2013 10K - Body
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Fiscal year Ended December 31, 2013
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21220
ALAMO GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE
74-1621248
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
 1627 East Walnut, Seguin, Texas 78155
(Address of principal executive offices, including zip code)
 
830-379-1480
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange
Common Stock, par value
on which registered
$.10 per share
New York Stock Exchange
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.Yes [X]  No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K. [X]
 
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
       Large accelerated filer   [  ]
Accelerated filer                        
[X]
       Non-accelerated filer     [  ]
Smaller reporting company        
[  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]
 
The aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of June 28, 2013 (based upon the last reported sale price of $40.82 per share) was approximately $361,724,144 on such date.
 
The number of shares of the registrant’s common stock, par value $.10 per share, outstanding as of
February 28, 2014 was 12,126,783 shares.
 
Documents incorporated by reference:  Portions of the registrant’s proxy statement relating to the 2014 Annual Meeting of Stockholders to be held on May 7, 2014 have been incorporated by reference herein in response to Part III. 



ALAMO GROUP INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-K
TABLE OF CONTENTS
                                                                                                                                                 
 
PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
Item 15.
 
Index to Consolidated Financial Statements
 
 
 
 


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PART I
Item 1. Business

Unless the context otherwise requires, the terms “the Company,”  “we,” “our” and “us” refer to Alamo Group Inc. and its subsidiaries on a consolidated basis.
 
General
 
The Company is a global leader in the design and manufacture of high quality agricultural equipment and infrastructure maintenance equipment for governmental and industrial use. The Company’s products include tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, excavators, vacuum trucks, snow removal equipment, pothole patchers, zero turn radius mowers ("ZTR's"), agricultural implements and related aftermarket parts and services. The Company emphasizes high quality, cost-effective products for its customers and strives to develop and market innovative products while constantly monitoring and seeking to contain its manufacturing and overhead costs. The Company has a long-standing strategy of supplementing its internal growth through acquisitions of businesses or product lines that currently complement, command, or have the potential to achieve a meaningful share of their niche markets. The Company has approximately 2,550 employees and operates a total of eighteen plants in North America, Europe and Australia. The Company sells its products primarily through a network of independent dealers and distributors to governmental end-users, related independent contractors, as well as to the agricultural and commercial turf markets. The Company operates primarily in the United States, England, France, Canada and Australia.
 
The predecessor corporation to Alamo Group Inc. was incorporated in the State of Texas in 1969, as a successor to a business that began selling mowing equipment in 1955, and Alamo Group Inc. was reincorporated in the State of Delaware in 1987.
 
History
 
Since its founding in 1969, the Company has focused on satisfying customer needs through geographic market expansion, product development and refinement, and selected acquisitions. The Company’s first products were based on rotary cutting technology. Through acquisitions, the Company added flail cutting technology in 1983 and sickle-bar cutting technology in 1984. The Company added to its presence in the industrial and governmental vegetation markets with the acquisition of Tiger Corporation (“Tiger”) in late 1994.

The Company entered the agricultural mowing markets in 1986 with the acquisition of Rhino Products Inc. (“Rhino”), a leading manufacturer in this field. With this acquisition, the Company embarked on a strategy to increase the Rhino dealer distribution network during a period of industry contraction. The addition of M&W Gear Company (“M&W”) in early 1995 allowed the Company to enter into the manufacturing and distribution of tillage equipment, which complements the Rhino distribution network. M&W has been integrated into the agricultural marketing group.

In 1991, the Company began its international expansion with the acquisition of McConnel Ltd. (“McConnel”), a United Kingdom (“U.K.”) manufacturer of vegetation maintenance equipment, principally hydraulic boom-mounted hedge and grass cutters and related parts. Bomford-Turner Ltd. (“Bomford”), also a U.K. company, was acquired in 1993. Bomford is a manufacturer of heavy-duty, tractor-mounted grass and hedge mowing equipment. McConnel and Bomford sell their products to dealers and distributors through their respective sales forces.

In 1994, the Company acquired Signalisation Moderne Autoroutiere S.A. (“SMA”) located in Orleans, France. SMA manufactures and sells principally a line of heavy-duty, tractor-mounted grass and hedge mowing equipment and associated replacement parts primarily to departments of the French government. This acquisition, along with the acquisitions of Forges Gorce, a flail blade manufacturer in France, in 1996 and Rousseau Holdings S.A. (“Rousseau”), a leading French manufacturer of hedge and verge mowers, in 2004, when combined with McConnel and Bomford, has made the Company one of the largest manufacturers in the European market for the kind of equipment sold by the Company.

In 1995, the Company expanded its business in the agricultural market with the acquisition of Herschel Corporation (“Herschel”), a manufacturer and distributor of aftermarket farm equipment replacement and wear parts. 

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In 2000, the Company acquired Schwarze Industries, Inc. (“Schwarze”). Schwarze is a manufacturer of a broad range of street sweeping equipment which is sold to governmental agencies and contractors. The Company believes the Schwarze sweeper products fit the Company’s strategy of identifying product offerings with brand recognition in the industrial markets the Company serves. In 2004, the Company purchased the pothole patcher product line from Wildcat Manufacturing, Inc. The product line was merged into the Schwarze operation and is complementary to its current product offerings.

In 2000, the Company purchased the product line and associated assets of Twose of Tiverton Ltd. (“Twose”) in the U.K. and incorporated its production into the existing facilities at McConnel and Bomford while maintaining its own sales force and dealer distribution network. Twose was a small regional manufacturer of power arm flail mowers and parts, as well as harrows and rollers, which strengthened the Company’s market leadership position in the U.K.

In 2000, the Company acquired Schulte Industries Ltd. and its related entities (“Schulte”). Schulte is a Canadian manufacturer of mechanical rotary mowers, snow blowers, and rock removal equipment. Schulte strengthened the Company’s Canadian presence in both marketing and manufacturing. It also expanded the Company’s range of large, heavy-duty rotary mowers.

In 2001, the Company acquired all of the assets of SMC Corporation (“SMC”). SMC manufactures front-end loaders and backhoes principally for Original Equipment Manufacturer (“OEM”) customers and its own SMC brand. This acquisition expanded the product range of our agricultural division by branding a line of loaders for Rhino.

In 2002, the Company purchased inventory, fixed assets and certain other assets of Valu-Bilt Tractor Parts (“Valu-Bilt”), a subsidiary of Quality Stores, Inc., located in Des Moines, Iowa. Valu-Bilt is a distributor of new, used and rebuilt tractor parts and other agricultural spare and wear parts sold directly to customers through its catalog and the internet and on a wholesale basis to dealers. Subsequent to the purchase, the operations of Valu-Bilt in Des Moines, Iowa, were consolidated into the Company’s Herschel facility in Indianola, Iowa.

In 2002, the Company purchased substantially all of the assets of Faucheux Industries S.A. (“Faucheux”), a leading French manufacturer of front-end loaders and attachments. The Company acquired Faucheux out of administration, a form of bankruptcy in France. This acquisition broadened the range of our agricultural implements offered in the French market.

In 2005, the Company, through its European subsidiary Alamo Group (EUR) Ltd., acquired 100% of the issued and outstanding stock of Spearhead Machinery Limited (“Spearhead”) and subsequently merged its manufacturing operations into Bomford’s facility. Spearhead manufactures a range of tractor-mounted vegetation maintenance equipment, including reach mowers, flail mowers and rotary cutters. This acquisition extended our product lines and market coverage in Europe.

In early 2006, the Company purchased substantially all of the assets of the Gradall excavator business (“Gradall”) of JLG Industries, Inc., including their manufacturing plant in New Philadelphia, Ohio. Gradall is a leading manufacturer of both wheeled and crawler telescopic excavators in North America. This acquisition enhanced our Industrial Division product offering sold to governmental buyers and related contractors for maintenance along right-of-ways.

In 2006, the Company purchased the vacuum truck and sweeper lines of Clean Earth Environmental Group, LLC and Clean Earth Kentucky, LLC (collectively referred to as “VacAll”). This included the product lines, inventory and certain other assets that relate to this business. The production of the vacuum truck and sweeper lines were moved to the Gradall facility in New Philadelphia, Ohio.

In 2006, the Company acquired 100% of the ownership interests in Nite-Hawk Sweepers LLC (“Nite-Hawk”), a manufacturer of truck mounted sweeping equipment primarily for the contract sweeping market, which expanded its presence in that market and complements our Schwarze sweeper line.             
 
In 2007, the Company purchased Henke Manufacturing Corporation (“Henke”), a manufacturer of specialty snow removal attachments. Henke’s products are mounted on both heavy industrial equipment and medium to

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heavy-duty trucks. The primary end-users are governmental agencies, related contractors and other industrial users.
In 2008, the Company acquired Rivard Developpement S.A.S. (“Rivard”), a leading French manufacturer of vacuum trucks, high pressure cleaning systems and trenchers. The acquisition broadened the Company’s product offering to its customers in Europe and other markets we serve.

In 2009, the Company acquired substantially all the assets of Bush Hog, LLC (“Bush Hog”), a leading agricultural equipment manufacturer of rotary cutters, finishing mowers, ZTR's, front-end loaders, backhoes, landscape equipment and a variety of other implements. This acquisition, combined with the Company’s existing range of agricultural mowers, created one of the largest manufacturers of agricultural mowers in the world.

In 2011, the Company acquired substantially all of the assets and assumed certain specified liabilities of Tenco Group, Inc. ("Tenco") and its subsidiaries. Tenco is a Canadian-based manufacturer of snow removal equipment including snow blades, blowers, dump bodies, spreaders and/associated parts and service. Tenco has operations in Quebec as well as New York and Vermont. The equipment is sold primarily through dealers to governmental end-users as well as contractors.

On September 4, 2013, the Company acquired substantially all of the assets and assumed certain specified liabilities of Superior Equipment Australia PTY. LTD ("Superior"). Superior is an Australian based small manufacturer of agricultural mowing equipment and other attachments, parts, and services. The equipment is sold through dealers primarily to agricultural end-users with some sold to governmental entities.

Marketing and Marketing Strategy
 
The Company believes that within the U.S. it is a leading supplier to governmental markets, a leading supplier in the U.S. agricultural market, and one of the largest suppliers in the European market for its key niche product offerings. The Company’s products are sold through the Company’s various marketing organizations and extensive worldwide dealer and distributor networks under the Alamo Industrial®, Terrain King®, Tiger®, Gradall®, VacAll®, Schwarze®, Nite-Hawk®, Henke®, Tenco®, Bush Hog®, Rhino®, Earthmaster®, Herschel®, Valu-Bilt®, Schulte®, Superior®, McConnel®, Bomford®, Spearhead, Twose, SMA®, Forges Gorce, Faucheux, Rousseau and Rivard® trademarks (some with related designs) as well as other trademarks and trade names.

Products and Distribution Channels

North American Industrial Division

Alamo Industrial equipment is principally sold through independent dealers to governmental end-users, related independent contractors and, to a lesser extent, utility and other dealers serving right-of-way maintenance operators and other applications in the U.S. and other countries. Governmental agencies and contractors that perform services for such agencies purchase primarily hydraulically-powered, tractor-mounted mowers, including boom-mounted mowers, other types of cutters and replacement parts for heavy-duty, intensive use applications, including maintenance around highway, airport, recreational and other public areas. A portion of Alamo Industrial’s sales includes tractors, which are not manufactured by Alamo Industrial.

Tiger equipment includes heavy duty, tractor- and truck-mounted mowing and vegetation maintenance equipment and replacement parts. Tiger sells to state, county and local governmental entities and related contractors, primarily through a network of independent dealers. Tiger’s dealer distribution network is independent of Alamo Industrial’s dealer distribution network. A portion of Tiger’s sales includes tractors, which are not manufactured by Tiger.

Schwarze equipment includes air, mechanical broom, and regenerative air sweepers, pothole patchers and replacement parts. Schwarze sells its products primarily to governmental agencies and independent contractors, either directly or through its independent dealer network. A portion of Schwarze’s sales includes truck chassis which are not manufactured by Schwarze. The Company believes that Schwarze complements Alamo Industrial because the dealer and/or end-user for both products in many cases are the same.


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Gradall produces a range of models based on high-pressure hydraulic telescoping booms which are sold through dealers primarily to governmental agencies, contractors and to a lesser extent the mining industry, steel mills and other specialty applications in the U.S. and other countries. Many of these products are designed for excavation, grading, shaping and similar tasks involved in land clearing, road building or maintenance. These products are available mounted on various types of undercarriages: wheels for full-speed highway travel, wheels for on/off road use, and crawlers.

VacAll produces catch basin cleaners and roadway debris vacuum systems. These units are powerful and versatile with uses including, but not limited to, removal of wet and dry debris, spill elimination, and cleaning of sludge beds. VacAll also offers a line of sewer cleaners. Its products are primarily sold through dealers to industrial and commercial contractors as well as governmental agencies. A portion of VacAll’s sales includes truck chassis which are not manufactured by the Company.

Nite-Hawk manufactures parking lot sweepers with unique and innovative hydraulic designs. By eliminating the auxiliary engine, Nite-Hawk sweepers have proven to be fuel-efficient, environmentally conscious, and cost-effective to operate. Nite-Hawk focuses mainly on and sells direct to parking lot contractors. A portion of Nite-Hawk’s sales includes truck chassis which are not manufactured by Nite-Hawk.

Henke designs and manufactures snow plows and heavy duty snow removal equipment, hitches and attachments for trucks, loaders and graders sold primarily through independent truck and industrial dealers. Henke’s primary end-users are governmental agencies, related contractors and other industrial users.

