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UNITED STATES
FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
quarterly period ended September 30, 2006 OR [ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
transition period from ____ to ____ Commission
file number
0-21220 ALAMO GROUP INC. DELAWARE 74-1621248 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1502 East Walnut, Seguin,
Texas 78155 830-379-1480
Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by
section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Indicate by check mark
whether registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of "accelerated filer and large
accelerated filer" in Exchange Act Rule 12b-2. Large accelerated filer [
] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes [ ] No [X]
At NOVEMBER 1, 2006, 9,761,509 shares of
common stock, $.10 par value, of the Registrant were outstanding.
Alamo Group Inc. and Subsidiaries INDEX
PAGE PART I. FINANCIAL
INFORMATION Item 1. Interim Condensed
Consolidated Financial Statements (Unaudited) September 30, 2006
and December 31, 2005 3 Three months and
Nine months ended September 30, 2006 4 Nine months ended
September 30, 2006 and September 30, 2005 5
Notes to Interim
Condensed Consolidated Financial Statements 6 Item 2. and Results of
Operations 14 Item 3. 21 Item 4. 22 PART II. 23 Item 1. None Item 2. None Item 3. None Item 4. None Item 5. Item 6. 2
Alamo Group Inc. and Subsidiaries (in thousands, except share amounts) September 30, December 31,
ASSETS Current assets: Cash and cash equivalents $ 7,290 $ 7,073 Accounts receivable, net 97,864 85,368 Inventories
122,116 77,013 Deferred income taxes
5,513 2,296 Prepaid expenses
3,624 2,331 Total current assets
236,407 174,081 Property, plant and equipment
111,709 95,318 Less: Accumulated depreciation
(54,530) (52,790) 57,179 42,528 Goodwill 40,404 26,416 Intangible assets 4,211 689 Assets held for sale 722 721 Other assets 1,889 1,781 Total assets
$ 340,812 $ 246,216 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable
42,148 26,518 Income taxes payable (596) 807 Accrued liabilities
24,816 18,608 Current maturities of long-term debt
2,832 2,997 Total current liabilities
69,200 48,930 Long-term debt, net of current maturities 83,622 30,912 Deferred pension liability 4,755 - Other long-term liabilities 2,112 - Deferred income taxes 3,133 2,898 Stockholders' equity: Common
stock, $.10 par value, 20,000,000 shares authorized; 980 979 Additional paid-in capital
52,269 51,736 Treasury stock, at cost; 42,600 shares at September 30, 2006
(426) (426) Retained earnings
112,852 104,261 Accumulated
other comprehensive income 12,315 6,926 Total
stockholders' equity 177,990 163,476 Total liabilities and stockholders' equity
$ 340,812 $ 246,216
See accompanying notes. 3
Alamo Group Inc. and Subsidiaries
Three Months Ended
Nine Months Ended (in thousands, except per share amounts)
2006
2005 2006 2005 Net sales: North American Industrial $ 58,637 $ 32,782 $ 172,241 $ 97,723 Agricultural 25,780 33,671 82,631 98,134 European 30,321 29,355 89,702 89,624 Total net
sales 114,738 95,808 344,574 285,481 Cost of
sales 91,484 74,222 274,464 223,124 Gross
profit 23,254 21,586 70,110 62,357 Selling,
general and administrative expense 17,415 14,626 50,247 44,127 Income
from operations 5,839 6,960 19,863 18,230 Interest
expense (1,812) (840) (5,010) (2,332) Interest income 188 177 545 600 Other
income (expense), net 66 38 (102) 137 Income
before income taxes 4,281 6,335 15,296 16,635 Provision
for income taxes 1,215 1,951 4,949 5,468 Net
income $ 3,066 $ 4,384 $ 10,347 $ 11,167 Net income
per common share: Basic $ 0.31 $ 0.45 $ 1.06 $ 1.15 Diluted $ 0.31 $ 0.44 $ 1.04 $ 1.13 Average
common shares Basic 9,760 9,747 9,754 9,745 Diluted 9,930 9,892 9,922 9,910 Dividends
declared $ 0.06 $ 0.06 $ 0.18 $ 0.18 See accompanying notes. 4
Alamo Group Inc. and Subsidiaries Nine Months Ended (in thousands, except per share amounts) 2006 2005 Operating
Activities Net income $ 10,347 $ 11,167 Adjustment
to reconcile net income to net cash Provision
for doubtful accounts 910 522 Depreciation 6,781 4,707 Amortization
95 170 Provision
for deferred income tax benefit 114 (122) Realized
(gain) loss on sale of property - - Gain
on sale of property, plant and equipment (260) (109) Changes
in operating assets and liabilities: Accounts
receivable (3,459) (7,335) Inventories (16,023) (8,919) Prepaid
expenses and other assets 1,227 43 Trade
accounts payable and accrued liabilities 7,591 5,354 Income
taxes payable (1,512) 456 Other
long-term liabilities (152) - Net cash
provided by operating activities 5,659 5,934 Investing
Activities Acquisitions,
net of cash acquired (48,716) (5,742) Purchase
of property, plant and equipment (10,159) (7,080) Proceeds
from sale of property, plant and equipment 976 190 Proceeds
from long-term investment 352 - Net cash used
by investing activities (57,547) (12,632) Financing
Activities Net
change in bank revolving credit facility 53,000 22,000 Principal
payments on long-term debt and capital leases (868) (1,376) Dividends
paid (1,756) (1,754) Proceeds
from sale of common stock 541 125 Net cash provided
by financing activities 50,917 18,995 Effect of
exchange rate changes on cash 1,188 (421) Net
change in cash and cash equivalents 217 11,876 Cash and
cash equivalents at beginning of the period 7,073 2,580 Cash and
cash equivalents at end of the period $ 7,290 $ 14,456 Cash paid
during the period for: Interest $ 4,676 $ 2,232 Income taxes
$ 3,998 $ 5,579 See accompanying notes. 5 Alamo Group Inc. and Subsidiaries 1.
Basis of Financial Statement Presentation The accompanying unaudited interim
condensed consolidated financial statements of Alamo Group Inc. and its subsidiaries
(the "Company") have been prepared in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they
do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. The balance sheet at December 31, 2005, has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2005. 2.
