group Inc](/companies/alg.md) (CIK 897077)
- Form: 10-Q
- Filed: 2012-05-07
- Accepted by EDGAR: May 7, 2012, 16:05 ET
- Period: 2012-03-31
- Accession: 0000897077-12-000011
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/897077/000089707712000011/a10qbodyq12012.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/897077/000089707712000011/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-01-01 to 2012-03-31 | $155.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-01-01 to 2012-03-31 | $120.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2012-01-01 to 2012-03-31 | $35.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-01-01 to 2012-03-31 | $24.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-01-01 to 2012-03-31 | $11.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-01-01 to 2012-03-31 | $443.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-01-01 to 2012-03-31 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-01-01 to 2012-03-31 | $6.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-01-01 to 2012-03-31 | 12,027,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2012-01-01 to 2012-03-31 | −$17.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2012-01-01 to 2012-03-31 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2012-01-01 to 2012-03-31 | $712.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-03-31 | $37.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-03-31 | $345.5m | us-gaap:AssetsCurrent |
| Total assets | at 2012-03-31 | $451.0m | us-gaap:Assets |
| Current liabilities | at 2012-03-31 | $90.6m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2012-03-31 | $53.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-03-31 | $3.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2012-03-31 | $287.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 27,396 characters.

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

| As a Percent of Net Sales North American | Three Months Ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| Industrial | 41.5% | 34.9% |
| Agricultural | 31.0% | 35.3% |
| European | 27.5% | 29.8% |
| Total sales, net | 100.0% | 100.0% |

| Cost Trends and Profit Margin, as Percentages of Net Sales | Three Months Ended March 31, 2012 | 2011 |
| --- | ---: | ---: |
| Gross margin | 22.6% | 22.7% |
| Income from operations | 7.1% | 6.6% |
| Income before income taxes | 6.4% | 6.0% |
| Net income | 4.4% | 4.0% |

### Overview

*This report contains forward-looking statements that are based on Alamo Group’s current expectations. Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section.*

In the first quarter of 2012, the Company's net income was up due to improved sales in the Industrial and European Divisions along with the benefits from continued cost control initiatives. Sales in the Agricultural Division reflected a softening in the market during the first quarter of 2012 compared to 2011. Dealer inventory was higher than historical levels as farmers were cautious about the U.S. economy. Alamo's Industrial Division saw a 32% increase in sales versus the first quarter of 2011 mainly from the acquisition of Tenco along with improved sales in mower related products and vacuum trucks. However, budget constraints continue to be an issue with governmental entities. European sales, in local currency, also showed improvement compared to the first quarter of 2011. Agricultural markets there continue to remain stready, though governmental markets are still being affected by weak conditions caused by the general slow down in the European economy.

The Company remains concerned that our markets for the remainder of 2012 could be negatively affected by a variety of factors such as a continued weakness in the overall economy, sovereign debt issues, credit availability, increased levels of government regulations; changes in farm incomes due to commodity prices or governmental aid programs; adverse situations that could affect our customers such as animal disease epidemics, weather conditions such as droughts, floods, snowstorms, etc.; budget constraints or revenue shortfalls in governmental entities and changes in our customer’s buying habits due to lack of confidence in the economic outlook.

### Results of Operations

#### Three Months Ended March 31, 2012 vs. Three Months Ended March 31, 2011

Net sales for the first quarter of 2012 were $155,911,000, an increase of $15,196,000, or 10.8% compared to $140,715,000 for the first quarter of 2011. The increase was from the acquisition of *Tenco* in the amount of $9,407,000 and improved sales in the Industrial and European segments. Agricultural markets experienced slower growth during the quarter as farmers were cautious about the U.S. economy.

Net North American Industrial sales increased during the first quarter by $15,699,000 or 32.0% to $64,732,000 for 2012 compared to $49,033,000 during the same period in 2011. The increase came primarily from the acquisition of *Tenco* in the amount of $9,407,000 and higher sales of mowing related products, sweepers, snow removal and vacuum trucks.