Tenco designs and manufactures a heavy duty line of snow removal equipment, including snow plows, snow blowers, dump bodies and spreaders. Its products are primarily sold through independent dealers. End-users are governmental agencies, contractors and other industrial users.
     
North American Agricultural Division

Bush Hog, Rhino and Earthmaster equipment is generally sold to farmers and ranchers to clear brush, maintain pastures and unused farmland, shred crops and till fields, and for haymaking. It is also sold to other customers, such as mowing contractors and construction contractors, for non-agricultural purposes. Bush Hog and Rhino equipment consists principally of a comprehensive line of tractor-powered equipment, including rotary cutters, finishing mowers, flail mowers, disc mowers, ZTR's, front-end loaders, backhoes, rotary tillers, posthole diggers, scraper blades and replacement parts. This equipment is primarily sold through farm equipment dealers, as well as original equipment manufacturers (“OEMs”) and other distributors.

In 2012, the backhoe operations at SMC were consolidated into the Company's agricultural facility in Gibson City, Illinois, and front-end loaders for Bush Hog and Rhino were outsourced.
Herschel/Valu-Bilt aftermarket replacement parts are sold for many types of farm equipment and tractors and certain types of mowing and construction equipment. Herschel products include a wide range of cutting parts, plain and hard-faced replacement tillage tools, disc blades and fertilizer application components. Herschel replacement tools and parts are sold throughout the United States, Canada and Mexico to five major customer groups: farm equipment dealers; fleet stores; wholesale distributors; OEMs; and construction equipment dealers. Valu-Bilt complements the Herschel product lines while also expanding the Company’s offering of aftermarket agricultural parts and added catalog and internet sales direct to end-users.
Schulte equipment includes heavy-duty mechanical rotary mowers, snow blowers, rock removal equipment and related replacement parts. Schulte serves both the agricultural and governmental markets primarily in Canada and the U.S. Schulte also sells some of the Company’s other product lines in their markets and some of its products through independent distributors throughout the world.

European Division
 
McConnel equipment principally includes a broad line of hydraulic, boom-mounted hedge and grass cutters, as well as other tractor attachments and implements such as hydraulic backhoes, cultivators, subsoilers, buckets and other digger implements and related replacement parts. McConnel equipment is sold primarily in the U.K., Ireland and France and in other parts of Europe and, to a lesser extent, throughout the world, through independent dealers and distributors.

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Bomford equipment includes hydraulic, boom-mounted hedge and hedgerow cutters, industrial grass mowers, agricultural seedbed preparation cultivators and related replacement parts. Bomford equipment is sold to governmental agencies, contractors and agricultural end-users in the U.K., Ireland and France and, to a lesser extent, other countries in Europe, North America, Australia and the Far East. Bomford’s sales network is similar to that of McConnel in the U.K. Rhino sells some of Bomford’s product line in the U.S. 

Twose equipment includes light-duty power arm mowers, agricultural implements and related replacement parts. Twose products are manufactured at the Company’s U.K. facilities. These products are sold through Twose’s dealer distribution network in the U.K. and through Faucheux’s and other independent distributors internationally.
The addition of Spearhead expanded the Company’s product lines, particularly rotary cutters, and market coverage in Europe and increased utilization of our existing U.K. manufacturing facilities.
SMA equipment includes hydraulic, boom-mounted hedge and hedgerow cutters and related replacement parts. SMA’s principal customers are French local authorities. SMA’s product offerings include certain quick-attach boom mowers manufactured by the Company in the U.K. to expand its presence in agricultural dealerships. During the third quarter of 2010, the Company closed and sold its SMA facility located in Orleans, France and production was relocated to the Rousseau manufacturing facility near Lyon, France.

Forges Gorce manufactures cutting blades which are sold to some of the Company’s subsidiaries as well as to other customers.

Faucheux equipment includes front-end loaders, backhoes, attachments and related parts. In addition, Faucheux also market certain agricultural related products from other company units and third party suppliers.
 
Rousseau sells hydraulic and mechanical boom mowers, primarily in France, through its own sales force and dealer distribution network mainly to agricultural and governmental markets. These products have also been introduced into other markets outside of France.
 
Rivard manufactures vacuum trucks, high pressure cleaning systems and trenchers. Rivard’s equipment is primarily sold in France and certain other markets, mainly in Europe and North Africa, to governmental entities and related contractors. It also complements our product offerings in North America. The majority of Rivard's customers provide their own truck chassis.
 
Replacement Parts
In addition to the sales of Herschel/Valu-Bilt replacement parts, the Company derives a significant portion of its revenues from sales of replacement parts for each of its wholegoods lines. Replacement parts represented approximately 22%, 23% and 24% of the Company’s total sales for the years ended December 31, 2013, 2012 and 2011, respectively. The decrease in 2013 was mainly from a change in sales mix between wholegoods and parts. Proprietary replacement parts generally are more profitable and less cyclical than wholegoods.
 
While the Company believes that the end-users of its products evaluate their purchases on the basis of price, reputation and product quality, such purchases are also based on a dealer’s service, support of and loyalty to the dealer based on previous purchase experiences, as well as other factors such as product and replacement part availability.

Product Development

The Company’s ability to provide innovative responses to customer needs, to develop and manufacture new products, and to enhance existing product lines is important to its success. The Company continually conducts research and development activities in an effort to improve existing products and develop new products. As of December 31, 2013, the Company employed 141 people in its various engineering departments, 73 of whom are degreed engineers and the balance of whom are support staff. Amounts expended on research and development activities were approximately $7,164,000 in 2013, $5,686,000 in 2012 and $6,017,000 in 2011. As a percentage of sales, research and development was approximately 1.1% in 2013, 0.9% in 2012 and 1.0% in 2011, and is expected to continue at similar levels in 2014.

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Seasonality

The Company’s sales, both product and replacement parts, are generally higher in the second and third quarters of the year, because a substantial number of the Company’s products are used for maintenance activities such as vegetation maintenance, highway right-of-way maintenance, construction, and street and parking lot sweeping. Usage of this equipment is lower in harsh weather. The Company utilizes an annual twelve-month sales forecast provided by the Company’s marketing departments which is updated quarterly in order to develop a production plan for its manufacturing facilities. In addition, many of the Company’s marketing departments attempt to equalize demand for products throughout the calendar year by offering seasonal sales programs which may provide additional incentives, including discounts and extended payment terms.

Competition

The Company’s products are sold in highly competitive markets throughout the world. The principal competitive factors are price, quality, availability, service and reputation. The Company competes with several large national and international companies that offer a broad range of equipment and replacement parts, as well as with numerous small, privately-held manufacturers and suppliers of a limited number of products, mainly on a regional basis. Some of the Company’s competitors are significantly larger than the Company and have substantially greater financial and other resources at their disposal. The Company believes that it is able to compete successfully in its markets by effectively managing its manufacturing costs, offering high quality products, developing and designing innovative products and, to some extent, avoiding direct competition with significantly larger potential competitors. There can be no assurance that the Company’s competitors will not substantially increase the resources devoted to the development and marketing of products competitive with the Company’s products or that new competitors with greater resources will not enter the Company’s markets.

Unfilled Orders

As of December 31, 2013, the Company had unfilled customer orders of $129,004,000 compared to $124,453,000 at December 31, 2012. The 4% increase was primarily from our European Division as new orders increased during the last half of 2013 due to improved market conditions in Europe. Management expects that substantially all of the Company’s backlog as of December 31, 2013 will be shipped during fiscal year 2014. The amount of unfilled orders at a particular time is affected by a number of factors, including manufacturing and shipping schedules which, in most instances, are dependent on the Company’s seasonal sales programs and the requirements of its customers. Certain of the Company’s orders are subject to cancellation at any time before shipment; therefore, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of future actual shipments. No single customer is responsible for 10% or more of the aggregate revenue of the Company.

Sources of Supply

The principal raw materials used by the Company include steel, other metal components, hydraulic hoses, paint and tires. During 2013, the raw materials needed by the Company were available from a variety of sources in adequate quantities and at prevailing market prices. No one supplier is responsible for supplying more than 10% of the principal raw materials used by the Company.
 
While the Company manufactures many of the parts for its products, a significant percentage of parts, including most drivelines, gearboxes, industrial engines, and hydraulic components, are purchased from outside suppliers which manufacture to the Company’s specifications. In addition, the Company, through its subsidiaries, purchases tractors and truck chassis as a number of the Company’s products are mounted and shipped with a tractor or truck chassis. Tractors and truck chassis are generally available, but some delays in receiving tractors or truck chassis can occur throughout the year. The Company sources its purchased goods from international and domestic suppliers. No single supplier is responsible for supplying more than 10% of the purchased goods used by the Company.
 

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Patents and Trademarks
 
The Company owns various U.S. and international patents. While the Company considers its patents to be advantageous to its business, it is not dependent on any single patent or group of patents. The net book value of trademarks was $5,500,000 as of December 31, 2013 and 2012.

The Company’s products are sold through the Company’s various marketing organizations and extensive worldwide dealer and distributor networks under the Alamo Industrial®, Terrain King®, Tiger®, Gradall®, VacAll®, Schwarze®, Nite-Hawk®, Henke®, Tenco®, Bush Hog®, Rhino®, Earthmaster®, Herschel®, Valu-Bilt®, Schulte®, Superior®, McConnel®, Bomford®, Spearhead, Twose, SMA®, Forges Gorce, Faucheux, Rousseau and Rivard® trademarks (some with related designs) as well as other trademarks and trade names.

Environmental and Other Governmental Regulations

Like other manufacturers, the Company is subject to a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways, and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, as well as the remediation of contamination associated with releases of hazardous substances at the Company’s facilities and offsite disposal locations, workplace safety and equal employment opportunities. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the effect 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 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 voluntarily worked with an environmental consultant and the state of Iowa with respect to these issues and believes it completed its remediation program in June 2006. The work was accomplished within the Company’s environmental liability reserve balance. We requested a “no further action” classification from the state. We received a conditional “no further action” letter in January of 2009. When we demonstrate stable or improving conditions below residential standards for a certain period of time by monitoring existing wells, we will request an unconditional “no further action” letter.
 
Prior to December 31, 2012, the Company had an environmental reserve in the amount of $1,185,000 related to the acquisition of Gradall’s facility in New Philadelphia, Ohio. The reserve was 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. Monitoring of the test wells by the City of New Philadelphia as required by the Ohio EPA has shown no increase in contamination over the past 30 years and the Company was informed in the fourth quarter of 2012 that the wells were plugged during the second half of the year. Based on this information, the Company has determined that a reserve is no longer required.

The Company knows that Bush Hog’s main manufacturing property in Selma, Alabama was contaminated with chlorinated volatile organic compounds which most likely resulted from painting and cleaning operations during the 1960s and 1970s. The contaminated areas were primarily in the location of underground storage tanks and underneath the former waste storage area. Under the Asset Purchase Agreement, Bush Hog’s prior owner agreed to and has removed the underground storage tanks at its cost and has remediated the identified contamination in accordance with the regulations of the Alabama Department of Environmental Management. An environmental consulting firm was retained by the prior owner to administer the cleanup and monitor the site on an ongoing basis until the remediation program is complete and approved by the applicable authorities.
  
Certain assets of the Company contain asbestos that may have to be remediated over time. The Company believes that any subsequent change in the liability associated with the asbestos removal will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
 
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

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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.

Employees

As of December 31, 2013, the Company employed approximately 2,550 employees. In North America, the Company has collective bargaining agreements at the Gradall facility which cover 187 employees and will expire on March 12, 2017 and at the Tenco facility in Canada covering 55 employees which will expire on December 13, 2015. The Company’s European operations, McConnel, Bomford, Spearhead, Twose, AMS-UK, SMA, Forges Gorce, Faucheux, Rousseau and Rivard, also have various collective bargaining agreements covering 866 employees. The Company considers its employee relations to be satisfactory.

Financial Information about Segments

See Note 14 of the accompanying consolidated financial statements.

International Operations and Geographic Information

See Note 15 of the accompanying consolidated financial statements.

Available Information

The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the operation of the Public Reference Room. The SEC maintains a website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s website is www.sec.gov.

The Company’s website is www.alamo-group.com. The Company makes available free of charge through its website, via a link to the SEC’s website at www.sec.gov, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company also makes available through its website, via a link to the SEC’s website, statements of beneficial ownership of the Company’s equity securities filed by its directors, officers, 10% or greater shareholders and others required to file under Section 16 of the Exchange Act.

The Company also makes available free of charge on its website its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q for the current fiscal year, its most recent proxy statement and its most recent annual report to stockholders, although in some cases these documents are not available on our site as soon as they are available on the SEC’s site. You will need to have on your computer the Adobe Acrobat Reader® software to view the documents, which are in PDF format. In addition, the Company posts on its website its Charters for its Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee, as well as its Corporate Governance Policies and its Code of Conduct and Ethics for its directors, officers and employees. You can obtain a written copy of these documents, excluding exhibits, at no cost, by sending your request to the Corporate Secretary, Alamo Group Inc., 1627 E. Walnut Street, Seguin, Texas 78155, which is the principal corporate office of the Company. The telephone number is (830) 379-1480 ext. 1621. The information on the Company’s website is not incorporated by reference into this report.

Forward-Looking Information

Part I of this Annual Report on Form 10-K and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II of this Annual 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.

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Statements that are not historical are forward-looking. When used by us or on our behalf, the words "expect," “will,” “estimate,” “believe,” “intend,” "would," “could,” “should,” “anticipate,” “project,” “forecast,” “plan,” “may” and similar expressions generally identify forward-looking statements made by us or on our behalf. 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 we serve. Certain particular risks and uncertainties that continually face us include the following:

budget constraints and revenue shortfalls which could affect the purchases of our type of equipment by governmental customers and related contractors in both domestic and international markets;
market acceptance of new and existing products;
our ability to maintain good relations with our employees;
our ability to hire and retain quality employees;
changes in the prices of agricultural commodities, which could affect our customers’   income levels; and
impairment in the carrying value of goodwill.