Acquisitions On February 3, 2006, the
Company announced that it had purchased substantially all of the assets and
assumed certain liabilities of the Gradall excavator business of JLG
Industries, Inc. (NYSE:JLG). The purchase price was $36.9 million, according
to the terms of the Asset Purchase Agreement. The purchase price has
preliminarily been allocated to the assets and liabilities acquired and
includes trademarks of $3.6 million and goodwill of approximately $6.5 million.
This acquisition enhances our Industrial market coverage in that over half of
its sales are to governmental entities or related contractors. Gradall is a
leading manufacturer of both wheeled and crawler telescopic excavators in North
America. Gradall's annual sales were approximately $76.0 million for its
fiscal year ending July 31, 2005 and is located in New Philadelphia, Ohio. The
assets include a 430,000 square foot facility, machinery, tooling and
intellectual property including the Gradall® name. The
Company also added 405 employees, of which 275 are represented by the
International Association of Machinists & Aerospace Workers union. The
results of the operations of Gradall have been included in the Company's
Consolidated Statement of Income since February 3, 2006. The unaudited pro forma
statement of income of the Company assuming the transaction occurred at January
1, 2005 is as follows: Three Months Ended
Nine Months Ended 2006 2005 2006 2005 Net Sales $ 114,738 $ 120,760 $ 344,574 $ 342,191 Net Income $ 3,066 $ 4,884 $ 10,347 $ 12,303 Diluted Earnings per
Share $ 0.31 $ 0.49 $ 1.04 $ 1.24 The Company also announced
on February 3, 2006 that it had entered into an Amended and Restated Revolving
Credit Agreement between the Company and its lenders, Bank of America, N.A., JP
Morgan Chase Bank and Guaranty Bank to expand its credit facility from $70.0
million to $125.0 million. The Company has the ability to increase its
commitment by $25.0 million. In addition, the asset coverage ratio was reduced
and interest margins reduced. The final maturity remains the same at August
25, 2009. As of September 30, 2006 the Company had borrowed $80.0 million
under its credit facility and had $32.7 million available for future
borrowings. On May 24, 2006, the
Company announced it had completed the acquisition of the vacuum truck and
sweeper lines ("VacAll") from Clean Earth Environmental Group, LLC and Clean
Earth Kentucky, LLC ("Clean Earth"). The purchase price of $8.9 million has
preliminarily been allocated to the assets and liabilities acquired and includes
approximately $3.7 million of goodwill. This acquisition will add diversity to
our existing offerings in the Industrial Division. Clean Earth's 2005 sales of
these products were approximately $15.8 million and the product line has been
moved into the Company's Gradall facility in New Philadelphia, Ohio and to a
lesser extent its Schwarze facility in Huntsville, Alabama. The results of
operations of VacAll have been included in the Company's Consolidated Statement
of Income since May 24, 2006. 6 On July 14, 2006, the Company
acquired Nite-Hawk Sweepers, LLC, a manufacturer of truck mounted sweeping
equipment primarily for the contract sweeping market. The purchase price of
$3.1 million has preliminarily been allocated to the assets and liabilities acquired and
includes goodwill of approximately $2.7 million. This product expands the
Company's direct sales presence and compliments the Schwarze sweeper line. The
results of operations of Nite-Hawk have been included in the Company's
Consolidated Statement of Income since July 14, 2006. 3.
Accounts Receivable Accounts Receivable is shown net
of the allowance for doubtful accounts of $2,020,000 and $2,064,000 at
September 30, 2006 and December 31, 2005, respectively. 4.
Inventories Inventories valued at LIFO cost
represented 60% and 46% of total inventory at September 30, 2006 and
December 31, 2005, respectively. The excess of current costs over LIFO valued
inventories was $7,912,000 at September 30, 2006 and December
31, 2005. Inventory obsolescence reserves were $6,538,000
at September 30, 2006 and $5,472,000 at December 31, 2005. The increase
in obsolescence reserve was primarily due to currency exchange rate
fluctuations. Net inventories consist of the following: (in thousands) September 30, December 31, Finished
goods $ 102,318 $ 63,611 Work in
process 11,569 6,577 Raw
materials 8,229 6,825 $ 122,116 $ 77,013 An actual valuation of inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and costs at
that time. Accordingly, interim LIFO must necessarily be based to some extent
on management's estimates. 5. Common Stock and Dividends Dividends declared and paid on a per share basis were
as follows: Three Months Ended Nine Months Ended 2006 2005 2006 2005 Dividends declared
$ 0.06 $ 0.06 $ 0.18 $ 0.18 Dividends paid 0.06 0.06 0.18 0.18 6. Stock-Based Compensation The Company has granted
options to purchase its common stock to employees and directors of the Company
and its affiliates under three stock option plans at no less than the fair
market value of the underlying stock on the date of grant. These options are
granted for a term not exceeding ten years and are forfeited in the event the
employee or director terminates, other than retirement, his or her employment
or relationship with the Company or one of its affiliates. These options
generally vest over five years. All option plans contain anti-dilutive
provisions that permit an adjustment of the number of shares of the Company's
common stock represented by each option for any change in capitalization such
as stock splits. 7 The Company adopted the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123(R), Share-Based Payment ("Statement 123(R)"), on January 1, 2006, using the
modified-prospective-transition method. The fair value of the options is
estimated using a Black-Scholes option-pricing model and amortized to expense
over the options' vesting period. Prior to adoption of Statement 123(R), the
Company accounted for share based payments under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related Interpretations, as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"). The Company did not recognize employee compensation cost
related to its stock option grants in its Consolidated Statement of Operations
prior to adoption of Statement 123(R), as all options granted had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Under the modified-prospective-transition method, compensation cost
recognized beginning in 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of Statement
123(R). Results for prior periods have not been restated. As a result of adopting
Statement 123(R), the Company's income before income taxes and net income for
the nine months ended September 30, 2006, was $409,000 and $266,000 lower,
respectively, than if the Company had continued to account for share-based
compensation under APB 25. Prior to the adoption of
Statement 123(R), the Company presented tax benefits from deductions resulting
