Alamo Group Inc: Form 10-Q for the period ended Jun 30, 2014

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

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.

For the first half of 2014, the Company's net income was down 12.0% compared to the same time in 2013. This was primarily related to soft market conditions in the Agricultural Division which resulted in a 6% decrease in sales excluding the acquisitions of Fieldquip and Superior. Alamo's Industrial Division saw a 11.0% increase in sales versus 2013 excluding the acquisition of Specialized. This came from improved sales in sweepers, mowing equipment, excavators, and snow equipment products. European sales for the first half of 2014 excluding the acquisition of Kellands were up 8% compared to the same time in 2013. Favorable exchange rates provided most of the improvement. Consolidated gross margins were down in the first half of 2014 without the acquisitions as increased sales in both the Industrial and European Divisions could not offset the decline from the Agricultural Division. Also negatively affecting net income were transaction costs and additional stock option expense from accelerated vesting of options to retirement eligible recipients. The Company's backlog improved 69% to $163 million during the first half of 2014 versus $96 million during the same period in 2013 which should benefit sales through the rest of the year. Excluding the acquisitions of Specialized, Kellands, Fieldquip and Superior backlog increased by 9%. The increase in the backlog came from the Company's European and Industrial Divisions. Negatively affecting backlogs were lower new orders in the Agricultural Division.

The Company believes that its markets for 2014 will be steady but they 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 customers' buying habits due to lack of confidence in the economic outlook.

Results of Operations

Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013

Net sales for the second quarter of 2014 were $206,353,000, an increase of $28,289,000, or 15.9% compared to $178,064,000 for the second quarter of 2013. The increase was mainly from the acquisitions of Specialized in the amount of $18,977,000, Kellands in the amount of $3,282,000, Superior in the amount of $724,000 and Fieldquip in the amount of $655,000. The Company also experienced improved equipment sales and tractors in the Company's Industrial and European Divisions. In the Industrial Division, sweepers, mowing equipment, excavators and snow removal products were the main product lines to show sales improvement. Sales of mowing equipment in the Agricultural Division were down during the quarter due to the softness of the overall agricultural market. Excluding the acquisition of Kellands, European sales for the second quarter of 2014 were slightly up as favorable exchange rates were the main contributing factor to improved sales levels.

Net North American Industrial sales increased during the second quarter by $27,443,000 or 35.3% to $105,082,000 for 2014 compared to $77,639,000 during the same period in 2013. The increase came primarily from the acquisition of Specialized in the amount of $18,977,000 and higher sales of mowing and sweeper units, as well as excavator and snow removal equipment.

Net North American Agricultural sales were $52,631,000 in 2014 compared to $57,255,000 for the same period in 2013, a decrease of $4,624,000 or 8.1%. Lower crop prices and rising production costs affected farmers' ability to purchase new equipment. This also resulted in higher dealer inventory levels for both tractors and attachments.

Net European Sales for the second quarter of 2014 were $48,640,000, an increase of $5,470,000 or 12.7% compared to $43,170,000 during the second quarter of 2013. The increase was primarily due to the acquisition of Kellands in the amount of $3,282,000. Also affecting sales favorably in the second quarter of 2014 were changes in currency exchange rates.

Gross profit for the second quarter of 2014 was $47,286,000 (22.9% of net sales) compared to $44,091,000 (24.8% of net sales) during the same period in 2013, an increase of $3,195,000. The increase in margin dollars were mainly due to the acquisitions of Specialized and Kellands in the amount of $5,799,000. Also higher sales volume in the Industrial Division, particularly mowing, excavator and sweeping products helped increase gross margins. Negatively affecting both the gross margin and margin percent during the second quarter of 2014 were inefficiencies from lower absorption on reduced sales volumes in the Agricultural Division.

Selling, general and administrative expenses (“SG&A”) were $32,490,000 (15.7% of net sales) during the second quarter of 2014 compared to $26,530,000 (14.9% of net sales) during the same period of 2013, an increase of $5,960,000. The increase in SG&A expenses in 2014 was primarily from the acquisitions of Specilaized in the amount of $2,730,000 and Kellands, Fieldquip and Superior in the amount of $645,000. Also there were $1,346,000 of acquisition expenses and $906,000 of additional stock option expense related to the accelerated vesting options to retirement eligible recipients.

Interest expense was $1,044,000 for the second quarter of 2014 compared to $336,000 during the same period in 2013, an increase of $708,000. The increase in 2014 came from increased borrowings due to the acquisition of Specialized.