In addition, we are subject to risks and uncertainties facing the industry in general, including the following:

changes in business and political conditions and the economy in general in both domestic and international markets;
increase in unfunded pension plan liability due to financial market deterioration;
price and availability of critical raw materials, particularly steel and steel products;
increased competition;
our ability to develop and manufacture new and existing products profitably;
adverse weather conditions such as droughts, floods, snowstorms, etc., which can affect the buying patterns of our customers and related contractors;
increased costs of complying with new regulations;
the potential effects on the buying habits of our customers due to animal disease outbreaks;
adverse market conditions and credit constraints which could affect our customers and end-users, such as cutbacks on dealer stocking levels;
changes in market demand;
financial market changes including changes in interest rates and fluctuations in foreign exchange rates;
the inability of our suppliers, customers, creditors, public utility providers and financial service organizations to deliver or provide their products or services to us;
abnormal seasonal factors in our industry;
legal actions and litigation;
changes in domestic and foreign governmental policies and laws, including increased levels of government regulation and changes in agricultural policies;
government actions, including budget levels, regulations and legislation, relating to the environment, commerce, infrastructure spending, health and safety;
risk of governmental defaults and resulting impact on the global economy and particularly financial institutions; and
amount of farm subsidies and farm payments.

We wish to caution readers not to place undue reliance on any forward-looking statement 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 and under “Risk Factors,” as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning us and our businesses, including factors that could potentially materially affect our 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.
 

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Executive Officers of the Company
 
Certain information is set forth below concerning the executive officers of the Company, each of whom has been elected to serve until the 2014 annual meeting of directors or until his successor is duly elected and qualified.
Name
 
Age
 
Position
Ronald A. Robinson
 
61
 
President and Chief Executive Officer
Dan E. Malone
 
53
 
Executive Vice President and Chief Financial Officer
Robert H. George
 
67
 
Vice President, Secretary and Treasurer
Richard J. Wehrle
 
57
 
Vice President and Controller
Donald C. Duncan
 
62
 
Vice President and General Counsel
Geoffrey Davies
 
66
 
Vice President, Alamo Group Inc. and Managing    Director, Alamo Group (EUR) Ltd., European Division
Richard D. Pummell
 
67
 
Vice President, Alamo Group Inc. and Executive Vice President Alamo Group (USA) Inc., Agricultural Division
Jeffery A. Leonard
 
54
 
Vice President, Alamo Group Inc. and Executive Vice President Alamo Group (USA) Inc., Industrial Division

Ronald A. Robinson was appointed President, Chief Executive Officer and a director of the Company on July 7, 1999. Mr. Robinson had previously been President of Svedala Industries, Inc., the U.S. subsidiary of Svedala Industries AB of Malmo, Sweden, a leading manufacturer of equipment and systems for the worldwide construction, mineral processing and materials handling industries. Mr. Robinson joined Svedala in 1992 when it acquired Denver Equipment Company of which he was Chairman and Chief Executive Officer.

Dan E. Malone was appointed Executive Vice President, Chief Financial Officer on January 15, 2007. Prior to joining the Company, Mr. Malone held the position of Executive Vice President, Chief Financial Officer & Corporate Secretary at Igloo Products Corporation, a manufacturer of insulated consumer goods, from 2002 to January 2007. Mr. Malone was Vice President and Chief Financial Officer of The York Group, Inc. from 2000 to 2002, and held various financial positions from 1987 to 2000 with Cooper Industries, Inc. and its various subsidiaries.

Robert H. George joined the Company in May 1987 as Vice President and Secretary/Treasurer and has served the Company in various executive capacities since that time. Prior to joining the Company, Mr. George was Senior Vice President of Frost National Bank, a national bank association, from 1978 to 1987.

Richard J. Wehrle has been Vice President and Controller of the Company since May 2001. Prior to his appointment, Mr. Wehrle served in various accounting management capacities within the Company since 1988.

Donald C. Duncan has been General Counsel of the Company since January 2002 and was elected Vice President in February 2003. Prior to joining the Company, Mr. Duncan was counsel for various publicly held companies in Houston, Texas and most recently was Associate General Counsel for EGL, Inc. from 2000 to 2001 and Senior Counsel for Weatherford International Inc. from 1997 to 1999.

Geoffrey Davies, OBE and PhD, has been Managing Director of Alamo Group (EUR) Ltd. since December 1993 and was elected Vice President of the Company in February 2003. From 1988 to 1993, Dr. Davies served McConnel Ltd., a U.K. company acquired by Alamo Group in 1991, in various capacities including serving as its Marketing Director from February 1992 until December 1993.
 
Richard D. Pummell was elected Vice President of Alamo Group Inc. in November 2009. Mr. Pummell joined the Company in 2005 as Executive Vice President of Alamo Group (USA) Inc. and is in charge of the Agricultural Division. Prior to joining the Company, Mr. Pummell was Vice President for Global Supply and General Manager of

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Metso Minerals, a supplier of technology and services for mining, constructions, power generation, automation, recycling, and pulp and paper industries.

Jeffery A. Leonard joined Alamo Group in September 2011 as Vice President of Alamo Group Inc. and Executive Vice President of Alamo Group (USA) Inc., in charge of the Industrial Division. Mr. Leonard previously was Senior Vice President of Metso Minerals Industries Inc., a supplier of technology and services for mining, constructions, power generation, automation, recycling, and pulp and paper industries.

Item 1A. Risk Factors

You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to the Company’s securities. If any of the following risks develop into actual events, the Company’s business, financial condition or results from operations could be materially and adversely affected and you could lose all or part of your investment.

Risks related to our business
 
Deterioration of industry conditions could harm our business, results of operations and financial condition.
 
Our business depends to a large extent upon the prospects for the mowing, right-of-way maintenance and agricultural markets in general. Future prospects of the industry depend largely on factors outside of our control. Any of those factors could adversely impact demand for our products, which could adversely impact our business, results of operations and financial condition. These factors include the following:

weakness in worldwide economy;
the price and availability of raw materials, purchased components and energy;
budget constraints and revenue shortfalls for our governmental customers;
changes in domestic and foreign governmental policies and laws, including increased levels of governmental regulation;
the levels of interest rates;
the value of the U.S. dollar relative to the foreign currencies in countries where we sell our products but don’t have a manufacturing presence;
impact of tighter credit markets on the Company, its dealers and end-users;
impairment in the carrying value of goodwill; and
increase in unfunded pension plan liability due to financial market deterioration.
 
In addition, our business is susceptible to a number of factors that specifically affect agricultural customer spending patterns, including the following:

animal disease outbreaks, epidemics and crop pests;
weather conditions, such as droughts, floods and snowstorms;
changes in farm incomes;
cattle and agricultural commodity prices;
changes in governmental agricultural policies worldwide;
the level of worldwide farm output and demand for farm products; and
limits on agricultural imports.

A downturn in general economic conditions and outlook in the United States and around the world could adversely affect our net sales and earnings.
 
The strength and profitability of our business depends on the overall demand for our products and upon economic conditions and outlook, including but not limited to economic growth rates; consumer spending levels; financing availability, pricing and terms for our dealers and end-users; employment rates; interest rates; inflation; consumer confidence and general economic and political conditions and expectations in the United States and the other economies in which we conduct business. Slow or negative growth rates, inflationary pressures, higher commodity costs and energy prices, reduced credit availability or unfavorable credit terms for our dealers and end-user customers, increased unemployment rates, and continued recessionary economic conditions and outlook

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could cause consumers to continue to reduce spending, which may cause them to delay or forgo purchases of our products and could have an adverse effect on our net sales and earnings.
 
We depend on governmental sales and a decrease in such sales could adversely affect our business, results of operations and financial condition.
 
A substantial portion of our revenues is derived from sales to federal, state and local governmental entities both in the U.S. and in other countries in which we sell our products. These sales depend primarily on the levels of budgeted and appropriated expenditures for highway, airport, roadside and parks maintenance by various governmental entities and are affected by changes in local and national economic conditions.
 
Our dependence on, and the price and availability of, raw materials as well as purchased components may adversely affect our business, results of operations and financial condition.

We are subject to fluctuations in market prices for raw materials such as steel and energy. In addition, although most of the raw materials and purchase components we use are commercially available from a number of sources, we could experience disruptions in the availability of such materials. If we are unable to purchase materials we require or are unable to pass on price increases to our customers or otherwise reduce our cost of goods sold, our business, results of operations and financial condition may be adversely affected. In addition, higher energy costs may negatively affect spending by farmers, including their purchases of our products.

Impairment in the carrying value of goodwill could negatively impact our consolidated results of operations and net worth.

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 December 31, 2013, goodwill was $32,073,000, which represents 7% of total assets.

The Company recognized no goodwill impairment in 2013. The Company recognized goodwill impairment at one of its French operations, Faucheux, of $656,000 in 2012 and two of its French operations, SMA and Rousseau, of $1,898,000 in 2011. The primary reason for the goodwill impairment in 2012 and 2011 was the general economic downturn that continues to affect the Company's European operations. This caused the Company to revise its expectations about future revenue, which is a significant factor in the discounted cash flow analysis used to estimate the fair value of the Company's reporting units. During the 2013 impairment analysis review, we performed a sensitivity analysis for goodwill impairment with respect to each of our reporting units and determined that a hypothetical 15% decline in the fair value of each reporting unit as of December 31, 2013 would not result in an impairment of goodwill for any of the reporting units. During the 2012 impairment analysis review, it was noted that even though the Schwarze and Rivard reporting units' fair value was above carrying value, it was not materially different. On December 31, 2013, there was approximately $6.9 million and $12.3 million of goodwill related to the Schwarze and Rivard reporting units, respectively. These reporting units would be most likely affected by changes in the Company’s assumptions and estimates. The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions used, such as changes in the reporting unit’s future growth rates, discount rates, etc.

We are significantly dependent on information technology.

We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic and financial information, to manage a variety of business processes and activities, and to comply with regulatory, legal, and tax requirements. We also depend on our information technology infrastructure for digital marketing activities and for electronic communications among our locations, personnel, customers, and suppliers. These information technology systems, [some of which are provided and maintained by third parties], may be susceptible to damage, disruptions, or shutdowns due to hardware failures, computer viruses, hacker attacks, telecommunication failures, user errors, catastrophic events or other factors. If our information technology systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, we could experience business disruptions, transaction errors, processing inefficiencies,

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and the loss of customers and sales, causing our product sales, financial condition, and operating results to be adversely affected and the reporting of our financial results to be delayed.

In addition, if we are unable to prevent security breaches or disclosure of non-public information, we may suffer financial and reputational damage, litigation or remediation costs or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers, or suppliers.

We operate in a highly competitive industry, and some of our competitors and potential competitors have greater resources than we do.

Our products are sold in highly competitive markets throughout the world. We compete with several large national and international companies that offer a broad range of equipment and replacement parts that compete with our products, as well as with numerous small, privately-held manufacturers and suppliers of a limited number of products mainly on a regional basis. Some of our competitors are significantly larger than we are and have substantially greater financial and other resources at their disposal. We believe that we are able to compete successfully in our markets by, to some extent, avoiding direct competition with significantly larger potential competitors. There can be no assurance that our competitors will not substantially increase the resources devoted to the development and marketing of products competitive with our products or that new competitors with greater resources will not enter our markets. Any failure to effectively compete could have an adverse effect on our business, results of operations and financial condition.

We operate and source internationally, which exposes us to the political, economic and other risks of doing business abroad.
 
We have operations in a number of countries outside of the United States and we source raw materials and components globally. Our international operations are subject to the risks normally associated with conducting business in foreign countries, including but not limited to the following:

limitations on ownership and on repatriation of earnings;
import and export restrictions, tariffs and quotas;
additional expenses relating to the difficulties and costs of staffing and managing international operations;
labor disputes and uncertain political and economic environments and the impact of foreign business cycles;
changes in laws or policies;
delays in obtaining or the inability to obtain necessary governmental permits;
potentially adverse consequences resulting from the applicability of foreign tax laws;
cultural differences;
increased expenses due to inflation;
weak economic conditions in foreign markets where our subsidiaries distribute their products;
changes in currency exchange rates;
disruptions in transportation and port authorities; and
new regulations involving international freight shipments.

Our international operations may also be adversely affected by laws and policies of the United States and the other countries in which we operate affecting foreign trade, investment and taxation.
 
In addition, political developments and governmental regulations and policies in the countries in which we operate directly affect the demand for our products. For example, decreases or delays in farm subsidies to our agricultural customers, or changes in environmental policies aimed at limiting mowing activities, could adversely affect our business, results of operations and financial condition.

Our acquisition strategy may not be successful, which may adversely affect our business, results of operations and financial condition.

We intend to grow internally and through the acquisition of businesses and assets that will complement our current businesses. To date, a material portion of our growth has come through acquisitions. We cannot be certain that we will be able to identify attractive acquisition targets, obtain financing for acquisitions on satisfactory terms or successfully acquire identified targets. Competition for acquisition opportunities may also increase our costs of

15


making acquisitions or prevent us from making certain acquisitions. These and other acquisition-related factors may adversely impact our business, results of operations and financial condition.

We may be unable to complete or integrate existing or future acquisitions effectively, and businesses we have acquired, or may acquire in the future, may not perform as expected.