Net North American Agricultural sales were $48,271,000 in 2012 compared to $49,739,000 for the same period in 2011, an decrease of $1,468,000 or 3.0%. The decrease was from lower preseason stocking orders in the agriculture sector as dealer inventory for both Bush Hog and Rhino were higher than 2011 levels. Drought conditions in Oklahoma and Texas improved during the first quarter of 2012 but are still below normal.

Net European Sales for the first quarter of 2012 were $42,908,000, a increase of $965,000 or 2.3% compared to $41,943,000 during the first quarter of 2011. The increase was primarily from strengthening in its agricultural U.K. operations, however, market conditions continue to be soft in governmental markets due to the economic slowdown throughout Europe.

Gross profit for the first quarter of 2012 was $35,238,000 (22.6% of net sales) compared to $31,901,000 (22.7% of net sales) during the same period in 2011, an increase of $3,337,000. The increase was from the acquisition of Tenco in the amount of $1,975,000 and improved sales mainly in the Industrial segment and, to a lesser extent, lower manufacturing costs.

Selling, general and administrative expenses (“SG&A”) were $24,245,000 (15.6% of net sales) during the first quarter of 2012 compared to $22,560,000 (16.0% of net sales) during the same period of 2011, an increase of $1,685,000. The increase was mainly from the acquisition of Tenco in the amount of $1,206,000 and higher sales commissions on increased sales.

Interest expense was $443,000 for the first quarter of 2012 compared to $765,000 during the same period in 2011, a decrease of $322,000. The decrease came from lower interest rates in 2012 compared to 2011 despite higher borrowing due to increased working capital requirements.

Other Income was a $574,000 expense for the first quarter of 2012 compared to a $147,000 expense in 2011. Other income in 2012 and 2011 were the result of exchange rate changes.

Provision for income taxes was $3,246,000 (32.4%) in the first quarter of 2012 compared to $2,834,000 (33.3%) during the same period in 2011.

The Company’s net income after tax was $6,785,000 or $0.56 per share on a diluted basis for the first quarter of 2012 compared to $5,667,000 or $0.47 per share on a diluted basis for the first quarter of 2011. The increase of $1,118,000 resulted from the factors described above.

### Liquidity and Capital Resources

In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to operate the Company’s business, including inventory purchases and capital expenditures. The Company’s inventory and accounts payable levels typically build in the first half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts receivable historically build in the first and fourth quarters of each year as a result of fall pre-season sales programs and out of season sales, particularly in our Agricultural Division. Preseason sales help level the Company’s production during the off season.

As of March 31, 2012, the Company had working capital of $254,959,000 which represents an increase of $54,529,000 from working capital of $200,430,000 of December 31, 2011. The increase in working capital was primarily from higher levels of accounts receivable and inventory due to seasonality.

Capital expenditures were $1,684,000 for the first three months of 2012, compared to $1,433,000 during the first three months of 2011. Capital expenditures for 2012 are expected to be somewhat higher than 2011 levels. The Company expects to fund expenditures from operating cash flows or through its revolving credit facility, described below.

The Company was authorized by its Board of Directors in 1997 to repurchase up to 1,000,000 shares of the Company’s common stock to be funded through working capital and credit facility borrowings. There were no shares purchased in 2011 or through the first quarter of 2012. The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares previously repurchased.

Net cash provided by financing activities was $46,293,000 during the three month period ending March 31, 2012, compared to net cash used of $22,505,000 for the same period in 2011. The increase was mainly due to increased borrowings on the Company’s credit facility to support higher levels of accounts receivable and inventory.