Other income (expense), net was $153,000 of income for the second quarter of 2014 compared to $343,000 of income during the same period in 2013. The income in 2014 was from the gain on the sale of the SMC facility offset by losses relating to foreign exchange rate changes. In 2013 the gain was mainly the result of foreign exchange rate changes.

Provision for income taxes was $4,745,000 (34.0%) in the second quarter of 2014 compared to $5,822,000 (33.1%) during the same period in 2013. The increased tax rate in 2014 reflects that Research and Development tax credits have not yet been approved by the U.S. federal government for 2014.

The Company’s net income after tax was $9,195,000 or $0.75 per share on a diluted basis for the second quarter of 2014 compared to $11,787,000 or $0.97 per share on a diluted basis for the second quarter of 2013. The decrease of $2,592,000 resulted from the factors described above.

Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013

Net sales for the first six months of 2014 were $377,603,000, an increase of $41,110,000 or 12.2% compared to $336,493,000 for the first six months of 2013. The increase was mainly from the acquisitions of Specialized in the amount of $18,977,000, Kellands in the amount of $3,282,000, Superior in the amount of $1,459,000 and Fieldquip in the amount of $655,000. Also improved sales in the Company's North American Industrial Division which was up 11% without the Specialized acquisition was a contributing factor. Agricultural Division sales were down 6% for the first half of 2014 from a weak overall agricultural market and the prolonged winter weather conditions in the early part of 2014. Sales in the European Division were up 8% in the first half of 2014 compared to the same time in 2013 as overall conditions in the European economy remain weak but showed some signs of improvement. Favorable exchange rate changes also had a significant impact on sales.

Net North American Industrial sales increased during the first six months by $35,423,000 or 24.1% to $182,396,000 for 2014 compared to $146,973,000 during the same period in 2013. The increase came primarily from the acquisition of Specialized in the amount of $18,977,000. Also, favorably affecting sales were the increase from mowing, sweeper, excavator and snow equipment product lines.

Net North American Agricultural sales were $102,476,000 in 2014 compared to $106,891,000 for the same period in 2013, a decrease of $4,415,000 or 4.1%. The decrease in sales for the first six months of 2014 compared to the first six months of 2013 was from soft market conditions in the agricultural market. Lower crop prices and rising production costs dampened retail sales and resulted in higher dealer inventory levels.

Net European sales for the first six months of 2014 were $92,731,000, a increase of $10,102,000 or 12.2% compared to $82,629,000 during the same period of 2013. The increase in 2014 was primarily due to the Kellands acquisition in the amount of $3,282,000 and improved sales in the UK. Also affecting sales favorably were changes in currency exchange rates. The European Division continued to be faced with challenging market conditions and both our governmental and agricultural markets were constrained by Europe's overall economic uncertainty.

Gross profit for the first six months of 2014 was $85,416,000 (22.6% of net sales) compared to $79,003,000 (23.5% of net sales) during the same period in 2013, an increase of $6,413,000. The increase in margin dollars was mainly due to the acquisitions of Specialized and Kellands in the amount of $5,799,000, and favorable performance in the Industrial Division. Negatively affecting both the gross margin and margin percent during the first half of 2014 were inefficiencies from lower absorption on reduced sales volumes in the Agricultural Division.

Selling, general and administrative expenses (“SG&A”) were $59,989,000 (15.9% of net sales) during the first six months of 2014 compared to $51,703,000 (15.4% of net sales) during the same period of 2013, an increase of $8,286,000. The increase in SG&A for the first six months of 2014 was primarily from the acquisitions of Specilaized $2,730,000 and Kellands, Fieldquip and Superior in the amount of $845,000. Also there were $1,708,000 of acquisition expenses and $1,015,000 of additional stock option expense related to the accelerated vesting options to retirement eligible recipients. The Company also had increased trades show and advertising expenses, recruiting and relocation expenses and increased costs related to IT projects.

Interest expense was $1,283,000 for the first six months of 2014 compared to $578,000 during the same period in 2013, a increase of $705,000. The increase in 2014 came from increased borrowings due to the acquisition of Specialized.

Other income (expense), net was $627,000 of income during the first six months of 2014 compared to $632,000 of income in the first six months of 2013. The income in 2014 was from the gain on the sale of the SMC facility partially offset by losses relating to foreign exchange rate changes. In 2013 the gain was mainly the result of foreign exchange rate changes.

Provision for income taxes was $8,434,000 (33.9%) in the first six months of 2014 compared to $8,702,000 (31.7%) during the same period in 2013. Due to the delay in signing the American Taxpayer Relief Act of 2012 which extended research and development tax credits, the Company was not able to include $350,000 of tax credits in its 2012 financial statements but instead recognized this tax benefit in the first quarter of 2013. The increased tax rate in 2014 reflects that Research and Development tax credits have not yet been approved by the U.S. federal government for 2014.