We may not be successful in integrating acquired businesses into our existing operations and achieving projected synergies. We could face many risks in integrating acquired businesses, including but not limited to the following:

we may incur substantial costs, delays or other operational or financial challenges in integrating acquired businesses, including integrating each company's accounting, information technology, human resource and other administrative systems to permit effective management;
we may be unable to achieve expected cost reductions, to take advantage of cross-selling opportunities, or to eliminate redundant operations, facilities and systems;
we may need to implement or improve controls, procedures and policies appropriate for a public company;
acquisitions may divert our management’s attention from the operation of our existing businesses;
we may not be able to retain key personnel of acquired businesses;
there may be cultural challenges associated with integrating management and employees from the acquired businesses into our organization; and
we may encounter unanticipated events, circumstances or legal liabilities.

Our integration of acquired businesses requires significant efforts from the management of each entity, including coordinating existing business plans and research and development efforts. Integrating operations may distract management’s attention from the day-to-day operation of the combined companies. Ultimately, our attempts to integrate the operations, technology and personnel of acquired businesses may not be successful. If we are unable to successfully integrate acquired businesses, our future results may be negatively impacted.

In addition, we may be adversely affected if businesses that we have acquired, or that we acquire in the future, do not perform as expected. An acquired business could perform below our expectations for a number of reasons, including legislative or regulatory changes that affect the areas in which the acquired business specializes, the loss of customers and dealers, general economic factors that directly affect the acquired business, and the cultural incompatibility of its management team. Any or all of these reasons could adversely affect our business, results of operation and financial condition.

The agricultural industry and the mowing and right of way maintenance industry are seasonal and are affected by the weather, and seasonal fluctuations may cause our results of operations and working capital to fluctuate from quarter to quarter.

In general, agricultural and governmental end-users typically purchase new equipment during the first and second calendar quarters. Other products such as street sweepers, excavators, snow blowers, front-end loaders and pothole patchers have different seasonal patterns, as do replacement parts in general. In attempting to achieve efficient utilization of manpower and facilities throughout the year, we estimate seasonal demand months in advance and manufacturing capacity is scheduled in anticipation of such demand. We utilize a rolling twelve-month sales forecast provided by our marketing divisions and order backlog in order to develop a production plan for our manufacturing facilities. In addition, many of our marketing departments attempt to equalize demand for their products throughout the calendar year by offering seasonal sales programs which may provide additional incentives, including discounts and extended payment terms, on equipment that is ordered during off-season periods. Because we spread our production and wholesale shipments throughout the year to take into account the factors described above, sales in any given period may not reflect the timing of dealer orders and retail demand.

Weather conditions and general economic conditions may affect the timing of purchases and actual industry conditions might differ from our forecasts. Consequently, sudden or significant declines in industry demand could adversely affect our working capital or results of operations.


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If we do not retain key personnel and attract and retain other highly skilled employees, our business may suffer.

Our continued success will depend on, among other things, the efforts and skills of our executive officers, including our president and chief executive officer, and our ability to attract and retain additional highly qualified managerial, technical, manufacturing, and sales and marketing personnel. We do not maintain “key man” life insurance for any of our employees, and all of our senior management are employed at will. We cannot assure you that we will be able to attract and hire suitable replacements for any of our key employees. We believe the loss of a key executive officer or other key employee could have an adverse effect on our business, results of operations and financial condition.

We are subject on an ongoing basis to the risk of product liability claims and other litigation arising in the ordinary course of business.

Like other manufacturers, we are subject to various claims, including product liability claims, arising in the ordinary course of business, and we are a party to various legal proceedings that constitute routine litigation incidental to our business. We may be exposed to product liability claims in the event that the use of our products results, or is alleged to result, in bodily injury, property damage, or both. We cannot assure you that we will not experience any material product liability losses in the future or that we will not incur significant costs to defend the Company against such claims. While we currently have product liability insurance, we cannot assure you that our product liability insurance coverage will be adequate for any liabilities that may ultimately be incurred or that it will continue to be available on terms acceptable to us. A successful claim brought against us in excess of available insurance coverage or a requirement to participate in a product recall may have a materially adverse effect on our business.

We are subject to environmental, health and safety and employment laws and regulations and related compliance expenditures and liabilities.

Like other manufacturers, the Company is subject to a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways, and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, as well as the remediation of contamination associated with releases of hazardous substances at the Company’s facilities and offsite disposal locations, workplace safety and equal employment opportunities. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the effect 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 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 voluntarily worked with an environmental consultant and the state of Iowa with respect to these issues and believes it completed its remediation program in June 2006. The work was accomplished within the Company’s environmental liability reserve balance. We requested a “no further action” classification from the state. We received a conditional “no further action” letter in January of 2009. When we demonstrate stable or improving conditions below residential standards for a certain period of time by monitoring existing wells, we will request an unconditional “no further action” letter.

The Company knows that Bush Hog’s main manufacturing property in Selma, Alabama was contaminated with chlorinated volatile organic compounds which most likely resulted from painting and cleaning operations during the 1960s and 1970s. The contaminated areas were primarily in the location of underground storage tanks and underneath the former waste storage area. Under the Asset Purchase Agreement, Bush Hog’s prior owner agreed to and has removed the underground storage tanks at its cost and has remediated the identified contamination in accordance with the regulations of the Alabama Department of Environmental Management. An environmental consulting firm was retained by the prior owner to administer the cleanup and monitor the site on an ongoing basis until the remediation program is complete and approved by the applicable authorities.
  
Certain properties of the Company contain asbestos that may have to be remediated over time and it could be additional expense to the Company.

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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.
 
If we are unable to comply with the terms of our credit arrangements, especially the financial covenants, our credit arrangements could be terminated.
 
We cannot assure you that we will be able to comply with all of the terms of our credit arrangements, especially the financial covenants. Our ability to comply with such terms depends on the success of our business and our operating results. Various risks, uncertainties, and events beyond our control could affect our ability to comply with the terms of our credit arrangements. If we were out of compliance with any covenant required by our credit arrangements following any applicable cure periods, the banks could terminate their commitments unless we could negotiate a covenant waiver. The banks could condition such waiver on amendments to the terms of our credit arrangements that may be unfavorable to us, including, a potential increase to the interest rate we currently pay on outstanding debt under our credit arrangements could increase, which could adversely affect our operating results.
 
Fluctuations in currency exchange rates may adversely affect our financial results.
 
Our earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly in European countries, Canada and Australia, as a result of the sale of our products in international markets. While we do hedge against such fluctuations to an extent (primarily in the U.K. market), we cannot assure you that we will be able to effectively manage these risks. Significant long-term fluctuations in relative currency values, such as a devaluation of the Euro against the U.S. dollar, could have an adverse effect on our future results of operations or financial condition.
 
Risks related to investing in our common stock
 
Because the price of our common stock may fluctuate significantly and its trading volume has generally been low, it may be difficult for you to resell our common stock when desired or at attractive prices.
 
The trading price of our common stock has and may continue to fluctuate. The closing prices of our common stock on the New York Stock Exchange during 2013 ranged from $60.69 to $33.89 per share, and during 2012 from $34.07 to $26.20 per share. Our stock price may fluctuate in response to the risk factors set forth herein and to a number of events and factors, such as quarterly variations in operating and financial results, litigation, changes in financial estimates and recommendations by securities analysts, the operating and stock performance of other companies that investors may deem comparable to us, news reports relating to us or trends in our industry or general economic conditions. Furthermore, the trading volume of our common stock has generally been low, which may increase the volatility of the market price for our stock. The stock price volatility and low trading volume may make it difficult for you to resell your shares of our common stock when desired or at attractive prices.

You may experience dilution of your ownership interests due to the future issuance of additional shares of our common stock.

We may issue shares of our previously authorized and unissued securities which will result in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue 20,000,000 shares of common stock. On December 31, 2013, 12,123,083 shares of our common stock were issued and outstanding, and there were outstanding options and restricted stock awards totaling an additional 417,774 shares of our common stock. We also have additional shares available for grant under our 2005 Incentive Stock Option Plan and our 2009 Equity Incentive Plan. Additional stock option or other compensation plans or amendments to existing plans for employees and directors may be adopted. Issuance of these shares of common stock may dilute the ownership interests of our then existing stockholders. We may also issue additional shares of our common stock in connection with the hiring of personnel, future acquisitions, such as the 1,700,000 shares issued as consideration for the acquisition of Bush Hog in 2009, future private placements of our securities for capital raising purposes or for other business purposes. This would further dilute the interests of our existing stockholders.

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There is no assurance that we will continue declaring dividends or have the available cash to make dividend payments.
 
On January 2, 2013, the Board of Directors of the Company increased its quarterly dividend from $.06 per share to $.07 per share. Although we have paid a cash dividend in each quarter since becoming a public company in 1993, there can be no assurance that we will continue to declare dividends or that funds will continue to be available for this purpose in the future. The declaration and payment of dividends are restricted by the terms of our amended and restated revolving credit agreement, are subject to the discretion of our Board of Directors, are not cumulative, and will depend upon our profitability, financial condition, capital needs, future prospects, and other factors deemed relevant by our Board of Directors.
 
Provisions of our corporate documents may have anti-takeover effects that could prevent a change in control.
 
Provisions of our charter, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include supermajority voting requirements, prohibiting the stockholder from calling stockholder meetings, removal of directors for cause only and prohibiting shareholder actions by written consent. Our Certificate of Incorporation and By-laws state that any amendment to certain provisions, including those provisions regarding the removal of directors and limitations on action by written consent discussed above, be approved by the holders of at least two-thirds of our common stock. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which would prevent us from engaging in a business combination with a person who becomes a 15% or greater shareholder for a period of three years from the date such person acquired such status unless certain board or shareholder approvals were obtained.

Future sales, or the possibility of future sales, of a substantial amount of our common stock may depress the price of the shares of our common stock.
 
Future sales, or the availability for sale in the public market, of substantial amounts of our common stock could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through future sales of equity securities. If we or our existing stockholders sell substantial amounts of our common stock in the public market, or if there is a perception that these sales may occur, the market price of our common stock could decline.
 
Certain stockholders own a significant amount of our common stock, and their interests may conflict with those of our other stockholders.
 
As of December 31, 2013, Capital Southwest Corporation, and its subsidiary Capital Southwest Venture Corporation, beneficially owned approximately 23% of our outstanding common stock and, four other investors - Bgear LLC, Henry Crown and Company, Royce & Associates, LLC, and Dimensional Fund Advisors LP - beneficially own approximately 32% of our outstanding common stock. As a result, either Capital Southwest or the other major stockholders combined could be able to significantly influence the direction of the Company, the election of our Board of Directors and the outcome of any other matter requiring stockholder approval, including mergers, consolidations and the sale of all or substantially all of our assets, and together with other beneficially owned investors, to prevent or cause a change in control of the Company. Also, pursuant to contractual obligations, each of Capital Southwest Venture Corporation, Capital Southwest Corporation and Duroc LLC, an affiliate of Bgear LLC and Henry Crown and Company, was entitled to certain rights with respect to the registration of the common stock owned by them under the Securities Act. Pursuant to such registration rights, on March 12, 2012 we filed a registration statement related to the common stock owned by such entities and such registration statement was declared effective by the SEC. The interests of Capital Southwest and other major stockholders may conflict with the interests of our other stockholders.
 
Item 1B. Unresolved Staff Comments 

The Company has no unresolved staff comments to report pursuant to Item 1B.


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Item 2. Properties
      As of December 31, 2013, the Company utilized nine principal manufacturing plants located in the United States, six in Europe, two in Canada, and one in Australia. The facilities are listed below:
 
Facility
 
Square
Footage
 
Principal Types of Products
Manufactured And Assembled
Selma, Alabama
767,700

Owned
Mechanical Rotary Mowers, Finishing Mowers, Zero Turn Radius Mowers, Backhoes, Front-end Loaders for Bush Hog
New Philadelphia, Ohio
430,000

Owned
Telescopic Excavators for Gradall and Vacuum Trucks for VacAll
Gibson City, Illinois
275,000

Owned
Mechanical Mowers, Blades, Post Hole Diggers, Deep Tillage Equipment, Front-end Loaders and Backhoes and other implements for, Rhino, Bush Hog and OEM's
Seguin, Texas
230,000

Owned
Hydraulic and Mechanical Rotary and Flail Mowers, Sickle-Bar Mowers, and Boom-Mounted Equipment for Alamo Industrial
Indianola, Iowa
200,000

Owned
Distribution and Manufacturing of Aftermarket Farm Equipment Replacement and Wear Parts for Herschel/Valu-Bilt
Neuville, France
195,000

Owned
Hydraulic and Mechanical Boom-Mounted Hedge and Grass Cutters for Rousseau and SMA
Ludlow, England
160,000

Owned
Hydraulic Boom-Mounted Hedge and Grass Cutters and other Equipment for McConnel and Twose
Salford Priors, England
157,000

Owned
Tractor-Mounted Power Arm Flails and other Equipment for Bomford and Twose and Spearhead
Chartres, France
136,000

Owned
Front-end Loaders, Backhoes and Attachments for Faucheux and McConnel
Huntsville, Alabama
136,000

Owned
Air and Mechanical Sweeping Equipment for Schwarze
St. Valerien, Quebec, Canada
100,000

Owned
Snow and Ice Removal Equipment for Tenco
Daumeray, France
100,000

Leased
Vacuum trucks, high pressure cleaning systems and trenchers for Rivard
Englefeld, Saskatchewan, Canada
85,000

Owned
Mechanical Rotary Mowers, Snow Blowers, and Rock Removal Equipment for Schulte
Leavenworth, Kansas
70,000

Owned
Snow Plows and Heavy-duty Snow Removal Equipment for Henke
Sioux Falls, South Dakota
66,000

Owned
Hydraulic and Mechanical Mowing Equipment for Tiger
Kent, Washington
42,800

Leased
Truck Mounted Sweeping Equipment for the contractor market branded Nite-Hawk
Peschadoires, France
22,000

Owned
Replacement Parts for Blades, Knives and Shackles for Forges Gorce
Wacol, Australia
18,000

Leased
Agriculture mowing equipment and other attachments for Superior
Ipswich, Australia
15,000

Leased
Air and Mechanical Sweeping Equipment for Schwarze
Installation Facilities, Warehouses & Sales
72,000

 Leased
Services Parts Distribution, Installation Facilities and Sales Office
Offices, Seguin, Texas
10,400

Owned
Corporate Office
 
Total
3,287,900

0.9246327443
 
     

20



Approximately 92% of the manufacturing, warehouse and office space is owned. In July of 2012, the Company closed its SMC manufacturing facility located in Sioux Falls, South Dakota and consolidated the operations into the Company's Gibson City, Illinois facility. The Company has entered into a contract to sell the SMC plant for $900,000 and anticipates a gain on the sale of the facility which is expected to close in the second quarter of 2014. The Company considers this facility to be well maintained, in good operating condition and adequate for its present level of operations. The Company's Memphis warehouse totaling 28,000 sq. ft. was sold during the first quarter of 2013.