from the exercise of stock options as operating cash flows in the Statement of
Cash Flows. Statement 123(R) requires the cash flows resulting from tax deductions
in excess of the compensation cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. The following table
illustrates the effect on net income and earnings per share for the three
months and nine months ended September 30, 2006 and 2005 as if the Company had
applied the fair value recognition provisions of Statement 123 to options
granted under the Company's stock option plans in all periods presented. For
purposes of this pro forma disclosure, the value of the options is estimated
using a Black-Scholes option-pricing model and amortized to expense over the
options' vesting periods. Three Months Ended September 30, (In thousands, except per
share amounts) 2006 2005 2006 2005 Net income as
reported $ 3,066 $ 4,384 $ 10,347 $ 11,167 Fair Value of Compensation
cost (tax affected) - (64) - (192) Pro forma Net Income $ 3,066 $ 4,320 $ 10,347 $ 10,975 Basic Earnings per
share (basic) As reported $ 0.31 $ 0.45 $ 1.06 $ 1.15 Fair Value of
Compensation Cost - (0.01) - (0.02) Pro forma earnings
per share (basic) $ 0.31 $ 0.44 $ 1.06 $ 1.13 Basic Earnings per
share (diluted) As reported $ 0.31 $ 0.44 $ 1.04 $ 1.13 Fair Value of
Compensation Cost - (0.01) - (0.02) Pro forma earnings
per share (diluted) $ 0.31 $ 0.43 $ 1.04 $ 1.11 8 The Company calculated
the fair value for these options using a Black-Scholes option pricing model
with the following weighted average assumptions for 2006 and 2005: September 30, 2006 2005 Risk-free interest
rate 6.0% 4.5% Dividend Yield 1.0 - 3.8% 1.0 - 3.8% Volatility Factors 24 - 68% 24 - 68% *Weighted Average
Expected Life 5.0 years 5.0 years Incentive Options On
April 28, 1994, the stockholders approved the 1994 Incentive Stock Option Plan
("1994 ISO Plan") for key employees. Each option becomes vested and
exercisable for up to 20% of the total optioned shares each year after grant.
Under the terms of this plan, the exercise price of the shares subject to each
option granted would not be less than the fair market value of the common stock
at the date the option is granted. On August 31, 1999, the stockholders of the
Company approved amending the 1994 Amended and Restated ISO Plan. During the year
ended December 31, 2004, options to purchase 23,000 shares had been granted.
On February 12, 2003, the Board of Directors
approved an administrative amendment to the 1994 ISO Plan. The amendment
eliminates the mandatory minimum annual purchase requirement and eliminates the
one month window to purchase vested options for any new option grants after
February 12, 2003. There are 123,400 shares outstanding under this option
plan. No further option grants can be made under this plan. On May 3, 2005, the stockholders of the Company
approved the 2005 ISO Plan and the Company reserved 500,000 shares of common
stock for these options. During the year ended December 31, 2005, options to
purchase 57,000 shares had been granted under this plan. Each option becomes
vested and exercisable for up to 20% of the total optioned shares one year
following the grant of the option and for an additional 20% of the total
optioned shares after each succeeding year until the option is fully
exercisable at the end of the fifth year. Following is a summary of activity in the
Incentive Stock Option Plans for the period indicated: For
nine months ending September 30, 2006 2006 Shares Exercise Options outstanding
at beginning of year 188,750 Granted 31,000 $22.39 Exercised
(5,350) $9.30 Cancelled
(3,000) $17.85 Options
outstanding at September 30, 2006 211,400 $15.63 Options
exercisable at September 30, 2006 99,200 $12.15 Options
available for rant at September 30, 2006 412,000 *Weighted
Averages 9 Options
outstanding and exercisable at September 30, 2006 were as follows: Qualified
Stock Options Options Outstanding Options Exercisable Shares Remaining Exercise
Shares Exercise Range
of Exercise Price 98,400 5.17 $ 10.70 75,600
$ 10.28 $14.38 -
$22.39 113,000 8.94 $ 19.92 23,600 $ 18.16 Total
211,400 99,200 *Weighted
Averages Non-qualified
Options On July 7, 1999, the Company granted options to
purchase 200,000 shares of the Company's Common Stock under the 1999
Non-Qualified Stock Option Plan to Mr. Robinson, CEO and President at an
exercise price of $8.9375 per share, being the closing price of the Company's
Common Stock on the grant date. Each option becomes vested and exercisable for
up to 20% of the total optioned shares one year following the grant of the
option and for an additional 20% of the total optioned shares after each
succeeding year. During 2005, 2004 and 2003, no shares were exercised. On May 3, 2001, the stockholders of the Company
approved the First Amended and Restated 1999 Non-Qualified Stock Option Plan
("FAR 1999 NQSO Plan") to add non-employee directors as eligible persons to
receive grants of stock options. The Company then granted options to purchase
5,000 shares of the Company's Common Stock to each Messrs. Goldress, Morris,
Skaggs, and Thomas, at an exercise price of $13.96 per share, being the closing
price of the Company's Common Stock on the grant date. Each option becomes
vested and exercisable for up to 20% of the total optioned shares one year
following the grant of the option and for an additional 20% of the total
optioned shares after each succeeding year until the option is fully
exercisable. In 2006, 5,000 shares have been exercised. During 2002 and 2005,
500 shares and 1,000 shares were exercised. No shares were exercised in 2003
or 2004. On May 12, 2003 the Company granted an
additional option under the FAR 1999 NQSO Plan to purchase 5,000 shares of the
Company's Common Stock to each Messrs. Goldress, Morris, Skaggs and Thomas, and
50,000 shares to Mr. Robinson at an exercise price of $12.10 per share, being
the closing price of the Company's Common Stock on the grant date. Each
option becomes vested and exercisable for up to 20% of the total optioned
shares one year following the grant of the option and for an additional 20% of
the total optioned shares after each succeeding year until the option is fully
exercisable. In 2006, 1,000 shares have been exercised. No shares were
exercised in 2004 and 2005. On May 4, 2005 the Company granted an additional
option under the FAR 1999 NQSO Plan to purchase 5,000 shares of the Company's
Common Stock to each Messrs. Goldress, Morris, Skaggs and Thomas, at an
exercise price of $19.79 per share, being the closing price of the Company's
Common Stock on the grant date. Each option becomes vested and exercisable
for up to 20% of the total optioned shares one year following the grant of the
option and for an additional 20% of the total optioned shares after each
succeeding year until the option is fully exercisable. Currently no shares
have been exercised. On August 8, 2006 the Company granted an option
under the FAR 1999 NQSO Plan to purchase 2,500 shares of the Company's Common
Stock to Mr. Grzelak at an exercise price of $25.02 per share, being the
