Alamo Group Inc: Form 10-Q for the period ended Jun 30, 2015

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 six months of 2015, the Company's net income was up approximately 3.9% when compared to the same period in 2014. This was primarily related to the acquisition of the Specialized business units and to a lesser extent the acquisitions of Kellands and Fieldquip. Similar to the first half of 2014, adverse weather conditions affected both our internal operations and markets along with soft market conditions in the Agricultural Division. Also negatively affecting both our sales and profits was the effect of the currency translation rates on our non-U.S. results. Alamo's Industrial Division saw a 4.4% decrease in sales versus 2014 excluding the acquisition of the Specialized business units. Agricultural sales excluding the acquisition of Fieldquip and Herder were down compared to the first six months of 2014 by 4.4%. European sales for the first six months of 2015 were down in U.S. dollars compared to the same period in 2014 but up in local currency by 7.6%. Consolidated operating income was essentially flat in the first six months of 2015 excluding the impact of the acquisitions. The Company's backlog was $162 million during the first six months of 2015, slightly up versus $161 million during the same period in 2014, which should benefit sales through the rest of the year. Excluding the exchange rate affect on our international operations, backlog increased by 2.6%. The increase in the backlog came from the Company's Industrial and Agricultural Divisions.

The Company believes that its markets for the remainder of 2015 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, changes in currency exchange rates, 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, 2015 vs. Three Months Ended June 30, 2014

Net sales for the second quarter of 2015 were $215,734,000, an increase of $7,983,000, or 3.8% compared to $207,751,000 for the second quarter of 2014. The increase was from the acquisition of the Specialized business units in May 2014 which contributed $34,173,000 of sales in 2015 compared to $18,976,000 in 2014. In the Industrial Division, sweepers, excavators, and snow removal products all had increased sales compared to the second quarter of 2014, however sales of vacuum trucks and mowing equipment were down due to soft market conditions in the non-governmental sector. Sales in the Agricultural Division were down slightly during the quarter due to softness in the agricultural market and low commodity prices. European sales were down 9.1% in U.S. dollars as currency translation rates negatively affected the sales of UK and European products.

Net Industrial sales increased during the second quarter by $13,045,000 or 12.4% to $118,521,000 for 2015 compared to $105,476,000 during the same period in 2014. The increase came from the acquisition of the Specialized business units which contributed $34,173,000 of sales in 2015 compared to $18,976,000 in 2014, as well as a slight improvement in sales of sweepers, excavators and snow removal equipment offset by declines in vacuum trucks and mowing equipment.

Net Agricultural sales were $52,981,000 in 2015 compared to $53,635,000 for the same period in 2014, a decrease of $654,000 or 1.2%. The acquisition of Herder contributed $775,000 in sales during the second quarter of 2015. Low commodity prices negatively affected farm income which limited farmers' ability to purchase new equipment.

Net European Sales for the second quarter of 2015 were $44,232,000, a decrease of $4,408,000 or 9.1% compared to $48,640,000 during the second quarter of 2014. The decrease was the result of changes in currency translation rates which had a negative impact during the quarter. Sales in local currency were up compared to the same time last year. Sales in France were down compared to the second quarter of 2014 as the French market remains weak.

Gross profit for the second quarter of 2015 was $50,665,000 (23.5% of net sales) compared to $47,286,000 (22.8% of net sales) during the same period in 2014, an increase of $3,379,000. The increase in margin dollars was due to the acquisitions of the Specialized business units in the amount of $2,816,000, favorable production efficiencies and increased sales of higher margin replacement parts. Negatively affecting both the gross margin and margin percent during the second quarter of 2015 was $775,000 in higher cost of goods sold related to the step-up in fair value of inventory in the Specialized business units.

Selling, general and administrative expenses (“SG&A”) were $34,230,000 (15.9% of net sales) during the second quarter of 2015 compared to $32,490,000 (15.6% of net sales) during the same period of 2014, an increase of $1,740,000. The increase in SG&A expenses in 2015 was from the acquisitions of the Specialized business units in the amount of $3,706,000. Included in the SG&A expenses for the Specialized business units were $782,000 in amortization expenses related to the valuation of the intangible assets.

Interest expense was $1,848,000 for the second quarter of 2015 compared to $1,044,000 during the same period in 2014, an increase of $804,000. The increase in 2015 came from increased borrowings due to the acquisition of the Specialized business units and and the repurchase of the shares of common stock from Capital Southwest.

Other income (expense), net was $488,000 of income for the second quarter of 2015 compared to $153,000 of income during the same period in 2014. The income in 2015 and 2014 were primarily the result of changes in exchange rates. The income in 2014 includes a gain on the sale of a manufacturing facility in the amount of $795,000.

Provision for income taxes was $5,406,000 (35.8%) in the second quarter of 2015 compared to $4,745,000 (34.0%) during the same period in 2014. The increased tax rate in 2015 reflects the acquisition of the Specialized business units which are located in jurisdictions subject to tax rates above the Company's average.