Item 3. Legal Proceedings

Like other manufacturers, the Company is subject to a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways, and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, as well as the remediation of contamination associated with releases of hazardous substances at the Company’s facilities and off-site disposal locations, workplace safety and equal employment opportunities. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the effect 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 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 voluntarily worked with an environmental consultant and the state of Iowa with respect to these issues and believes it completed its remediation program in June 2006. The work was accomplished within the Company’s environmental liability reserve balance. We requested a “no further action” classification from the state. We received a conditional “no further action” letter in January of 2009. When we demonstrate stable or improving conditions below residential standards for a certain period of time by monitoring existing wells, we will request an unconditional “no further action” letter.

The Company knows that Bush Hog’s main manufacturing property in Selma, Alabama was contaminated with chlorinated volatile organic compounds which most likely resulted from painting and cleaning operations during the 1960s and 1970s. The contaminated areas were primarily in the location of underground storage tanks and underneath the former waste storage area. Under the Asset Purchase Agreement, Bush Hog’s prior owner agreed to and has removed the underground storage tanks at its cost and has remediated the identified contamination in accordance with the regulations of the Alabama Department of Environmental Management. An environmental consulting firm was retained by the prior owner to administer the cleanup and monitor the site on an ongoing basis until the remediation program is complete and approved by the applicable authorities.
  
Certain properties of the Company contain asbestos that may have to be remediated over time. The Company believes that any subsequent change in the liability associated with the asbestos removal will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
 
In December of 2012, a federal district court jury in Louisiana found that Gradall was unjustly enriched in the amount of $1,000,000 plus interest when it sold several telescopic fire apparatuses after properly terminating what the jury determined to be an enforceable contract with the plaintiff, a fire truck manufacturer. Gradall is appealing the decision and has reserved the full amount.

Alamo Group Inc.  and Bush Hog, Inc. were added as defendants in 2013 to ongoing litigation by Deere & Company as plaintiff against Bush Hog, LLC (now Duroc, LLC) and Great Plains Manufacturing Incorporated, in which Deere alleged infringement of a mower-related patent. The jury concluded that not only did the defendants not infringe the patent but that the patent was invalid as well. The Company expensed $2,100,000 in legal fees related to this lawsuit in 2013.

Some of the former employees of SMA in Orleans, France, contested the severance offered by the Company as a result of the closure of that facility in 2010 and were awarded additional payments by a French labor court. The Company is appealing the award but did accrue the full exposure of the severance.


21


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.

Item 4. Mine Safety Disclosures

Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock trades on the New York Stock Exchange under the symbol: ALG. On February 28, 2014, there were 12,126,783 shares of common stock outstanding, held by approximately 79 holders of record, but the total number of beneficial owners of the Company’s common stock exceeds this number. On February 28, 2014, the closing price of the common stock on the New York Stock Exchange was $52.58 per share.

The following table sets forth, for the period indicated, on a per share basis, the range of high and low sales prices for the Company’s common stock as quoted by the New York Stock Exchange. These price quotations reflect inter-dealer prices, without adjustment for retail markups, markdowns or commissions, and may not necessarily represent actual transactions.

2013
 
2012
 
 
 
 
 
Cash
 
 
 
 
 
 
Cash
 
 
Sales Price
Dividends
 
 
 
Sales Price
Dividends
Quarter Ended
 
High
 
Low
Declared
 
Quarter Ended
 
High
 
Low
Declared
March 31, 2013
 
$
40.64

 
$
33.12

 
$
.07

 
 
March 31, 2012
 
$
30.93

 
$
25.51

 
$
.06

 
June 30, 2013
 
44.13

 
37.39

 
.07

 
 
June 30, 2012
 
34.23

 
29.40

 
.06

 
September 30, 2013
 
49.45

 
40.48

 
.07

 
 
September 30, 2012
 
34.00

 
27.07

 
.06

 
December 31, 2013
 
61.27

 
45.51

 
.07

 
 
December 31, 2012
 
34.63

 
29.66

 
.06

 

The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends as they depend on future earnings, capital requirements and financial condition. In addition, the payment of dividends is subject to restrictions under the Company’s bank revolving credit agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Item 7 of Part II of this Annual Report on Form 10‑K for a further description of the bank revolving credit agreement.
 
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 in 2012 or in 2013. The authorization to repurchase up to 1,000,000 shares remains available, less 42,600 shares previously purchased.

Information relating to compensation plans under which equity securities of the Company are authorized for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.

22


Stock Price Performance Graph

The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act except to the extent that Alamo Group Inc. specifically incorporates it by reference into a document filed under the Securities Act or the Exchange Act.
 
The following graph and table set forth the cumulative total return to the Company's stockholders of our Common Stock  during a five-year period ended December 31, 2013, as well as the performance of an overall stock market index (the S&P 500 Index) and the Company's selected peer group index (the Russell 2000 Index).
 
The Company believes a representative industry peer group of companies with a similar business segment profile does not exist. The SEC has indicated that companies may use a base other than industry or line of business for determining its peer group index, such as an index of companies with similar market capitalization. Accordingly, the Company has selected the Russell 2000 Index, a widely used small market capitalization index, to use as a representative peer group.

 
*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.
 
 
 
 
Fiscal year ending December 31.
 
 
 
 
 
 
 
 
 
Copyright© 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
 
 
 
Copyright© 2014 Russell Investment Group. All rights reserved.
 
 
 
 
 
December 31, 2008
 
December 31, 2009
 
December 31, 2010
 
December 31, 2011
 
December 31, 2012
 
December 31, 2013
Alamo Group Inc.
 
100.00
 
116.89
 
191.74
 
187.42
 
228.94
 
428.69
S&P 500
 
100.00
 
126.46
 
145.51
 
148.59
 
172.37
 
228.19
Russell 2000
 
100.00
 
127.17
 
161.32
 
154.59
 
179.86
 
249.69

23


Item 6. Selected Financial Data
 
The following selected financial data is derived from the consolidated financial statements of Alamo Group Inc. and its subsidiaries. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
 
 
Fiscal Year Ended December 31, (1)
 
(in thousands, except per share amounts)
2013
2012
2011
2010
2009
Operations:
 
 

 

 

 
Net sales
$
676,836

$
628,402

$
603,593

$
538,548

$
454,825

Income before income taxes
51,388

43,446

48,129

29,032

31,106

Net income
36,094

28,903

32,687

21,117

18,633

Percent of sales
5.3
%
4.6
%
5.4
%
3.9
%
4.1
%
Earnings per share
 
 

 

 

 

Basic
3.00

2.43

2.76

1.79

1.80

Diluted
2.96

2.40

2.73

1.78

1.80

Dividends per share
0.28

0.24

0.24

0.24

0.24

Average common shares
 
 

 

 

 

Basic
12,050

11,899

11,848

11,782

10,330

Diluted
12,212

12,058

11,966

11,893

10,363

Financial Position:
 
 
 
 
 
Total assets
$
438,476

$
404,339

$
381,665

$
370,983

$
379,957

Short-term debt and current maturities
420

588

1,190

2,319

5,453

Long-term debt, excluding current maturities
8

118

8,621

23,106

44,336

Stockholders’ equity
$
350,465

$
310,286

$
277,276

$
253,260

$
236,919

 
(1)   Includes the results of operations of companies acquired from the effective dates of acquisitions.
 
 

24


Item 7. Management’s Discussion and Analysis of Financial Condition
And Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K.
The following tables set forth, for the periods indicated, certain financial data:
 
 
Fiscal Year Ended December 31,
 
Net sales (data in thousands):
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
North American
 
 
 
 
 
 
Industrial
 
$
296,617

 
$
263,353

 
$
229,594

Agricultural
 
215,340

 
200,467

 
203,993

European
 
164,879

 
164,582

 
170,006

Total net sales
 
$
676,836

 
$
628,402

 
$
603,593

 
 
 
 
 
 
 
Cost and profit margins, as percentages of net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
76.6
%
 
77.2
%
 
77.6
%
Gross profit
 
23.4
%
 
22.8
%
 
22.4
%
Selling, general and administrative expenses
 
15.9
%
 
15.5
%
 
15.3
%
Income from operations
 
7.5
%
 
7.2
%
 
8.2
%
Income before income taxes
 
7.6
%
 
6.9
%
 
8.0
%
Net income
 
5.3
%
 
4.6
%
 
5.4
%
                                                                                           
Results of Operations
 
Fiscal 2013 compared to Fiscal 2012
 
The Company’s net sales in the fiscal year ended December 31, 2013 (“2013”) were $676,836,000, an increase of $48,434,000 or 7.7% compared to $628,402,000 for the fiscal year ended December 31, 2012 (“2012”). The increase was mainly from improved sales in the Company's North American and Agricultural Divisions. The Industrial Division was up 12.6% as sales of all product lines increased over 2012. Likewise, sales in the Agricultural Division were up 7.4% over last year as mowing products for all three major brands showed improvement. Sales in the European Division were slightly up compared to 2012 as markets for our products showed increases in the second half of 2013 for the first time in several years.

North American Industrial sales (net) were $296,617,000 in 2013 compared to $263,353,000 in 2012, an increase of $33,264,000 or 12.6%. The increase was primarily from higher sales of sweepers, excavator, vacuum trucks and snow equipment as demand for infrastructure maintenance equipment was strong for most of 2013.

North American Agricultural sales (net) were $215,340,000 in 2013 compared to $200,467,000 in 2012, representing an increase of $14,873,000 or 7.4%. The increase in sales compared to 2012 was from improved demand for Bush Hog, Schulte and Rhino products in the agricultural market in North America. Favorable weather conditions during the middle of 2013 helped improve sales to both row crop and hobby farmers. Commodity prices retreated somewhat during the year from levels experienced over prior years, but still remain strong.
 
European sales (net) increased $297,000 or 0.2% to $164,879,000 in 2013 compared to $164,582,000 in 2012. This slight increase was mainly from improved sales during the last half of 2013 as European markets showed some signs of improvement after being in decline for the last several years. However, challenging market conditions and uncertainty in the European economy continued to affect this Division.

25


 
Gross margins for 2013 were $158,510,000 (23.4% of net sales) compared to $143,512,000 (22.8% of net sales) in 2012, an increase of $14,998,000. The increase was from higher sales volume during 2013 which led to favorable production efficiencies. Increased lower margin tractor and chassis sales combined with lower sales of higher margin replacement parts negatively affecting the gross profit in 2013.
 
Selling, general and administrative expenses (“SG&A”) were $107,773,000 (15.9% of net sales) in 2013 compared to $97,507,000 (15.5% of net sales) in 2012. The increase of $10,266,000 in SG&A in 2013 was primarily litigation expenses from a patent infringement lawsuit, which we were successful in defending, in the amount of $2,137,000, $972,000 of acquisition related expenses and $586,000 of additional stock option expense related to the accelerated vesting of options to retirement eligible recipients. Also during 2013, the Company had restructuring costs at one of its French operations, higher performance based incentive compensation expense, increased sales commissions on higher sales and increased trade show expenses in both North America and Europe.
 
Interest expense for 2013 was $1,161,000 compared to $1,620,000 in 2012, a decrease of $459,000 or 28.3%. The decrease came from reduced borrowings in 2013 compared to 2012.

Other income (expense), net was income of $1,626,000 during 2013 compared to an expense of $517,000 in 2012. The income in 2013 included a grant of $475,000 from the UK government related to R&D training and employment, a $70,000 gain realized from the sale of the Company's Memphis warehouse in the first quarter of 2013 and fluctuations in foreign exchange rates. In 2012 the expense was entirely the result of foreign exchange rate fluctuations.

Provision for Income Taxes was $15,294,000 (29.8% of income before income taxes) for 2013 compared to $14,543,000 (33.5% of income before income taxes) in 2012. Due to the delay in signing the American Taxpayer Relief Act of 2012 which extended the research and development tax credits, the Company was not able to include $350,000 of tax credits in its 2012 financial statements but instead recognized this tax benefit in the first quarter of 2013. Also included in the 2013 provision is a credit related to the reversal of reserves for uncertain tax positions and a tax benefit relating to current losses in one of our French companies.

Net Income for 2013 was $36,094,000 compared to $28,903,000 in 2012 due to the factors described above.
 