closing price of the Company's Common Stock on the grant Date. The option
becomes vested and exercisable for up to 20% of the total optioned shares one
year following the grant of the option and for an additional 20% of the total
optioned shares after each succeeding year until the option is fully
exercisable. 10 Following is a summary of activity in the Non-Qualified
Stock Option Plans for the period indicated: For
nine months ending September 30, 2006 2006 Shares Exercise Options
outstanding at beginning of year 308,500 Granted 2,500 $25.02 Exercised
(6,000) $13.65 Cancelled
- Options
outstanding at September 30, 2006 305,000 $10.72 Options
exercisable at September 30, 2006 258,500 $ 9.87 Options
available for grant at September 30, 2006 87,500 *Weighted
Averages Options outstanding and exercisable at September
30, 2006 were as follows: Non-Qualified
Stock Options Options Outstanding Options Exercisable Shares Remaining Exercise
Shares Exercise Range
of Exercise Price $8.9375 -
$12.10 269,000 4.03 $ 9.75 241,000 $ 9.48 $13.96 - $25.02
36,000 7.57 $17.97 17,500 $15.29 Total
305,000 258,500 *Weighted Averages 7. Earnings Per Share The
following table sets forth the reconciliation from basic to diluted average
common shares and the calculations of net income per common share. Net income
for basic and diluted calculations do not differ. Three Months Ended
Nine Months Ended 2006
2005 2006
2005 Net Income $ 3,066 $ 4,384 $ 10,347 $ 11,167
Average Common
Shares:
BASIC
(weighted-average outstanding shares) 9,760 9,747 9,754 9,745 Dilutive
potential common shares from stock 170 145 168 165 Diluted
(weighted-average outstanding shares) 9,930 9,892 9,922 9,910 Basic earnings per
share $ 0.31 $ 0.45 $ 1.06 $ 1.15 Diluted earnings per
share $ 0.31 $ 0.44 $ 1.04 $ 1.13 11 8. Segment Reporting At September 30, 2006 the following
unaudited financial information is segmented: Three Months Ended Nine Months Ended (in
thousands) 2006
2005 2006 2005 Net
Revenue Industrial $ 58,637 $ 32,782 $ 172,241 $ 97,723 Agricultural 25,780 33,671 82,631 98,134 European 30,321 29,355 89,702 89,624 Consolidated $ 114,738 $ 95,808 $ 344,574 $ 285,481 Income
From Operations Industrial $ 3,740 $ 2,635 $ 14,729 $ 7,104 Agricultural (933) 965 (2,260) 2,881 European 3,032 3,360 7,394 8,245 Consolidated $ 5,839 $ 6,960 $ 19,863 $ 18,230 Goodwill Industrial $ 25,184 $ 12,120 $ 25,184 $ 12,120 Agricultural 5,379 5,227 5,379 5,227 European 9,841 9,280 9,841 9,280 Consolidated $ 40,404 $ 26,626 $ 40,404 $ 26,626 Total
Identifiable Assets Industrial $ 158,749 $ 75,470 $ 158,749 $ 75,470 Agricultural 80,545 92,420 80,545 92,420 European 101,518 92,526 101,518 92,526 Consolidated $ 340,812 $ 260,416 $ 340,812 $ 260,416 9. Accounting Standards and Disclosures In June 2006, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109," ("FIN 48") FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, as well as
accounting in interim periods, disclosure and transition. The Company is
required to adopt the provisions of FIN 48 during the first fiscal year
beginning after December 15, 2006. The Company is currently evaluating the
impact of FIN 48 on its consolidated results of operations and financial
position. Off-Balance Sheet Arrangements The Company does not have any
obligation under any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with the Company is party, that has or is
reasonably likely to have a material effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
10. Comprehensive Income
During the third quarter of 2006
and 2005, Comprehensive Income amounted to $3,432,000 and $4,329,000,
respectively.
12
The components of Comprehensive
Income, net of related tax are as follows: Three Months Ended Nine Months Ended (in
thousands) 2006 2005 2006 2005 Net Income $ 3,066 $ 4,384 $ 10,347 $ 11,167 Foreign currency translation adjustment
366 (55) 5,389 (5,168) Comprehensive Income $ 3,432 $ 4,329 $ 15,736 $ 5,999 The components of Accumulated Other
Comprehensive Income as shown on the Balance Sheet are solely comprised of
foreign currency translation adjustments of $12,315,000 and $6,926,000 at
September 30, 2006 and December 31, 2005, respectively:
September 30,
December 31, (in
thousands) 2006 2005 Foreign currency translation $ 12,315 $ 6,926 Accumulated other comprehensive income $ 12,315 $ 6,926 11. Contingent Matters The Company is subject
to various unresolved legal actions that arise in the ordinary course of its
business. The most prevalent of such actions relates to product liability,
which is generally covered by insurance. While amounts claimed might be
substantial and the ultimate liability with respect to such litigation cannot
be determined at this time, the Company believes that the ultimate outcome of
these matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations. The Company is subject to numerous environmental
laws and regulations concerning air emissions, discharges into waterways and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. The Company's policy is to comply with all applicable
environmental, health and safety laws and regulations, and the Company believes
it is currently in material compliance with all such applicable laws and
regulations. These laws and regulations are constantly changing, and it is
impossible to predict with accuracy the affect that changes to such laws and
regulations may have on the Company in the future. Like other industrial
concerns, the Company's manufacturing operations entail the risk of
noncompliance, and there can be no assurance that the Company will not incur
material costs or other liabilities as a result thereof. The Company knows that its Indianola, Iowa
property is contaminated with chromium which most likely resulted from chrome
plating operations which were discontinued several years before the Company
purchased the property. Chlorinated volatile organic compounds have also been
detected in water samples on the property, though the source is unknown at this
time. The Company has been voluntarily working with an environmental
consultant and the state of Iowa with respect to these issues and believes it
has completed its remediation program in June 2006. The work was accomplished
within the Company's environmental liability reserve balance. We have
requested a "no further action" classification from the state, The State of
Iowa has asked for some additional testing information which the Company will
provide. The Company also preliminarily established an
environmental reserve in the amount of $1,939,000 related to the acquisition of
Gradall's facility in Ohio. Three specific remediation projects that were
identified prior to the acquisition are in process and estimated to be
$400,000. The balance of $1,539,000 is mainly for potential ground water
contamination/remediation that was identified before the acquisition and
believed to have been generated by a third party company located near the
Gradall facility. This situation, along with a potential asbestos issue, is in
the process of being evaluated.