The Company’s net income after tax was $9,710,000 or $0.84 per share on a diluted basis for the second quarter of 2015 compared to $9,195,000 or $0.75 per share on a diluted basis for the second quarter of 2014. The increase of $515,000 resulted from the factors described above.

Six Months Ended June 30, 2015 vs. Six Months Ended June 30, 2014

Net sales for the first six months of 2015 were $423,532,000, an increase of $43,171,000 or 11.4% compared to $380,361,000 for the first six months of 2014. The increase was primarily from the Specialized business units and other acquisitions, which contributed $82,453,000 of sales in 2015 compared to $18,976,000 in 2014. In the Company's Industrial Division excavators, sweepers, and snow removal products were up in the first six months of 2015 compared to the first six months of 2014, however sales of mowing equipment and vacuum trucks were down due to adverse weather conditions and soft markets in non-governmental sector. Agricultural Division sales were down 2.9% for the first six months of 2015 due to a weak agricultural market compared to the same time in 2014. Sales in the European Division were down 6.5% in U.S. dollars as sales of UK and European products were negatively affected by currency translation rates.

Net Industrial sales increased during the first six months by $52,246,000 or 28.5% to $235,433,000 for 2015 compared to $183,187,000 during the same period in 2014. The increase came primarily from the acquisition of the Specialized business units which contributed $78,425,000 of sales in 2015 compared to $18,976,000 in 2014. Also, favorably affecting sales were increases from sweeper, excavator, and snow removal equipment product lines. Negatively affecting sales were lower mowing equipment and vacuum trucks.

Net Agricultural sales were $101,438,000 in 2015 compared to $104,443,000 for the same period in 2014, a decrease of $3,005,000 or 2.9%. The decrease in sales for the first six months of 2015 compared to the first six months of 2014 was from lower commodity prices and higher farm input costs that resulted in softer market conditions in the agricultural market. Also affecting this Division were the prolonged winter weather conditions during the first quarter of 2015. Sales from Herder which was acquired in March 2015, contributed $775,000 for the first six months of 2015.

Net European sales for the first six months of 2015 were $86,661,000, a decrease of $6,070,000 or 6.5% compared to $92,731,000 during the same period of 2014. The decrease in 2015 was primarily due to the negative affect on sales from currency translation rates. In local currency sales were up for the first six months of 2015 compared to the same time last year. The European Division continued to be faced with challenging market conditions particularly in France as agricultural markets were constrained by Europe's overall economic uncertainty.

Gross profit for the first six months of 2015 was $96,202,000 (22.7% of net sales) compared to $85,416,000 (22.5% of net sales) during the same period in 2014, an increase of $10,786,000. The increase in margin dollars was mainly due to the acquisitions of the Specialized business units, Kellands and Fieldquip in the amount of $13,625,000. Negatively affecting both the gross margin and margin percent during the first six months of 2015 was $2,530,000 in higher cost of goods sold related to the step-up in fair value of inventory in the Specialized business units.

Selling, general and administrative expenses (“SG&A”) were $67,639,000 (16.0% of net sales) during the first six months of 2015 compared to $59,989,000 (15.8% of net sales) during the same period of 2014, an increase of $7,650,000. The increase in SG&A for the first six months of 2015 was primarily from the acquisitions of the Specialized business units, Kellands and Fieldquip in the amount of $10,386,000. Included in the SG&A expenses for the Specialized business units were $1,563,000 in amortization expenses related to the valuation of the intangible assets.

Interest expense was $3,471,000 for the first six months of 2015 compared to $1,283,000 during the same period in 2014, a increase of $2,188,000. The increase in 2015 came from increased borrowings due to the acquisition of the Specialized units and to a lesser extent the repurchase of shares of common stock from Capital Southwest.

Other income (expense), net was $1,348,000 of income during the first six months of 2015 compared to $627,000 of income in the first six months of 2014. The income in 2015 and 2014 were primarily the result of changes in exchange rates. The income in 2014 includes a gain on the sale of a manufacturing facility in the amount of $795,000.

Provision for income taxes was $9,464,000 (35.7%) in the first six months of 2015 compared to $8,434,000 (33.9%) during the same period in 2014. The increased tax rate in the first six months of 2015 reflects the acquisition of the Specialized business units which are located in jurisdictions subject to tax rates above the Company's average.

The Company's net income after tax was $17,069,000 or $1.49 per share on a diluted basis for the first six months of 2015 compared to $16,433,000 or $1.34 per share on a diluted basis for the first six months of 2014. The decrease of $636,000 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, primarily in the Agricultural Division, help level the Company’s production during the off season.

As of June 30, 2015, the Company had working capital of $319,398,000 which represents an increase of $15,463,000 from working capital of $303,935,000 of December 31, 2014. The increase in working capital was primarily from seasonally higher levels of accounts receivable and inventory.