Fiscal 2012 compared to Fiscal 2011
 
The Company’s net sales in the fiscal year ended December 31, 2012 (“2012”) were $628,402,000, an increase of $24,809,000 or 4.1% compared to $603,593,000 for the fiscal year ended December 31, 2011 (“2011”). The increase was mainly due to the acquisition of Tenco in October of 2011 and improved sales of mowing and vacuum truck equipment in the Industrial Division. The Company's Agricultural Division was slightly down as agricultural markets experienced slower growth as farmers remained cautious about the weak U.S. economy. Sales in the European Division were also down in 2012 compared to 2011 as governmental markets remained soft due to the economic slowdown that has continued to affect Europe.

North American Industrial sales (net) were $263,353,000 in 2012 compared to $229,594,000 in 2011, an increase of $33,759,000 or 14.7%. The increase was from the acquisition of Tenco which contributed $21,444,000 of sales in 2012 compared to $6,950,000 in 2011, and improved sales from VacAll vacuum trucks and mowing equipment from both the Alamo Industrial and Tiger branded products. Sales of excavators and street sweepers were negatively affected by slower markets resulting from continued budget pressures at governmental entities.

North American Agricultural sales (net) were $200,467,000 in 2012 compared to $203,993,000 in 2011, representing a decrease of $3,526,000 or 1.7%. The decrease was from market conditions and the summer drought that affected the Midwest part of the U.S. during the first nine months of 2012. However, preseason orders during the last quarter of 2012 for both Bush Hog and Rhino products were up compared to 2011. This improvement reflected strengthening in the agricultural sector by increases in commodity prices and farm incomes.
 

26


European sales (net) decreased $5,424,000 or 3.2% to $164,582,000 in 2012 compared to $170,006,000 in 2011. This decrease reflected soft governmental market conditions that affected this Division for all of 2012. French markets in particular were down as economic uncertainty in the European economy negatively affected product sales in France.
 
Gross margins for 2012 were $143,512,000 (22.8% of net sales) compared to $135,085,000 (22.4% of net sales) in 2011, an increase of $8,427,000. The increase was from the acquisition of Tenco in the amount of $4,378,000 and improved vacuum trucks and mowers sales in the Company's Industrial Division. Gross margin percentages also improved over last year as a result of continued improvements from efficiency initiatives which helped lower manufacturing costs.
 
Selling, general and administrative expenses (“SG&A”) were $97,507,000 (15.5% of net sales) in 2012 compared to $92,347,000 (15.3% of net sales) in 2011. The increase of $5,160,000 in SG&A in 2012 was primarily from the acquisition of Tenco in the amount of $3,515,000. During the fourth quarter of 2012, the Company incurred $2,420,000 in expenses relating to various litigation matters. These additional SG&A expenses were partially offset by the reversal of an environmental reserve at Gradall in the amount of $1,185,000.
 
The Company incurred goodwill impairment non-cash charges of $656,000 in 2012 and $1,898,000 in 2011. In 2012, the Company wrote off all the goodwill at its French company Faucheux. In 2011, the Company wrote off all of the goodwill pertaining to two of its French companies, SMA and Rousseau. The primary reason for the goodwill impairment in 2012 and 2011 was the general economic downturn that continues to affect the Company's European operations. All three companies are part of its European Division.
 
Interest expense for 2012 was $1,620,000 compared to $2,422,000 in 2011, a decrease of $802,000 or 33.1% . The decrease came from reduced borrowings in 2012 compared to 2011.
Other income (expense), net was an expense of $517,000 during 2012 compared to income of $848,000 in 2011. The loss and gain in 2012 and 2011 were entirely from changes in exchange rates.
Provision for Income Taxes was $14,543,000 (33.5% of income before income taxes) for 2012 compared to $15,442,000 (32.1% of income before income taxes) in 2011. Due to the delay in signing the American Taxpayer Relief Act of 2012 which extended the research and development tax credits, the Company was not able to include these tax credits in its 2012 financial statements. This benefit will be recognized in the first quarter of 2013.
Net Income for 2012 was $28,903,000 compared to $32,687,000 in 2011 due to the factors described above.

Recent Developments

On February 24, 2014, the Company entered into an agreement to acquire the operating units of Specialized Industries, LP. This includes the businesses of Super Products LLC, Wausau-Everest LP and Howard P. Fairfield LLC (the “Pending Acquisition”). Super Products is a manufacturer of vacuum trucks and related equipment, parts and service, which is complementary to Alamo’s VacAll operation. Wausau-Everest is a manufacturer of snow removal equipment which is complementary to Alamo’s Tenco and hence operations. Howard P. Fairfield is a dealer/distribution operation primarily in the New England area. Total consideration for the purchase is approximately $186 million, subject to certain adjustments. The purchase is anticipated to close within 30 to 45 days and is subject to receiving regulatory approval and completion of other pre-closing requirements.

Liquidity and Capital Resources
 
In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to conduct the Company’s business, including inventory purchases and capital expenditures. The Company’s inventory and accounts payable levels, particularly in its North American Agricultural Division, build in the first quarter and early spring and, to a lesser extent, 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 pre-season sales. These sales help balance the Company’s production during the first and fourth quarters. Some of the Company’s recent acquisitions which are not involved in vegetation maintenance have helped to soften this seasonality pattern.
 

27


As of December 31, 2013, the Company had working capital of $256,332,000, which represents an increase of $27,660,000 from working capital of $228,672,000 as of December 31, 2012. The increase in working capital was primarily from cash and cash equivalents as the Company experienced solid cash flow from its operations .
 
Capital expenditures were $13,639,000 for 2013, compared to $4,654,000 for 2012. The increase in 2013 was primarily related to plant expansions at both the Bomford facility in the U.K. and the Schulte facility in Canada. The Company expects to fund capital 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 in 2012 or in 2013. The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares previously purchased.

The Company has $44,922,000 in cash and cash equivalents held by its foreign subsidiaries as of December 31, 2013. The majority of these funds are at our UK and Canadian facilities and would not be available for use in the United States without incurring US federal and state tax consequences. The Company plans to use these funds for capital expenditures or acquisitions outside the United States.  

During the fourth quarter of 2011, the Company announced its plans to close the SMC manufacturing facility located in Sioux Falls, South Dakota and consolidate the operations into the Company's Gibson City, Illinois facility. The closure resulted in a pretax charge of $867,000 in redundancy costs. The Company completed the consolidation in July of 2012 with no additional costs. The Company has entered into a contract to sell the SMC plant for $900,000 and anticipates a gain on the sale of the facility which is expected to close in the second quarter of 2014.
 
Net cash provided by operating activities was $31,627,000 for 2013, compared to $51,263,000 for 2012. The decrease of cash from operating activities resulted from sales driven increases in accounts receivable levels.
 
Net cash used by financing activities was $2,484,000 for 2013, compared to net cash used of $9,942,000 for 2012. The net cash used in both years was repayment of amounts borrowed from our bank credit facility due to cash provided by operating activities.
 
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 $100,000,000 and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional $50,000,000. The revolving credit agreement requires us to maintain various financial covenants including a minimum EBIT to interest expense ratio, a minimum leverage ratio and a minimum asset coverage ratio. The agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on sale of properties and limitations on liens and capital expenditures. The revolving credit agreement also contains other customary covenants, representations and events of defaults. As of December 31, 2013, the Company was in compliance with the covenants under the revolving credit facility. The expiration date of the revolving credit facility is March 28, 2016. As of December 31, 2013, no amounts were outstanding under the revolving credit facility. On December 31, 2013, $722,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts resulting in $99,278,000 in available borrowings. As of December 31, 2013, the Company is in compliance with the terms and conditions of its credit facilities.

The Company is planning on amending its revolving credit facility and increasing its line of credit from $100 million to $250 million to accommodate the Pending Acquisition and meet the ongoing needs of the combined entities.
 
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, challenges affecting the banking industry and credit markets in general can potentially cause changes to credit availability, which creates a level of uncertainty.
 

28


Inflation
 
The Company believes that inflation generally has not had a material impact on its operations or liquidity. The Company is exposed to the risk that the price of energy, steel and other purchased components may increase and the Company may not be able to increase the price of its products correspondingly. If this occurs, the Company’s results of operations would be adversely impacted.

Recent Accounting Pronouncements and Legislative Changes

In July 2013, the provisions of Accounting Standards Codification Topic 740, “Income Taxes,” were amended to provide specific guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendment requires entities to present an unrecognized tax benefit as a reduction to the deferred tax asset generated by the net operating loss carryforward, similar tax loss, or tax credit carryforward, if such items are available to be used to offset the unrecognized tax benefit. These provisions are effective for interim and annual reporting periods beginning after December 15, 2013 and should be applied prospectively to all unrecognized tax benefits that exist at the effective date, with retrospective application permitted.

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “ATR Act”) which included an extension of the federal research and development credit retroactively to 2012 and prospectively through 2013. The effects of the ATR Act are recognized in 2013. 

The SEC adopted the conflict mineral rules under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act on August 22, 2012. The rules require public companies to disclose information about their use of specific minerals originating from and financing armed groups in the Democratic Republic of the Congo or adjoining countries. The conflict mineral rules cover minerals frequently used to manufacture a wide array of electronic and industrial products including semiconductor devices. The rules do not ban the use of minerals from conflict sources, but require public disclosure beginning with calendar year 2013. We have determined that we are subject to the rules and are evaluating our supply chain and continue to develop processes to assess the impacts and comply with the regulation.

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 a 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.

Contractual and Other Obligations
The following table shows the Company’s approximate obligations and commitments to make future payments under contractual obligations as of December 31, 2013:
 
 
Payment due by period
(in thousands)
 
 
 
Less than
 
1-3
 
3-5
 
More than
Contractual Obligations
 
Total
 
1 Year
 
Years
 
Years
 
5 Years
 
 
 
 
 
 
 
 
 
 
 
Long-term debt obligations
 
$
308

 
$
308

 
$

 
$

 
$

Capital lease obligations
 
120

 
112

 
8

 

 

Interest obligations
 
13

 
13

 

 

 

Operating lease obligations
 
3,346

 
1,507

 
1,442

 
397

 

Purchase obligations
 
83,105

 
83,105

 

 

 

 
    Total
 
$
86,892

 
$
85,045

 
$
1,450

 
$
397

 
$

 

29


Definitions:
(A)
Long-term debt obligation means a principal payment obligation under long-term borrowings.
(B)
Capital lease obligation means a principal payment obligation under a lease classified as a capital lease.
(C)
Interest obligation represents interest due on long-term debt and capital lease obligations. Interest on long-term debt assumes all floating rates of interest remain the same as those in effect at December 31, 2013.
(D)
Operating lease obligation means a payment obligation under a lease classified as an operating lease.
(E)
Purchase obligation means an agreement to purchase goods or services that is enforceable and legally binding on the registrant that specifies all significant terms, including:  fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions.
 
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 U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
Critical Accounting Policies

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

 Allowance for Doubtful Accounts
 
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations, the Company 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 aging and changes in current economic conditions.
 
The Company evaluates all receivables that are over 60 days old and will reserve specifically on a 90-day basis. The Company has a secured or insured interest on most of its wholegoods that each customer purchases. This allows the Company, in times of a difficult economy when the customer is unable to pay or has filed for bankruptcy, to repossess its 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 allowance for doubtful accounts balance was $2,738,000 on December 31, 2013, and $3,077,000 on December 31, 2012. The decrease was mainly from the Company’s Industrial Division.

Sales Discounts
 
On December 31, 2013, the Company had $16,724,000 in reserves for sales discounts compared to $15,005,000 on December 31, 2012 on product shipped to our customers under various promotional programs. The increase was due primarily to increased sales volume of the Company’s agricultural products during the 2013 pre-season, which runs during the third and fourth quarters of each year with orders shipped through the second quarter of 2014. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time.
 
The Company bases its reserves on historical data relating to discounts taken by the customer under each program. Historically, between 85% and 95% of the Company’s customers who qualify for each program actually take the discount that is available.

30


 
Inventories – Obsolete and Slow Moving
 
The Company had a reserve of $8,596,000 on December 31, 2013 and $9,099,000 on December 31, 2012 to cover obsolete and slow moving inventory. The decrease in the reserve was mainly from the Industrial Division and to a lesser extent the Company's Agricultural Division. The obsolete and slow moving inventory policy states that the reserve is to be calculated as follows: 1) no inventory usage over a three-year period 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 are made on a quarterly basis. The Company relies on historical information when available to support its reserve. The Company does not adjust the reserve balance until the inventory is liquidated.
 
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 on parts, though some components can have warranty for longer terms.
 
Warranty reserve, as a percentage of sales, is generally calculated by looking at the current twelve months’ expenses and prorating that amount based on twelve months’ sales with a ninety-day to 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 made when required.
 
The current liability warranty reserve balance was $4,994,000 on December 31, 2013 and $5,007,000 on December 31, 2012.
 
Goodwill
 
We test goodwill for impairment annually, at the reporting unit level, and whenever events or circumstances make it likely that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative assessment or a two-step process. We have an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where we perform the two-step process, the first step requires us to compare the fair value of each reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss.

The Company estimates the fair value of its reporting units using a discounted cash flow analysis. This analysis requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The cash flows are estimated over a significant future period of time, which makes those estimates and assumptions subject to an even higher degree of uncertainty. The Company also utilizes market valuation models and other financial ratios, which require the Company to make certain assumptions and estimates regarding the applicability of those models to its assets and businesses. As of December 31, 2013, goodwill was $32,073,000, which represents 7% of total assets.