13 The Company is subject
to various other federal, state, and local laws affecting its business, as well
as a variety of regulations relating to such matters as working conditions,
equal employment opportunities and product safety. A variety of state laws
regulate the Company's contractual relationships with its dealers, some of
which impose restrictive standards on the relationship between the Company and
its dealers, including events of default, grounds for termination, non-renewal
of dealer contracts and equipment repurchase requirements. The Company
believes it is currently in material compliance with all such applicable laws
and regulations. 12. Restructuring Cost On December 5, 2005, the
Company announced that as a part of its ongoing effort to reduce costs and
improve efficiencies, it was closing its Holton, Kansas facility which produced
agricultural mowing equipment and relocating this production to its Gibson
City, Illinois plant. The closure was completed in the second quarter of 2006. The Company expensed $489,000
for restructuring costs in the fourth quarter of 2005. This amount is
comprised of severance and performance bonuses. As of September 30, 2006, the
balance in the reserve for restructuring costs was zero. 13. Pension Benefits On February 3, 2006, the Company
assumed the Gradall Company Employees' Retirement Plan and the Gradall
Company Hourly Pension Plan from the Gradall acquisition. An evaluation
was prepared of the accumulated benefit obligations (ABO) as of February 4,
2006 and the results are presented in the following table: Salaried Hourly Totals Accumulated
benefit obligation (ABO) $13,538,000 $ 8,184,000 $ 21,722,000 Plan
assets 9,805,000 7,162,000 16,967,000 Unfunded
ABO at February 4, 2006 $ 3,733,000 $ 1,022,000 $ 4,755,000
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations The following tables set forth, for the periods indicated,
certain financial percentages: Three Months Ended Nine Months Ended (Sales
Data In Percentages) 2006 2005 2006 2005 North American Industrial
51.1 % 34.2 % 50.0 % 34.2 % Agricultural
22.5 % 35.1 % 24.0 % 34.4 % European 26.4 % 30.7 % 26.0 % 31.4 % Total sales, net 100.0 % 100.0 % 100.0 % 100.0 % Three Months Ended Nine Months Ended 2006 2005 2006 2005 Gross margin % Income from operations % Income before income taxes
% Net income %
14 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 nine months of 2006 the Company
experienced mixed results. We achieved improvements in our Industrial segment
which we believe will continue for the rest of 2006. Weakness in our North
American Agricultural Division, which began during the third quarter of 2005, has
continued to affect both sales and earnings. Our European Division has held
steady despite soft market conditions. While our outlook remains positive, we are
concerned that our markets could be negatively affected by a variety of factors
such as a downturn in the overall economy, inflation, particularly with raw
materials such as steel; increased levels of government regulations both in the
U.S. and other countries in which we operate; changes in farm incomes due to
commodity prices or governmental aid programs; adverse situations that could
affect our customers such as epidemics like avian flu, weather conditions such
as droughts and floods and higher fuel costs which affect operating expenses;
and, budget constraints or revenue shortfalls in governmental entities to which
the Company sells its products. Results of Operations Three Months Ended September 30, 2006 vs. Three Months Ended
September 30, 2005 Net sales for the third quarter of
2006 were $114,738,000, an increase of $18,930,000 or 19.8% compared to $95,808,000 for the third
quarter of 2005. The increase was primarily
attributable to the acquisitions of Gradall Industries, Inc. ("Gradall") and
VacAll in the amount of $21,064,000 and Nite-Hawk Sweepers ("Nite-Hawk"), Inc.
in the amount of $1,328,000, improved markets in the sweeper division and
increased sales of multiple unit orders from states in the Industrial Division.
The Company continued to experience significant weakness in its Agricultural
markets and to a lesser extent in European markets. Net North American Industrial sales increased during the third
quarter by $25,855,000 or 78.9% to $58,637,000 for 2006 compared to $32,782,000 during the same
period in 2005. The majority of the increase came from the acquisitions of
Gradall and VacAll ($21,064,000) and Nite-Hawk ($1,328,000) along with increased
demand for Industrial products. Sales of Schwarze sweepers have also increased
over 2005 with dealer and direct sales accounting for the majority of the
increase.
Net North American
Agricultural sales were $25,780,000 in 2006 compared to $33,671,000 for the
same period in 2005, a decrease of $7,891,000 or 23.4%. The decrease was a
result of continuing softness in the agricultural market due to higher fuel and
fertilizer prices which have impacted farmers spending on new capital
equipment.
Net European Sales for the third quarter of 2006 were $30,321,000
an increase of $966,000 or 3.3% compared to $29,355,000 during the third
quarter of 2005. The majority of the increase was primarily a result in some
improvement from farm subsidy payments from the European Union and increased
export sales. The European markets remain soft and competition in our core
products continues to be strong. Gross profit for
the third quarter of 2006 was $23,254,000 (20.3% of net sales) compared to $21,586,000
(22.5% of net sales) during the same period in 2005, an increase of $1,668,000.