The Company's net income after tax was $16,433,000 or $1.34 per share on a diluted basis for the first six months of 2014 compared to $18,737,000 or $1.54 per share on a diluted basis for the first six months of 2013. The decrease of $2,304,000 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 preseason 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 June 30, 2014, the Company had working capital of $321,512,000 which represents an increase of $65,180,000 from working capital of $256,332,000 of December 31, 2013. The increase in working capital was primarily from the acquisitions of Specialized, Kellands and Fieldquip.

Capital expenditures were $4,319,000 for the first six months of 2014, compared to $7,195,000 during the first six months of 2013. 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 2013 or through the second quarter of 2014. The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares previously repurchased.

Net cash provided by (used in) financing activities was $186,910,000 and ($852,000) during the six month period ending June 30, 2014 and June 30, 2013, respectively. The Company had $188,000,000 borrowed from its revolving credit facility at June 30, 2014 versus $0 borrowed at June 30, 2013. This change was due to the acquisition of Specialized.

The Company had $31,478,000 in cash and cash equivalents held by its foreign subsidiaries as of June 30, 2014. The majority of these funds are at our UK and Canadian facilities and would not be available for use in the United States without incurring US federal and state tax consequences. The Company plans to use these funds for capital expenditures or acquisitions outside the United States.

Effective May 12, 2014, the Company amended its revolving credit facility and increased its line of credit from $100 million to $250 million to accommodate the acquisition of Specialized and meet the ongoing needs of the combined entities.

The Company maintains a revolving credit facility with certain lenders under its Amended and Restated Revolving Credit Agreement. The aggregate commitments from lenders under such revolving credit facility is $250,000,000 and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional $50,000,000. The revolving credit agreement requires us to maintain various financial covenants including a minimum EBIT to interest expense ratio, a maximum leverage ratio and a minimum asset coverage ratio. The agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on sale of properties and limitations on liens and capital expenditures. The revolving credit agreement also contains other customary covenants, representations and events of defaults. As of June 30, 2014, the Company was in compliance with the covenants under the revolving credit facility. The termination date of the revolving credit facility is May 12, 2019. As of June 30, 2014, $188,000,000 was outstanding under the revolving credit facility. On June 30, 2014, $722,000 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 $61,278,000 in available borrowings.

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 could 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 in the Company's 2013 10-K and Note 2 of these interim condensed consolidated financial statements.

Allowance for Doubtful Accounts

The Company evaluates its ability to collect 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 $2,785,000 at June 30, 2014 and $2,738,000 at December 31, 2013.

Sales Discounts

At June 30, 2014 the Company had $20,040,000 in reserves for sales discounts compared to $16,724,000 at December 31, 2013 on products shipped to our customers under various promotional programs. The increase was primarily due to seasonally additional discounts reserved on the Company's agricultural products during the pre-season, which runs from August to December of each year and orders are shipped through the second quarter of 2014. 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 $8,559,000 at June 30, 2014 and $8,596,000 at December 31, 2013 in reserve to cover obsolete and slow moving inventory. The decrease in reserve for obsolescence resulted from the Company's 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 $6,394,000 at June 30, 2014 and $4,994,000 at December 31, 2013. The increase was mainly from the acquisitions of Specialized in the amount of $1,097,000 and to a lessor extent increases in our European Division.

Product Liability

At June 30, 2014 the Company had accrued $332,000 in reserves for product liability cases compared to $259,000 at December 31, 2013. The Company accrues primarily on a case by case basis and adjusts the balance quarterly.

The S.I.R. (Self Insurance Retention) for all U.S. products is $100,000 per claim or less. The Company also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.’s or deductibles.

Goodwill

We test goodwill for impairment annually, at the reporting unit level, and whenever events or circumstances make it likely that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. 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 June 30, 2014, the Company had $73,594,000 of goodwill, which represents 11% of total assets. The increase was from the the acquisitions of Specialized, Kellands and Fieldquip in the amount of $ 41,403,000. The Company expects to finalize these amounts as soon as possible but no later than one year from the acquisition date.