On August 25, 2004, the Company entered into a five-year $70 million Amended and Restated Revolving Credit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, and Guaranty Bank. This contractually-committed, unsecured facility allows the Company to borrow and repay amounts drawn at floating or fixed interest rates based upon Prime or LIBOR rates. Proceeds may be used for general corporate purposes or, subject to certain limitations, acquisitions. The loan agreement contains among other things the following financial covenants: Minimum Fixed Charge Coverage Ratios, Minimum Consolidated Tangible Net Worth, Consolidated Funded Debt to EBITDA Ratio and Minimum Asset Coverage Ratio, along with limitations on dividends, other indebtedness, liens, investments and capital expenditures. Since 2004, the Company has periodically amended the credit facility based upon its business requirements.

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

As of March 31, 2012, there was $52,000,000 borrowed under the revolving credit facility. On March 31, 2012, $1,095,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors’ contracts resulting in approximately $47,000,000 in available borrowings.

On October 24, 2011, Lloyd TSB Bank plc renewed its £5.5 million overdraft facility to Alamo Group Europe Limited through October 31, 2012. The facility is unsecured but guaranteed by the borrowers' U.K. subsidiaries. Interest is payable on amounts owing at 1.40% per annum over the Bank’s Base Rate. At March 31, 2012, there were no amounts outstanding under this facility.

There are additional lines of credit: for the Company’s French operations in the amount of 6,200,000 Euros; for our Canadian operation in the amount of 3,500,000 Canadian dollars; and for our Australian operation in the amount of 800,000 Australian dollars. As of March 31, 2012, 187,000 Euros were borrowed against the French line of credit; 2,424,000 Canadian dollars were outstanding on the Canadian line of credit; and no Australian dollars were outstanding under its facility. The Canadian and Australian revolving credit facilities are guaranteed by the Company.

As of March 31, 2012, the Company is in compliance with the terms and conditions of its credit facilities.

Management believes the bank credit facilities and the Company’s ability to internally generate funds from operations should be sufficient to meet the Company’s cash requirements for the foreseeable future. However, the challenges affecting the banking industry and credit markets in general can potentially cause changes to credit availability which creates a level of uncertainty.

### Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

### Critical Accounting Policies

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

### Allowance for Doubtful Accounts

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

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

The bad debt reserve balance was $3,261,000 at March 31, 2012 and $3,215,000 at December 31, 2011.

### Sales Discounts

At March 31, 2012 the Company had $18,457,000 in reserves for sales discounts compared to $14,567,000 at December 31, 2011 on products shipped to our customers under various promotional programs. The increase was due primarily to increased sales volume in 2011 on the Company’s agricultural products during the pre-season program, the bulk of which runs during the third and fourth quarters of each year on orders that are generally shipped through the second quarter of 2012. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time.

The Company bases its reserves on historical data relating to discounts taken by the customer under each program. Historically between 85% and 95% of the Company’s customers who qualify for each program, actually take the discount that is available.

### Inventories – Obsolescence and Slow Moving

The Company had $7,920,000 at March 31, 2012 and $7,630,000 at December 31, 2011in reserve to cover obsolete and slow moving inventory. The increase in reserve for obsolescence was from the Company's quarterly review during its normal course of business. The obsolete and slow moving policy states that the reserve is to be calculated on a basis of: 1) no inventory usage over a three year period and inventory with quantity on hand is deemed obsolete and reserved at 100 percent and 2) slow moving inventory with little usage requires a 100 percent reserve on items that have a quantity greater than a three year supply. There are exceptions to the obsolete and slow moving classifications if approved by an officer of the Company based on specific identification of an item or items that are deemed to be either included or excluded from this classification. In cases where there is no historical data, management makes a judgment based on a specific review of the inventory in question to determine what reserves, if any are appropriate. New products or parts are generally excluded from the reserve policy 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 support its reserve. Once the inventory is written down, the Company does not adjust the reserve balance until the inventory is sold.

### Warranty

The Company’s warranty policy is generally to provide its customers warranty for up to one year on all equipment and 90 days for parts.

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

The current liability warranty reserve balance was $5,470,000 at March 31, 2012 and $5,313,000 at December 31, 2011.