The increase was primarily from higher sales from our Gradall and Nite-Hawk
acquisitions. The Company's margin percentage was negatively impacted during
the quarter by continued inefficiencies due to the reorganization efforts
relating to the closure and relocation of the Company's facility in Holton,
Kansas into its Gibson City facility which was previously announced in the
fourth quarter of 2005. A few minor capital improvements remain to be
completed in the fourth quarter of 2006 along with training requirements for
all new employees as well as new product introductions.
15 Selling, general
and administrative expense ("SG&A") was $17,415,000 (15.2% of net sales)
during the third quarter of 2006 compared to $14,626,000 (15.3% of net sales)
during the same period of 2005, an increase of $2,789,000. The increase in SG&A
was primarily from the additions of Gradall, VacAll, and Nite-Hawk in the
amounts of $3,121,000, $782,000 and $180,000, respectively. Interest expense was $1,812,000
for the third quarter of 2006 compared to $840,000 during the same period in 2005,
an increase of $972,000. This increase was from higher interest rates and
increased borrowings in 2006. Other income (expense) was $66,000
of income during the third quarter of 2006 compared to $38,000 of income in the
third quarter of 2005. The gain on the sale of the Holton facility in the
amount of $517,000 offset by the loss on the sale of machinery and equipment at
Holton totaling $336,000 were the primary reason for the income in 2006 along
with exchange rate losses from foreign currency contracts covering accounts
receivable in our European operations. Income in 2005 was from exchange rate
gains from foreign currency contracts covering accounts receivable in our
European operations. Income tax expense for the
third quarter of 2006 was $1,215,000 (28.4% of income before taxes) compared to
$1,951,000 (30.8% of income before taxes) in the third quarter of 2005. The
decrease in the effective tax rate for 2006 was from final adjustments to the
2005 tax return that was filed in September of 2006. The effective tax rate in
the third quarter of 2005 also had a final adjustment for the 2004 tax return
which was filed in September of 2005. The Company's net income
after tax was $3,066,000 or $.31 per share on a diluted basis for the third
quarter of 2006 compared to $4,384,000 or $.44 per share on a diluted basis for
the third quarter of 2005. The decrease of $1,318,000 resulted from the
factors described above. Nine Months Ended September 30, 2006 vs. Nine
Months Ended September 30, 2005 Net sales for the first
nine months of 2006 were $344,574,000, an increase of $59,093,000 or 20.7%
compared to $285,481,000 for the first nine months of 2005. The increase was
primarily attributable to the acquisitions of Gradall, VacAll and Nite-Hawk in
the amounts of $64,743,000 and $1,328,000, respectively, and continued market
improvement in the Industrial division. Sales were negatively affected by the
soft market conditions primarily in the Agricultural sector. Net North American Industrial sales increased during the first
nine months by $74,518,000 or 76.3% to $172,241,000 for 2006 compared to $97,723,000
during the same period in 2005. The majority of the increase came from the
acquisitions of Gradall, VacAll and Nite-Hawk. Also, increased demand for both
sweeper and mowing equipment has continued to reflect growth from governmental
entities and contractors.
Net North American
Agricultural sales were $82,631,000 in 2006 compared to $98,134,000 for the
same period in 2005, a decrease of $15,503,000 or 15.8%. The softness in the Company's
agricultural market at the beginning of the year resulted in lower pre-season
orders. Higher fuel and fertilizer prices have continued throughout the year
and have affected farmers spending on capital equipment. Also affecting sales
were areas in parts of the U.S. that experienced drought conditions.
Net European Sales for the first nine months of 2006 were $89,702,000,
an increase of $78,000 or less than 1% compared to $89,624,000 during the same
period of 2005. This modest increase was a result of weaker market conditions
that began during the third quarter of 2005. Sales continue to be hampered by
changing governmental regulations concerning farm programs in the U.K. and
European Union. Without the sales of Spearhead, sales decreased by 1.6%.
Gross profit for
the first nine months of 2006 was $70,110,000 (20.3% of net sales) compared to $62,357,000 (21.8% of net
sales) during the same period in 2005, an increase of $7,753,000. The increase was mainly
attributable to the acquisitions of Gradall, VacAll and Nite-Hawk and higher
sales levels in our Industrial division. Negatively affecting the Company's
gross margin percent were lower margins on production parts produced by Gradall
for JLG Industries, previous owner of Gradall, as part of a six month
transition supply agreement which was signed at acquisition and inefficiencies
from the consolidation of the Company's Holton facility.
16 Selling, general
and administrative expense ("SG&A") were $50,247,000 (14.6% of net sales)
during the first nine months of 2006 compared to $44,127,000 (15.5% of net
sales) during the same period of 2005, an increase of $6,120,000. The increase
in SG&A for the first nine months of 2006 primarily came from the addition
of Gradall, VacAll and Nite-Hawk in the amount of $6,939,000. Interest expense was $5,010,000
for the first nine months of 2006 compared to $2,332,000 during the same period in 2005, an
increase of $2,678,000. The increase was due to higher interest rates in 2006
along with increased borrowings to support the acquisitions of Gradall, VacAll,
and Nite-Hawk along with higher levels of working capital. Other income (expense) was $102,000
of expense during the first nine months of 2006 compared to $137,000 of income in the
first nine months of 2005. The expense in 2006 is from losses in exchange rate
fluctuation and a gain on the sale of the Holton facility in the amount of
$517,000 offset by the loss on the sale of machinery and equipment at Holton
totaling $336,000. Income in 2005 was from exchange rate gains from foreign
currency contracts covering accounts receivable in our European operations. Income tax expense for the
third quarter of 2006 was $4,949,000 (32.4% of income before taxes) compared to
$5,468,000 (32.9% of income before taxes) in the third quarter of 2005. The
decrease in the effective tax rate for 2006 was from final adjustments to the
2005 tax return that was filed in September of 2006. The effective tax rate in
the third quarter of 2005 also had a final adjustment for the 2004 tax return
which was filed in September of 2005. The Company's net income
after tax was $10,347,000 or $1.04 per share on a diluted basis for the first
nine months of 2006 compared to $11,167,000 or $1.13 per share on a diluted basis for the first
nine months of 2005. The decrease of $820,000 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 expand 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. These sales enhance the
Company's production flow during the off season. As of September 30,
2006, the Company had working capital of $167,207,000, which represents an
increase of $42,056,000 from working capital of $125,151,000 as of December 31, 2005. The increase in working
capital was primarily from higher accounts receivable and inventory levels due
to the acquisitions of Gradall, VacAll and Nite-Hawk and seasonality. Capital
expenditures were $10,159,000 for the first nine months of 2006, compared to $7,080,000
during the first nine months of 2005. Capital
expenditures for 2006 are expected to be above those of 2005 mainly due to the
previously announced expansion, reorganization and upgrade of our Gibson City
facility estimated at $3,700,000 and also capital improvements at our newly
acquired Gradall facility which is expected to be approximately $1,500,000. 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 repurchased during 2005 or in
the first nine months of 2006. The authorization to repurchase up to 1,000,000
shares remains available less 42,600 shares, previously purchased. Net cash provided by financing activities
was $50,917,000
during the nine-month period ending September 30, 2006, compared to $18,995,000
net cash used by financing activities for the same period in 2005. The
increase was from additional borrowings for the acquisition of Gradall, VacAll
and Nite-Hawk and higher accounts receivable and inventory levels due to
seasonality.