The Company recognized no goodwill impairment in 2013. The Company recognized goodwill impairment at one of its French operations, Faucheux of $656,000 in 2012 and at two of its French operations, SMA and Rousseau of $1,898,000 in 2011. The primary reason for the goodwill impairment in 2012 and 2011 was the general economic downturn that continues to affect the Company's European operations. This caused the Company to revise its expectations about future revenue, which is a significant factor in the discounted cash flow analysis used to estimate the fair value of the Company's reporting units. During the 2013 impairment analysis review, we performed a sensitivity analysis for goodwill impairment with respect to each of our reporting units and determined that a hypothetical 15% decline in the fair value of each reporting unit as of December 31, 2013 would not result in an impairment of goodwill for any of the reporting units. During the 2012 impairment analysis review, it was noted that even though the Schwarze and Rivard reporting units' fair value was above carrying value, it was not materially different. On June 30, 2014, there was approximately $6.9 million and $12.3 million of goodwill related to the Schwarze and Rivard 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 and Rivard, reporting units' carrying value are 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; 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.

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 90% of its future net foreign currency collections over a period of six months. As of June 30, 2014, the Company had $2,462,000 outstanding in forward exchange contracts related to accounts receivable. A 15% fluctuation in exchange rates for these currencies would change the fair value of these contracts by approximately

$369,000. 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. Forward currency 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 $2,806,000 for the six month period ending June 30, 2014. 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 $2,797,000 for the six month period ended June 30, 2013. 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 second quarter of 2014 was a gain of $3,531,000. On June 30, 2014, the British pound closed at .5846 relative to 1.00 U.S. dollar, and the Euro closed at .7303 relative to 1.00 U.S. dollar. At December 31, 2013 the British pound closed at .6040 relative to 1.00 U.S. dollar and the Euro closed at .7275 relative to 1.00 U.S. dollar. By comparison, on June 30, 2013, the British pound closed at .6574 relative to 1.00 U.S. dollar, and the Euro closed at .7686 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 second quarter 2014 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1,880,000. 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.

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.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We may not be able to realize the potential or strategic benefits of the acquisitions we complete, or we may not successfully address problems encountered in connection with acquisitions.

Acquisitions are an important part of our growth strategy. We have completed a number of acquisitions over the past several years. We recently consummated three acquisitions in 2014, our acquisition of Fieldquip in Australia in April 2014 , our acquisition of Kellands in the U.K. also in April 2014, and our acquisition of Specialized Industries in the U.S. in May 2014. We expect to consider opportunities and make additional acquisitions in the future, but we may not find suitable acquisition targets or not be able to consummate desired acquisitions due to among other things, unfavorable credit markets or other risks, which could harm our operating results. Acquisitions can be difficult, time-consuming, and pose a number of risk, including:

• Potential negative impact on our earnings per share;
• Failure of acquired products to achieve projected sales;
• Problems in integrating the acquired products with our products;
• Potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased

headcount costs and other expenses associated with adding and supporting new products;

• Difficulties in retaining and integrating key employees;
• Failure to realize expected synergies or cost savings;
• Disruption of ongoing business operations, including diversion of management’s attention and uncertainty for employees and customers, particularly during the post-acquisition integration process; and
• Potential negative impact on our relationships with customers, distributors and vendors.

If we do not manage these risks, the acquisitions that we complete may have an adverse effect on our business, our results of operations or financial condition.

Increasingly stringent engine emission regulations could impact our ability to sell certain of our products into the market and appropriately price certain of our products, which could negatively affect our competitive position and financial results.

The EPA adopted increasingly stringent engine emission regulations, including Tier 4 emission requirements applicable to diesel engines in specified horsepower ranges that are used in some of our products. Beginning January 1, 2013, such requirements expanded to additional horsepower categories and, accordingly, apply to more of our products. Although we have developed plans to achieve substantial compliance with Tier 4 diesel engine emission requirements, these plans are subject to many variables including, among others, the ability of our suppliers to provide compliant and suitable engines on a timely basis or our ability to meet our production schedule. If we are unable to successfully execute such plans, our ability to sell our products into the market may be inhibited, which could adversely affect our competitive position and financial results. To the extent in which we are able to implement price increases to fully or partially offset higher engine costs as well as related research, development, engineering, and other expenses to design Tier 4 diesel engine compliant products and our competitors may implement different strategies with respect to compliance with Tier 4 diesel engine emission requirements, we may experience lower market demand for our products that may, ultimately, adversely affect our profit margins, net sales, and overall financial results. Additionally, as customers' buying patterns change to purchase our products in advance of price increases on compliant products, we have and may continue to experience abnormal fluctuation in sales and our financial results of any one period may not be representative of expected financial results in subsequent periods. If our competitors implement different strategies with respect to compliance with Tier 4 requirements that, either in the short term or over the long term, enable them to limit price increases, introduce product modifications that gain widespread market acceptance, or otherwise changing customer preferences and buying patterns in ways that we do not currently anticipate, we may experience lower market demand for our products that may, ultimately, adversely affect our net sales, profit margins, and overall financial results.