Herder Implementos e Maquinas Agricolas Ltda. ("Herder") was acquired on March 9, 2015 on a debt free basis and subject to certain post-closing adjustments with total consideration of approximately $4.0 million subject to adjustments. This acquisition is being accounted for in accordance with ASC Topic 805. Accordingly, the total purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed based on their estimated fair values as of the completion of the acquisition. These allocations reflect various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are finalized. The primary reason for the Herder acquisition was to establish a presence in South America which is a major global agricultural market, therefore Herder will be reported as part of the Company's Agricultural Division. The revenue and earnings of Herder from the date of acquisition to June 30, 2015 were not material to the Company’s consolidated results of operations. In addition, assuming the acquisition had occurred as of January 1, 2014, the results of operations of Herder would not have had a material pro forma effect on the Company’s revenues, earnings or earnings per share for the periods ended June 30, 2015 and 2014.

Capital expenditures were $5,101,000 for the first six months of 2015, compared to $4,319,000 during the first six months of 2014. The Company expects to fund future 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 2014 or through the second quarter of 2015 pursuant to this authorization. The authorization to repurchase up to 1,000,000 shares was revoked by the Board of Directors on August 6, 2015.

Net cash provided by financing activities was $13,151,000 and $186,910,000 during the six month period ending June 30, 2015 and June 30, 2014, respectively. The Company had $203,000,000 borrowed from its revolving credit facility at June 30, 2015 compared to $188,000,000 borrowings at June 30, 2014. This change was due to the repurchase of the shares of common stock of Capital Southwest in September of 2014.

The Company had $31,493,000 in cash and cash equivalents held by its foreign subsidiaries as of June 30, 2015. The majority of these funds are at our UK and Canadian subsidiaries 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 the Specialized business units 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 earnings before interest and tax 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. The termination date of the revolving credit facility is May 12, 2019. As of June 30, 2015, $203,000,000 was outstanding under the revolving credit facility. On June 30, 2015, $1,763,000 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 $45,237,000 in available borrowings. As of June 30, 2015, the Company was in compliance with the covenants under the revolving credit facility.

Management believes the bank credit facility 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 2014 10-K and Note 2 of these interim condensed consolidated financial statements.

Business Combinations

In the last ten years, we have acquired 14 businesses. The purchase prices of acquired businesses have been allocated to the tangible and intangible assets acquired and liabilities assumed, based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill.

Most of the businesses we have acquired did not have a significant amount of intangible assets. With the 2014 acquisition of the Specialized business units we acquired a significant amount of intangible assets. We identified the following intangible assets in the acquisition: trade name and trademarks, customer and dealer relationships, and patents, technology and drawings. In valuing certain acquired intangible assets, we used an excess earnings and relief from royalty methodologies, which are forms of discounted cash flow analysis. Tangible assets are typically valued using a replacement or reproduction cost approach, considering factors such as current prices of the same or similar equipment, the age of the equipment, and economic obsolescence. In making other assumptions on valuation and useful lives, we considered the unique nature of the acquisition and we utilized a third-party valuation firm to assist us in the valuation of the acquired intangibles and the resulting allocation of purchase price for the acquisition. As of June 30, 2015, we had $49,510,000 in intangible assets (net of accumulated amortization) and $44,195,000 in goodwill directly attributable to the Specialized acquisition.

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 allowance for doubtful accounts was $3,321,000 at June 30, 2015 and $2,853,000 at December 31, 2014. The increase came from additional reserves required in the Company's U.S. operations.

Sales Discounts

At June 30, 2015 the Company had $18,486,000 in reserves for sales discounts compared to $15,999,000 at December 31, 2014 on products shipped to our customers under various promotional programs. The increase was primarily due to 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 2015. 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 $7,404,000 at June 30, 2015 and $7,601,000 at December 31, 2014 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 policy regarding obsolete and slow moving inventory 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 $5,255,000 at June 30, 2015 and $5,913,000 at December 31, 2014. The decrease was mainly from the Company's Industrial Division and to a lessor extent from its European Division.

Product Liability

At June 30, 2015 the Company had accrued $311,000 in reserves for product liability cases compared to $240,000 at December 31, 2014. 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, Brazil and Australia which contain substantially lower S.I.R.’s or deductibles.

Goodwill and Intangible Assets

We test goodwill and intangible assets 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 and intangible assets impairment test as of December 31 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 and intangible assets 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 and intangible assets. If the fair value of the reporting unit exceeds its carrying value, the goodwill and intangible assets are 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 and intangible assets are 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 and intangible assets are 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, 2015, the Company had $77,389,000 of goodwill, which represents 12% of total assets and $55,010,00 of intangible assets which represents 8% of total assets.

The Company recognized no goodwill or intangible asset impairment in 2015, 2014 or 2013. During the 2014 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, 2014 would not result in an impairment of goodwill for any of the reporting units.

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.

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; a strong U.S. dollar; 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; the Company's ability to successfully complete acquisitions and operate acquired businesses or assets; 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, 2015, the Company had $2,345,000 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 $352,000. 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 translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the end of the year. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive income within the statement of stockholders’ equity. The total foreign currency translation adjustment for the current quarter increased stockholders’ equity by $5,830,000.

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 $2,577,000 for the six month period ending June 30, 2015. 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 $2,806,000 for the six month period ended June 30, 2014. 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.

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 2015 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1,015,000. 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.