17 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. On February 3, 2006, the
Company amended and restated the credit agreement to increase the Company's
existing credit facility from $70 million to $125 million. Pursuant to the
terms of the Amended and Restated Revolving Credit Agreement, the Company has
the ability to request an increase in commitments by $25 million. In addition,
the existing credit facility was modified in other respects, including reducing
the asset coverage ratio and lowering the interest margins. On
March 30, 2006 the Company entered into the Fourth Amendment of the Amended and
Restated Revolving Credit Agreement, dated March 30, 2006 (the "Amended and
Restated Revolving Credit Agreement"), between the Company and Bank of America,
N.A., J.P. Morgan Chase Bank and Guaranty Bank, as its lenders. Pursuant to
the terms of the Amended and Restated Revolving Credit Agreement, the Company
added Gradall Industries, Inc., formerly Alamo Group (OH) Inc., and N.P. Real
Estate Inc. as members of the Obligated Group. The Amendment also allows for
capital expenditures not to exceed $14.0 million for the fiscal year ending
2006 and $10.0 million in the aggregate during each fiscal year thereafter. As of September 30, 2006, there was $80,000,000 borrowed under the
revolving credit facility. At September 30, 2006, $2,746,000 of the revolver
capacity was committed to irrevocable standby letters of credit issued in the
ordinary course of business as required by vendors' contracts. There are three smaller
additional lines of credit; one for the Company's European operation in the
amount of 4,000,000 British pounds, one for our Canadian operation in the
amount of 3,500,000 Canadian dollars, and one for our Australian operation in
the amount of 1,300,000 Australian dollars. As of September 30, 2006 there
were no British pounds borrowed against the European line of credit, 1,010,000 Canadian dollars
were outstanding on the Canadian line of credit and 800,000 Australian dollars
were outstanding under its facility. The Canadian revolving credit facility is
guaranteed by the Company. The Australian facility is secured by a letter of
credit issued by the Company. The Company's borrowing levels for working
capital are seasonal with the greatest utilization generally occurring in the
first quarter and early spring. As of September 30, 2006, the Company
is in compliance with the terms and conditions of its credit facilities. Management believes
that 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.
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. 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 Consolidate Financial
Statements.
18
Critical Accounting Policies Allowance
for Doubtful Accounts The Company evaluates the
collectibility 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 percentage of revenues for each business unit, adjusted for relative
improvements or deteriorations in agings and changes in current economic
conditions. The Company evaluates all aged receivables that
are over 60 days old and will reserve specifically on a 90-day basis. The
Company has a secured interest in most of its wholegood sales. This allows the
Company, in the event of nonpayment or deteriorating financial condition, to
repossess the customer's inventory. This also allows Alamo Group to maintain
only a reserve over its cost which usually represents the margin on the
original sales price. The bad debt reserve balance
was $2,020,000 at September 30, 2006 and $2,064,000
on December 31, 2005. The Company does not believe that there are any
collectibility concerns within these reserves outside the normal course of
business. Sales
Discounts At September 30, 2006 the Company had $5,530,000
in reserves for sales discounts compared to $7,533,000 at December 31, 2005 on
product shipped to our customers under various promotional programs. The decrease
was due primarily to additional discounts taken on the Company's Rhino
and M&W products which are ordered during the pre-season, from July
to December of each year and are shipped through the second quarter of 2005.
The Company reviews the reserve quarterly based on the analysis made on each
program in effect at the time. The Company bases its reserves
on historical data relating to discounts taken by customers 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 Inventory The Company had $6,538,000 at September 30, 2006
and $5,472,000 at December 31, 2005 in reserves to cover obsolescence and slow
moving inventory. The increase was due primarily to currency exchange rate
fluctuations. The obsolescence and slow moving policy states that the reserve
in general 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 may be 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. The reserve is reviewed and, if
necessary, adjustments are 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 wholegood units and 90 days for
parts. Warranty reserve, as a percent of
sales, is calculated by looking at the current twelve months expenses and
prorating that based on twelve months sales with a six month lag period. The
Company's historical experience is that a customer takes approximately six
months from the time the unit is received and put it into operation to file any
warranty claim. A warranty reserve is established for each marketing group.
Reserve balances are evaluated on a quarterly basis and adjustments are made
when required.
19 The warranty reserve
balance was $4,137,000 at September 30, 2006 and $2,833,000 at December 31, 2005.