### Product Liability

At March 31, 2012 the Company had accrued $121,000 in reserves for product liability cases compared to $131,000 at December 31, 2011. The Company accrues primarily on a case by case basis and adjusts the balance quarterly.

The Company renewed its U.S. insurance coverage on September 30, 2011 and the S.I.R. for all U.S. products was $100,000 per claim. The Company also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.’s or deductibles.

### Goodwill

Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process. We have an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss.

The Company estimates the fair value of its reporting units using a discounted cash flow analysis. This analysis requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. The Company also utilizes market valuation models and other financial ratios, which require the Company to make certain assumptions and estimates regarding the applicability of those models to its assets and businesses. As of March 31, 2012, the Company had $32,365,000 of goodwill, which represents 7% of total assets.

The Company recognized goodwill impairment at two of its French operations, SMA and Rousseau, in the Company's European division of $1,898,000 in 2011. During the 2011 impairment analysis review, it was noted that even though the *Schwarze, Rivard and Faucheux* reporting unit’s fair value was above carrying value it was not materially different. On March 31, 2012, there was approximately $6.8 million, $12.0 million and $0.7 million of goodwill related to the *Schwarze, Rivard and Faucheux* reporting units respectively. These reporting units would be most likely affected by changes in the Company’s assumptions and estimates. The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions used, such as changes in the reporting unit’s future growth rates, discount rates, etc.

Management believes that the estimated valuations it arrived at are reasonable and consistent with what other marketplace participants would use in valuing the Company's components. However, management cannot give any assurance that these market values will not change in the future. For example, if discount rates demanded by the market increase, this could lead to reduced valuations under the income approach. If the Company's projections are not achieved in the future, this could lead management to reassess their assumptions and lead to reduced valuations under the income approach. If the market price of the Company's stock decreases, this could cause the Company to reassess the reasonableness of the implied control premium, which might cause management to assume a higher discount rate under the income approach which could lead to reduced valuations. If future similar transactions exhibit lower multiples than those observed in the past, this could lead to reduced valuations under the similar transactions approach. And finally, if there is a general decline in the stock market and particularly in those companies selected as comparable to the Company's components, this could lead to reduced valuations under the public company market multiple approach. The Company's annual impairment test is performed during the fourth quarter of each fiscal year. Given the current market conditions and continued economic uncertainty, the fair value of the Company's components could deteriorate which could result in the need to record impairment charges in future periods. The Company also monitors potential triggering events including changes in the business climate in which it operates, attrition of key personnel, volatility in the capital markets, the Company's market capitalization compared to its book value, the Company's recent operating performance, and the Company's financial projections. The occurrence of one or more triggering events could require additional impairment testing, which could result in future impairment charges. In particular, since the Schwarze, Rivard and Faucheux, reporting unit's carrying value is not materially different from fair value, any changes to the Company's assumptions could lead to an indicated impairment in step one, requiring the Company to proceed to step two and potentially record an impairment charge.

### Forward-Looking Information

Part I of this Quarterly Report on Form 10Q and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II of this Quarterly Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company.

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

Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses operating in a global market, as well as matters specific to the Company and the markets it serves.

Particular risks and uncertainties facing the Company include changes in market conditions; increased competition; decreases in the prices of agricultural commodities, which could affect our customers' income levels; budget constraints or income shortfalls which could affect the purchases of our type of equipment by governmental customers; credit availability for both the Company and its customers, adverse weather conditions such as droughts, floods, snowstorms, etc. which can affect buying patterns of the Company’s customers and related contractors; the price and availability of critical raw materials, particularly steel and steel products; energy cost; increased cost of new governmental regulations which effect corporations; the potential effects on the buying habits of our customers due to animal disease outbreaks such as mad cow and other epidemics; the Company’s ability to develop and manufacture new and existing products profitably; market acceptance of new and existing products; the Company’s ability to maintain good relations with its employees; and the ability to hire and retain quality employees.