31



The Company recognized no goodwill impairment in 2013. The Company recognized goodwill impairment at one of its French operations, Faucheux of $ 656,000 in 2012 and at two of its French operations, SMA and Rousseau of $1,898,000 in 2011. The primary reason for the goodwill impairment in 2012 and 2011 was the general economic downturn that continues to affect the Company's European operations. This caused the Company to revise its expectations about future revenue, which is a significant factor in the discounted cash flow analysis used to estimate the fair value of the Company's reporting units. During the 2013 impairment analysis review, we performed a sensitivity analysis for goodwill impairment with respect to each of our reporting units and determined that a hypothetical 15% decline in the fair value of each reporting unit as of December 31, 2013 would not result in an impairment of goodwill for any of the reporting units. During the 2012 impairment analysis review, it was noted that even though the Schwarze and Rivard reporting units' fair value was above carrying value, it was not materially different. On December 31, 2013, there was approximately $6.9 million and $12.3 million of goodwill related to the Schwarze and Rivard reporting units, respectively. These reporting units would be most likely affected by changes in the Company’s assumptions and estimates. The calculation of fair value could increase or decrease depending on changes in the inputs and assumptions used, such as changes in the reporting unit’s future growth rates, discount rates, etc.

Management believes that the estimated valuations it arrived at are reasonable and consistent with what other marketplace participants would use in valuing the Company's components.  However, management cannot give any assurance that these market values will not change in the future.  For example, if discount rates demanded by the market increase, this could lead to reduced valuations under the income approach.  If the Company's projections are not achieved in the future, this could lead management to reassess their assumptions and lead to reduced valuations under the income approach.  If the market price of the Company's stock decreases, this could cause the Company to reassess the reasonableness of the implied control premium, which might cause management to assume a higher discount rate under the income approach which could lead to reduced valuations.  If future similar transactions exhibit lower multiples than those observed in the past, this could lead to reduced valuations under the similar transactions approach.  And finally, if there is a general decline in the stock market and particularly in those companies selected as comparable to the Company's components, this could lead to reduced valuations under the public company market multiple approach.  The Company's annual impairment test is performed during the fourth quarter of each fiscal year.  Given the current market conditions and continued economic uncertainty, the fair value of the Company's components could deteriorate which could result in the need to record impairment charges in future periods.  The Company also monitors potential triggering events including changes in the business climate in which it operates, attrition of key personnel, volatility in the capital markets, the Company's market capitalization compared to its book value, the Company's recent operating performance, and the Company's financial projections.  The occurrence of one or more triggering events could require additional impairment testing, which could result in future impairment charges.  In particular, since the Schwarze and Rivard, reporting units' carrying value are not materially different from fair value, any changes to the Company's assumptions could lead to an indicated impairment in step one, requiring the Company to proceed to step two and potentially record an impairment charge. See Note 6 to the Consolidated Financial Statements for more information regarding goodwill.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
The Company is exposed to various financial 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 manufactures its products primarily in the United States, the U.K., 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 U.K. and Canadian operations 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.


32


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. and Canadian subsidiaries regularly enter into foreign exchange contracts to hedge over 90% of its future net foreign currency cash receipts over a period of six months. As of December 31, 2013, the Company had $2,884,000 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 $433,000. 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.

On December 31, 2013, the fair value of these agreements was in an unfavorable position; therefore, the derivative financial instruments were recorded as a gain of $17,000, which has been recognized in other income (expense), net.
 
Exposure to Exchange Rates

The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly in European countries, Canada and Australia, as a result of the sale of its products in international markets. Foreign currency forward exchange contracts in the U.K. are used to hedge against the earnings effects of such fluctuations. On December 31, 2013, the result of a uniform 10% strengthening in the value of the U.S. dollar relative to the currencies in which the Company’s sales are denominated would have resulted in a decrease in gross profit of $5,475,000. Comparatively, on December 31, 2012, 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 $5,275,000. 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 2013 was a loss of $479,000 . On December 31, 2013, the British pound closed at 0.6040 relative to the U.S. dollar, and the Euro closed at 0.7275 relative to the U.S. dollar. By comparison, on December 31, 2012, the British pound closed at 0.6155 relative to the U.S. dollar, and the Euro closed at 0.7579 relative to the 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 majority of 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 average level of borrowings at variable rates and a two hundred basis point change in the 2013 average interest rate under these borrowings, the Company’s 2013 interest expense would have changed by approximately $50,000. In the event of an adverse change in interest rates, management could take actions to mitigate its exposure. 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. However, challenges affecting the banking industry and credit markets in general can potentially cause changes to credit availability and cost of borrowing which creates a level of uncertainty.
 
Item 8. Financial Statements and Supplementary Data
 
The financial statements and supplementary data described in Item 15 of this report and included on pages 45 through 76 of this report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

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

33


defined in Rule 13a-15(e) under the Securities Exchange Act of 1933). Based upon the evaluation, the President & Chief Executive Officer, Executive Vice President & Chief Financial Officer (Principal Financial Officer), and Vice President & Corporate Controller (Principal Accounting Officer) concluded that the Company’s disclosure controls and procedures were effective at the end of the period covered by this report.
 
Management’s Annual Report on Internal Control Over Financial Reporting. Management’s report on the Company’s internal control over financial reporting is included on page 42 of this Annual Report on Form 10-K and incorporated by reference herein. The Company’s independent public accounting firm has audited and issued a report on the Company’s internal control over financial reporting which is included on page 43 of this Annual Report on Form 10-K and incorporated by reference herein.
 
Changes in Internal Controls over Financial Reporting. There have not been any changes in Alamo’s internal control over financial reporting (as such term is defined by paragraph (d) of Rule 13a-15) under the Securities Exchange Act during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, Alamo’s internal control over financial reporting.
 
Item 9B. Other Information

The following disclosure is made by Alamo Group Inc. (the “Company”) in lieu of disclosure on Form 8-K under Item 5.03, “Amendment of Articles of Incorporation or By-laws; Change in Fiscal Year.”

On March 6, 2014, the Board of Directors of the Company approved amendments (the “Amendments”) to the Company’s By-laws (the “By-laws”), effective March 6, 2014.

Article II, Section 2 of the By-laws was amended to clarify that the Board of Directors may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled by the Board of Directors.

Article II, Section 4 of the By-laws was amended to clarify that the stockholders do not have a right to call a special meeting of stockholders. In addition, Article II, Section 4 was amended to provide that the Board of Directors may postpone, reschedule or cancel any special meeting of stockholders previously scheduled by the Board of Directors.

Article II, Section 7 of the By-laws was amended to clarify that the Chairman of the Board of Directors shall act as chairman of meetings of stockholders of the Company and that the Board of Directors may designate any other director or officer of the Company to act as chairman of any meeting in the absence of the Chairman.

Article II, Section 8 of the By-laws was amended to remove the specific order of business applicable to the conduct of stockholders’ meeting previously provided and to provide that the Board of Directors may adopt such rules and regulations for the conduct of any meeting of stockholders as it shall deem appropriate.

Article II of the By-laws was amended to add a new Section 13 that provides that no business may be transacted at an annual meeting of stockholders, other than business that is either (i) specified in the Company’s proxy materials with respect to such meeting given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (ii) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (iii) otherwise properly brought before the annual meeting by any stockholder of the Company (A) who is a stockholder of record on the date of the giving of the notice provided for in Section 13 and on the record date for the determination of stockholders entitled to notice of and to vote at such annual meeting, (B) who is entitled to vote at such annual meeting and (C) who complies with the notice procedures set forth in Section 13. Section 13 provides that submission of a proposal in accordance with its provisions is the exclusive means by which a stockholder may present a proposal, other than matters that are properly brought under Rule 14a-8 of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 13 provides, among other things, requirements as to the timing and form of any notice permitted thereunder.

Article II of the By-laws was amended to add a new Section 14 that provides procedures for nomination of directors. Section 14 states that nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (i) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (ii) by any stockholder of the Company (A) who is a stockholder of record on the date of the giving of the notice provided for in Section 14 and on the record date for the determination of stockholders entitled to notice of and to vote at such meeting, (B) who is entitled to vote

34


at such meeting and (C) who complies with the notice procedures. Section 14 provides, among other things, requirements as to the timing and form of any notice permitted thereunder.

Article II of the By-laws was amended to add a new Section 15 that provides that notwithstanding the provisions of Article II, Sections 13 and 14, a stockholder shall also comply with all applicable requirements of the Exchange Act.

Article VII, Section 1 of the By-laws was amended to provide that the Board of Directors may provide that all or some of all classes or series of stock of the Company may be uncertificated shares.

Article VII, Section 4 of the By-laws was amended to provide certain provisions applicable to the issuance or transfer of uncertificated stock.

Article VIII of the By-laws was amended to add a new Section 7, that provides that unless a majority of the Board of Directors, acting on behalf of the Company, consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware or, if no state court within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) shall be the sole and exclusive forum for certain actions for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against the Company or any of its directors, officers or other employees arising pursuant to any provision of the DGCL, the Company’s Certificate of Incorporation or the By-laws (in each case, as may be amended from time to time) or (iv) any action asserting a claim against the Company or any of its directors, officers or other employees governed by the internal affairs doctrine of the State of Delaware, in all cases subject to the court’s having personal jurisdiction over all indispensible parties named as defendants. New Section 7 further provides that any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company is deemed to have notice of and consented to the foregoing provision.

The foregoing description of the Amendments does not purpose to be complete and is qualified in its entirety by reference to the By-laws, as amended, a copy of which is attached hereto as Exhibit 3.2 and incorporated by reference in its entirety.

PART III
 
Item 10. Directors, Executive Officers and Corporate Governance
 
There are incorporated in this Item 10, by reference, those portion of the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders, which appear therein under the captions “Proposal 1 -  Election of Directors,” “Nominees for Election to the Board of Directors,” “Information Concerning Directors,” “Meetings and Committees of the Board,” “The Audit Committee,” “The Nominating/Corporate Governance Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance.”  See also the information under the caption “Executive Officers of the Company” in Part I of this Report.

The Board of Directors has delegated certain responsibilities to three Committees of the Board. The Committees are the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. The Board of Directors has also adopted Corporate Governance guidelines and a Code of Business Conduct and Ethics for all employees, including the Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer and those individuals performing similar functions.

The Committee Charters, Code of Business Conduct and Ethics, and Corporate Governance Guidelines may be found on the Company’s website ( www.alamo-group.com) under the “Our Commitment” tab and are also available without charge in print by sending a request to the Corporate Secretary, Alamo Group Inc., 1627 E. Walnut Street, Seguin, Texas, 78155, which is the principal executive office of the Company. The telephone number is 830-379-1480. The Company will post any amendments to the Code of Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on the Company’s website.


35


Item 11. Executive Compensation

There are incorporated in this Item 11, by reference, those portions of the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders which appear therein under the captions “Executive Compensation,” “The Compensation Committee,” “Compensation Discussion and Analysis,” Compensation Committee Report” and “Director Compensation during 2013.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

There is incorporated in this Item 12, by reference, that portion of the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders which appears under the caption “Beneficial Ownership of Common Stock.”

Information on Alamo Group Inc.’s Equity Compensation Plans
 
The following table provides information on the shares that are available under the Company’s stock compensation plans and, in the case of plans where stock options may be granted, the number of shares of common stock issuable upon exercise of those stock options. The Company currently does not have an Equity Compensation Plan not approved by the Stockholders.
 
The numbers in the table are as of December 31, 2013, the last day of Alamo Group Inc.’s 2013 fiscal year.
 
 
 
A
 
B
 
C
 
 
 
                
 
 
Equity Compensation
Plan Category
 
 
 
 
Number of Securities to be issued upon
exercise of outstanding
options, warrants and rights
 
 
 
 
Weighted-average exercise
price of outstanding
options, warrants and
rights
 
 
Number of Securities
that remain
available for future
issuance
 under equity
compensation plans
(excluding securities
reflected in column A) 
Plans approved by stockholders
 
 
 
 
 
 
Amended and Restated 1994 Incentive Stock Option Plan
 
3,000
 
$17.85
 
First Amended and Restated 1999 Non-Qualified Stock Option Plan
 
49,700
 
$17.66
 
2005 Incentive Stock Option Plan
 
289,350
 
$26.78
 
66,100
2009 Equity Incentive Plan
 
75,724
 
$30.69
 
293,526
Plans not approved by stockholders
 
 
 
 
      Total                     
 
417,774
 

 
359,626

Item 13. Certain Relationships, Related Transactions and Director Independence

Information regarding certain relationships and related transactions is set forth under the caption “Certain Relationships and Related Transactions” in the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders and such information is incorporated by reference herein. There were no such reportable relationships or related party transactions in the fiscal year ended December 31, 2013. In 1999, the Company approved a supplemental retirement benefit for Donald J. Douglass which is paid on a quarterly basis over a period of fourteen and one-half years that began in the year 2000. The remaining balances on December 31, 2013 and 2012 were $40,000 and $115,000, respectively, and are included in the Accrued liabilities and Other long-term liabilities sections of the Company’s balance sheets.


36


Information regarding director independence is set forth under the caption “Information Concerning Directors” in the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders and such information is incorporated by reference herein.

Item 14. Principal Accountant Fees and Services

Information regarding principal accountant fees and services is set forth under the caption “Proposal 3 – Ratification of Appointment of Independent Auditors” in the Company’s definitive proxy statement for the 2014 Annual Meeting of Stockholders and such information is incorporated by reference herein.

PART IV
Item 15. Exhibits and Financial Statement Schedules

Financial Statements
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Financial Statement Schedules

All schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are omitted because they are not required or because the required information is included in the consolidated financial statements or notes thereto.

Exhibits

Exhibits – The following exhibits are incorporated by reference to the filing indicated or are included following the index to Exhibits.
 