The increase was related to the acquisition of Gradall, VacAll and Nite-Hawk
along with higher sales levels in the Industrial Division. Product Liability At September 30, 2006
the Company had accrued $240,000 in reserves for product liability cases
compared to $279,000 at December 31, 2005. The
Company accrues primarily on a case-by-case basis and adjusts the
balance quarterly. During most of 2005, the
self insured retention (S.I.R.) for U.S. product liability coverage was
$500,000 per claim. On September 30, 2005, the S.I.R. for rotary mowers
remained at $500,000 while the S.I.R. for all other products was reduced to
$100,000 per claim. On September 30, 2006 the S.I.R. for rotary mowers was
reduced to $250,000 while the S.I.R. for all other products continued to be
$100,000 per claim. The S.I.R. levels for the current policy period remain the
same. The Company also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.'s
or deductibles. Forward-Looking Information Part
I of this Quarterly Report on Form 10‑Q 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 at the present include changes in market
conditions; increased competition; decreases in the prices of agricultural
commodities, which could affect our customer's income levels; budget
constraints or income shortfalls which could affect the purchases of our type
of equipment by governmental customers; adverse weather conditions such as
droughts and floods which can affect buying patterns of the Company's customers
and related contractors; the price and availability of critical raw materials,
particularly steel; increased cost of new regulations such as Sarbanes-Oxley
which effect public companies; the potential effects on the buying habits of
our customers due to diseases such as mad cow and bird flu; 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.
20
Item 3. Quantitative and Qualitative Disclosures About
Market Risks The Company is
exposed to various market risks. Market risk is the potential loss 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 United States, the United Kingdom, France, Canada and Australia. The
Company sells its products primarily within the markets where the products are
produced, but certain of the Company's sales from its international operations
are exported and are denominated in other 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 effect of changes in currency exchange rates on the Company's
functional currency-based sales, the Company's U.K. subsidiaries regularly hedge
by entering into foreign exchange forward contracts to hedge approximately 80%
of their future net foreign currency sales transactions over a period of nine
months. As of September 30, 2006, the Company had £1,252,000 outstanding in forward exchange contracts related to
accounts receivable. A 15% fluctuation in exchange rates for these currencies
would change the fair value by approximately $354,000. 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 as a
Result of International Sales 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. At September 30, 2006, 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 $3,067,000 for the period
ending September 30, 2006. 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 $3,151,000 for the period
ended September 30, 2005. 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 are 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 third quarter of 2006 was a gain of $366,000. On September 30, 2006, the British pound closed at .5341 relative to 1.00 U.S. dollar, and the Euro closed
at .7886 relative to 1.00 US dollar. At December 31,
2005 the British pound closed at .5812
relative to 1.00 U.S. dollar and the Euro closed at .8446 relative to 1.00 U.S. dollar. By comparison, on September
30, 2005, the British pound closed at .5670 relative to 1.00 U.S.
dollar, and the Euro closed at .8319 relative to 1.00 U.S. dollar. No assurance can be given as to future valuation 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 third quarter 2006
average interest rate under these borrowings, the Company's interest expense
would have changed by approximately $1,200,000 for
the first nine months of the year. 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 affects 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.
21
Item 4. 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 and Vice-President,
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 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.
22
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Exact
name of registrant as specified in its charter)
(Address of principal executive
offices)
(Registrant's telephone number,
including area code)
Yes X No
___
and September 30, 2005
Interim Condensed Consolidated
Balance Sheets
2006
(Unaudited)
2005
(Audited)
9,804,109
and 9,792,759 issued and outstanding at
September 30, 2006 and December 31, 2005,
respectively
and December 31, 2005
Interim Condensed Consolidated
Statements of Income
(Unaudited)
September 30,
September 30,
Interim Condensed Consolidated
Statements of Cash Flows
(Unaudited)
September 30,
provided by
operating activities:
Notes to Interim Condensed
Consolidated Financial Statements - (Unaudited)
September 30, 2006
September 30,
September 30,
(In thousands, except per
share amounts)
2006
2005
September 30,
September 30,
Nine Months Ended
September 30,
Price*
Contractual
Life(yrs)*
Price*
Price*
$8.9375 -
$12.10
Price*
Contractual
Life(yrs)*
Price*
Price*
September 30,
September 30,
(In thousands, except per share amounts)
options and
warrants
September 30,
September 30,
September 30,
September 30,
2006
(Unaudited)
2005
(Audited)
Retirement
Plan
Pension
Plan
September 30,
September 30,
September 30,
September 30,
(Cost
Trends and Profit Margin, as
Percentages
of Net Sales)
20.3
%
22.5
%
20.3
%
21.8
5.1
%
7.3
%
5.8
%
6.4
3.7
%
6.6
%
4.4
%
5.8
2.7
%
4.6
%
3.0
%
3.9
Item 1. - None
Item 2 - None
Item 3 - None
Item 4 - None
(a) Reports on Form 8-K
November 3, 2006 - Press Release announcing third quarter fiscal 2006 earnings
(b) Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 |
Certification by Ronald A. Robinson under Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed Herewith |
||
31.2 |
Certification by Richard J. Wehrle under Section 302 of the Sarbanes-Oxley Act of 2002 |
Filed Herewith |
||
32.1 |
Certification by Ronald A. Robinson under Section 906 of the Sarbanes-Oxley Act of 2002 |
Filed Herewith |
||
32.2 |
Certification by Richard J. Wehrle under Section 906 of the Sarbanes-Oxley Act of 2002 |
Filed Herewith |
(b) Reports on Form 8-K
23
Alamo Group Inc. and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Alamo Group Inc. |
|
(Registrant) |
|
/s/ Ronald A. Robinson |
|
Ronald A. Robinson |
|
President
and CEO |
/s/ Richard J. Wehrle |
|
Richard J. Wehrle |
|
Vice President & Corporate Controller |
|
Principal Accounting Officer |
24
Exhibit 31.1
I, Ronald A. Robinson, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamo Group Inc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 8, 2006 |
/s/ Ronald A. Robinson |
Ronald A. Robinson | |
President & Chief Executive Officer |
Exhibit 31.2
I, Richard J. Wehrle, Vice President, Controller (Principal Accounting Officer), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamo Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
November 8, 2006 | /s/ Richard J. Wehrle |
Vice President, Controller | |
(Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Alamo Group Inc. (the "Company") on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald A. Robinson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Form 10-Q fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date November 8, 2006 |
/s/ Ronald A. Robinson |
Ronald A. Robinson |
|
President & CEO |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Alamo Group Inc. (the "Company") on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Wehrle, Vice President, Corporate Controller and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Form 10-Q fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 8, 2006 | /s/ Richard J. Wehrle |
Vice President, Corporate Controller & | |
Principal Accounting Officer |