In addition, the Company is subject to risks and uncertainties facing the industry in general, including changes in business and political conditions and the economy in general in both domestic and international markets; weather conditions affecting demand; slower growth in the Company’s markets; financial market changes including increases in interest rates and fluctuations in foreign exchange rates; actions of competitors; the inability of the Company’s suppliers, customers, creditors, public utility providers and financial service organizations to deliver or provide their products or services to the Company; seasonal factors in the Company’s industry; 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.

The Company wishes to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning the Company and its businesses, including factors that could potentially materially affect the Company’s financial results, may emerge from time to time. It is not possible for management to predict all risk factors or to assess the impact of such risk factors on the Company’s businesses.

## Market risk

As filed, 4,793 characters.

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

### Foreign Currency Risk

### International Sales

A portion of the Company’s operations consists of manufacturing and sales activities in international jurisdictions. The Company primarily manufactures its products in the U.S., U.K., France, Canada and Australia. The Company sells its products primarily in the functional currency within the markets where the products are produced, but certain sales from the Company's U.K. and Canadian operations are denominated in other foreign currencies. As a result, the Company’s financials, specifically the value of its foreign assets, could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the other markets in which the subsidiaries of the Company distribute their products.

To mitigate the short-term affect of changes in currency exchange rates on the Company’s functional currency-based sales, the Company’s U.K. subsidiaries regularly enter into foreign exchange forward contracts to hedge approximately 80% of its future net foreign currency collections over a period of six months. As of March 31, 2012, the Company had $1,675,000 outstanding in forward exchange contracts related to accounts receivables. A 15% fluctuation in exchange rates for these currencies would change the fair value by approximately $251,000. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts should be offset by changes in the underlying value of the transaction being hedged.

### Exposure to Exchange Rates

The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of its products in international markets.

Foreign currency options and forward contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company’s sales are denominated would result in a decrease in gross profit of $1,424,000 for the three month period ending March 31, 2012. Comparatively, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company’s sales are denominated would have resulted in a decrease in gross profit of approximately $1,188,000 for the three month period ended March 31, 2011. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which include a changed dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. The Company’s sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. The translation adjustment during the first quarter of 2012 was a gain of $4,041,000. On March 31, 2012, the British pound closed at .6425 relative to 1.00 U.S. dollar, and the Euro closed at .7495 relative to 1.00 U.S. dollar. At December 31, 2011 the British pound closed at .6434 relative to 1.00 U.S. dollar and the Euro closed at .7716 relative to 1.00 U.S. dollar. By comparison, on March 31, 2011, the British pound closed at .6233 relative to 1.00 U.S. dollar, and the Euro closed at .7055 relative to 1.00 U.S. dollar. No assurance can be given as to future valuations of the British pound or Euro or how further movements in those or other currencies could affect future earnings or the financial position of the Company.

### Interest Rate Risk

The Company’s long-term debt bears interest at variable rates. Accordingly, the Company’s net income is affected by changes in interest rates. Assuming the current level of borrowings at variable rates and a two percentage point change in the first quarter 2012 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $260,000. In the event of an adverse change in interest rates, management could take actions to mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.

## Controls and procedures

As filed, 904 characters.

**Disclosure Controls and Procedures.**

An evaluation was carried out under the supervision and with the participation of Alamo’s management, including our President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer) and Vice-President and Corporate Controller, (Principal Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13A-15(e) under the Securities Exchange Act of 1933). Based upon the evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer) and Vice-President, Corporate Controller, (Principal Accounting Officer) concluded that the Company’s design and operation of these disclosure controls and procedures were effective at the end of the period covered by this report.

Filed May 7, 2012.
Source: SEC EDGAR, the filing index for accession 0000897077-12-000011. Last ingested by Listed: Nov 4, 2026, 18:18 ET. No prices; not investment advice.