INDEX TO EXHIBITS
 
 
 
 
 
Incorporated by Reference
 
 
 
 
From the Following
Exhibits
 
Exhibit Title
 
Documents
 
 
 
 
 
2.1

Asset Purchase Agreement, dated September 4, 2009, between Alamo Group Inc. and Bush Hog, LLC
 
Filed as Exhibit 2.1 to Form 8-K, September 10, 2009, as amended by Form 8-K/A, November 9, 2009
2.2

Membership Interests and Partnership Interests Purchase Agreement by and between Alamo Group (USA) Inc., as Purchaser, and Specialized Industries LP, as Seller Dated as of February 24, 2014
 
Filed as Exhibit 10.1 to Form 8-K, February 28, 2014
3.1 

Certificate of Incorporation, as amended, of Alamo Group Inc.
 
Filed as Exhibit 3.1 to Form S-1, February 5, 1993
3.2 

By-Laws of Alamo Group Inc. as amended
 
Filed Herewith

37


10.1

Loan Agreement, dated April 30, 1969, between Douglass Industries, Inc. and Capital Southwest Corporation
 
Filed as Exhibit 10.6 to Form S-1, February 5, 1993
10.2

First Amendment to Loan Agreement, dated February 12, 1970, between Engler Manufacturing Corporation (formerly known as Douglass Industries, Inc.) and Capital Southwest Corporation
 
Filed as Exhibit 10.7 to Form S-1, February 5, 1993
10.3

Second Amendment to Loan Agreement, dated December 21, 1972, between Terrain King Corporation (formerly known as Engler Manufacturing Corporation and Douglass Industries, Inc.) and Capital Southwest Corporation
 
Filed as Exhibit 10.8 to Form S-1, February 5, 1993
10.4

Note and Warrant Purchase Agreement, dated October 15, 1971, among Terrain King Corporation and CSC Capital Corporation, First Dallas Capital Corporation and possibly an additional purchaser or purchasers
 
Filed as Exhibit 10.9 to Form S-1, February 5, 1993
10.5

Warrant Agreement, dated November 25, 1991, between Alamo Group Inc. and Capital Southwest Corporation
 
Filed as Exhibit 10.11 to Form S-1, February 5, 1993
10.6 

Form of indemnification agreements with Directors of Alamo Group Inc.
 
Filed as Exhibit 10.1 to Form 10-Q, May 15, 1997
10.7 

Form of indemnification agreements with certain executive officers of Alamo Group Inc.
 
Filed as Exhibit 10.2 to Form 10-Q, May 15, 1997
*10.8 

Incentive Compensation Plan, adopted on December 9, 1997
 
Filed as Exhibit 10.14 to Form 10-K, March 31, 1998
*10.9 

401(k) Restoration Plan for Highly Compensated Employees, adopted on December 9, 1997
 
Filed as Exhibit 10.15 to Form 10-K, March 31, 1998
*10.10 

Amended and Restated 1994 Incentive Stock Option Plan adopted by the Board of Directors on July 7, 1999
 
Filed as Exhibit B to Schedule 14A, July 30, 1999
*10.11 

First Amended and Restated 1999 Non-Qualified Stock Option Plan, adopted by the Board of Directors on February 13, 2001
 
Filed as Exhibit B to Schedule 14A, May 3, 2001
*10.12 

2005 Incentive Stock Option Plan, adopted by the Board of Directors on May 4, 2005
 
Filed as Appendix E to Schedule 14A, May 4, 2005
*10.13 

2009 Equity Incentive Plan, adopted by the Board of Directors on May 7, 2009
 
Filed as Exhibit 10.1 to Form 8-K, May 13, 2009
10.14 

 
Amended and Restated Revolving Credit Agreement, dated August 25, 2004, between the Company and Bank of America, N.A., JPMorgan Chase Bank and Guaranty Bank
 
Filed as Exhibit 10.3 to Form 8-K, August 25, 2004
10.15

Third Amendment of the Amended and Restated Revolving Credit Agreement, dated February 3, 2006 between the Company and Bank of America, N.A., Chase Manhattan Bank, and Guaranty Bank
 
Filed as Exhibit 10.3 to Form 8-K, February 8, 2006
10.16

Fourth Amendment of the Amended and Restated Revolving Credit Agreement, dated March 30, 2006, between the Company and Bank of America, N.A., JPMorgan Chase Bank and Guaranty Bank
 
Filed as Exhibit 10.1 to Form 8-K, April 5, 2006
10.17

Fifth Amendment of the Amended and Restated Revolving Credit Agreement, dated May 7, 2007, between the Company and Bank of America, N.A., JPMorgan Chase Bank, Guaranty Bank and Rabobank
 
Filed as Exhibit 10.13 to Form 10 Q, May 7, 2007

38


10.18

Sixth Amendment of and Waiver under Amended and Restated Revolving Credit Agreement, dated October 14, 2008, between the Company and Bank of America, N.A., JPMorgan Chase Bank, Guaranty Bank and Rabobank
 
Filed as Exhibit 10.12 to Form 10K, March 10, 2009
10.19

Seventh Amendment of the Amended and Restated Revolving Credit Agreement, dated November 5, 2009, between the Company and Bank of America, N.A., Wells Fargo Bank, N.A., BBVA Compass Bank, and Rabobank
 
Filed as Exhibit 10.1 to Form 10 Q, November 9, 2009
10.20

Eighth Amendment of the Amended and Restated Revolving Credit Agreement, dated March 28, 2011, between the Company and Bank of America, N.A., Wells Fargo Bank, N.A., BBVA Compass Bank, and Rabobank
 
Filed as Exhibit 10.1 to Form 8K, March 28, 2011
*10.21 

Form of Restricted Stock Award Agreement under the 2009 Equity Incentive Plan
 
Filed as Exhibit 10.2 to Form 8-K, May 13, 2009
*10.22 

Form of Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan
 
Filed as Exhibit 10.3 to Form 8-K, May 13, 2009
*10.23 

Form of Nonqualified Stock Option Agreement under the 2009 Equity Incentive Plan
 
Filed as Exhibit 10.4 to Form 8-K, May 13, 2009
*10.24 

Form of Nonqualified Stock Option Agreement under the First Amended and Restated 1999 Nonqualified Stock Option Plan
 
Filed as Exhibit 10.5 to Form 8-K, May 13, 2009
 
*10.25 

Form of Stock Option Agreement under the 2005 Stock Option Plan
 
Filed as Exhibit 10.6 to Form 8-K, May 13, 2009
10.26

Investor Rights Agreement, dated October 22, 2009, between Alamo Group Inc. and Bush Hog, LLC
 
Filed as Exhibit 10.25 to Form 10-K, March 12, 2011
*10.27

Supplemental Executive Retirement Plan
 
Filed as Exhibit 10.1 to Form 8-K, January 18, 2011
*10.28

Amended Incentive Compensation Plan
 
Filed as Exhibit 10.1 to Form 8-K, March 11, 2011
21.1 

Subsidiaries of the Registrant
 
Filed Herewith
23.1 

Consent of KPMG LLP
 
Filed Herewith
31.1 

Certification by Ronald A. Robinson under Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed Herewith
31.2 

Certification by Dan E. Malone under Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed Herewith
31.3 

Certification by Richard J. Wehrle under Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed Herewith
32.1 

Certification by Ronald A. Robinson under Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed Herewith
32.2 

Certification by Dan E. Malone under Section 906 of the  Sarbanes-Oxley Act of 2002
 
Filed Herewith
32.3 

Certification by Richard J. Wehrle under Section 906 of the  Sarbanes-Oxley Act of 2002
 
Filed Herewith
101.INS

XBRL Instance Document
 
Filed Herewith
101.SCH

XBRL Taxonomy Extension Schema Document
 
Filed Herewith
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed Herewith
101.LAB

XBRL Taxonomy Extension Label Linkbase Document
 
Filed Herewith
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed Herewith

39


101.DEF

XBRL Taxonomy Extension Definition Linkbase Document
 
Filed Herewith
________________________________________________________________________________________________________________________
*Compensatory Plan

40


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: 
March 11, 2014
 
 
 
/s/ Ronald A. Robinson
 
 
Ronald A. Robinson
 
 
President & Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on 11th day of March, 2014.
Signature
 
Title
 
 
 
 
 
/s/JAMES B. SKAGGS
James B. Skaggs
 
Chairman of the Board & Director
 
 
 
 
 
 
/s/RONALD A. ROBINSON
Ronald A. Robinson
 
President, Chief Executive Officer & Director (Principal Executive Officer)
 
 
 
 
 
/s/DAN E. MALONE
Dan E. Malone
 
Executive Vice President & Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
/s/RICHARD J. WEHRLE
Richard J. Wehrle
 
Vice President & Corporate Controller
(Principal Accounting Officer)
 
 
 
 
 
/s/RODERICK R. BATY
Roderick R. Baty
 
Director
 
 
 
 
 
/s/HELEN W. CORNELL
Helen W. Cornell
 
Director
 
 
 
 
 
/s/JERRY E. GOLDRESS
Jerry E. Goldress
 
Director
 
 
 
 
 
/s/DAVID W. GRZELAK
David W. Grzelak
 
Director
 
 
 
 
 
/s/GARY L. MARTIN
Gary L. Martin
 
Director
 
 
 
 
 

41


Report of Management on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 using the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management concludes that, as of December 31, 2013, the Company’s internal controls over financial reporting were effective based on the framework in Internal Control – Integrated Framework.
 
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of internal control over financial reporting, which is included herein.
  
Date:
March 11, 2014
/s/Ronald A. Robinson
 
 
President & Chief Executive Officer
 
 
 
 
 
/s/Dan E. Malone
 
 
Executive Vice President &
 
 
Chief Financial Officer
 
 
 
 
 
/s/Richard J. Wehrle
 
 
Vice President & Corporate Controller
 
 
Principal Accounting Officer
 

42


Report of Independent Registered Public Accounting Firm
  

The Board of Directors and Stockholders Alamo Group Inc:
 
We have audited Alamo Group Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Alamo Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Alamo Group Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alamo Group Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated March 11, 2014 expressed an unqualified opinion on those consolidated financial statements.
 
 
 
 
/s/KPMG LLP
San Antonio, Texas
 
 
March 11, 2014
 
 

43



Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders Alamo Group Inc:
 
We have audited the accompanying consolidated balance sheets of Alamo Group Inc. and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alamo Group Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alamo Group Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
 
/s/KPMG LLP
San Antonio, Texas
 
 
March 11, 2014
 
 

44


Alamo Group Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
December 31,
 
(in thousands, except per share amounts)
 
2013
 
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 

Cash and cash equivalents
 
$
63,960

 
$
48,291

Accounts receivable, net
 
151,396

 
140,268

Inventories
 
109,104

 
108,758

Deferred income taxes
 
5,741

 
3,824

Prepaid expenses
 
5,129

 
5,659

Income tax receivable 
 
1,623

 

Total current assets
 
336,953

 
306,800

 
 
 
 
 
Property, plant and equipment
 
158,376

 
146,454

Less:  Accumulated depreciation
 
(96,472
)
 
(89,653
)
 
 
61,904

 
56,801

 
 
 
 
 
Goodwill
 
32,073

 
31,648

Intangible assets
 
5,500

 
5,500

Deferred income taxes
 
457

 
2,593

Other assets
 
1,589

 
997

Total assets
 
$
438,476

 
$
404,339

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Trade accounts payable
 
$
45,593

 
$
41,641

Income taxes payable
 
1,126

 
4,045

Accrued liabilities
 
33,482

 
31,601

Current maturities of long-term debt and capital lease obligations
 
420

 
588

Deferred income taxes
 

 
253

Total current liabilities
 
80,621

 
78,128

 
 
 
 
 
Long-term debt and capital lease obligation, net of current maturities
 
8

 
118

Accrued pension liabilities
 
2,538

 
9,871

Other long-term liabilities
 
3,494

 
3,646

Deferred income taxes
 
1,350

 
2,290

Stockholders’ equity:
 
 

 
 

Common stock, $.10 par value, 20,000,000 shares authorized;12,113,109 and 12,028,354 issued at December 31, 2013 and December 31, 2012, respectively
 
1,211

 
1,203

Additional paid-in capital
 
91,439

 
88,660

Treasury stock, at cost: 42,600 shares at December 31, 2013 and December 31, 2012
 
(426
)
 
(426
)
Retained earnings
 
255,203

 
222,480

Accumulated other comprehensive income (loss)
 
3,038

 
(1,631
)
Total stockholders’ equity
 
350,465

 
310,286

Total liabilities and stockholders’ equity
 
$
438,476

 
$
404,339


See accompanying notes.

45


Alamo Group Inc. and Subsidiaries
Consolidated Statements of Income
 
 
 
 
Year Ended December 31,
 
(in thousands, except per share amounts)
 
2013
 
2012
 
2011
Net sales:
 
 
 
 
 
 
North American
 
 
 
 
 
 
Industrial
 
$
296,617

 
$
263,353

 
$
229,594

Agricultural
 
215,340

 
200,467

 
203,993

European
 
164,879

 
164,582

 
170,006

Total net sales
 
676,836

 
628,402

 
603,593

Cost of sales
 
518,326

 
484,890

 
468,508

Gross profit
 
158,510

 
143,512

 
135,085

 
 
 
 
 
 
 
Selling, general and administrative expenses
 
107,773

 
97,507

 
92,347

Gain on bargain purchase
 

 

 
(8,616
)
Goodwill impairment
 

 
656

 
1,898

Income from operations
 
50,737

 
45,349

 
49,456

 
 
 
 
 
 
 
Interest expense
 
(1,161
)
 
(1,620
)
 
(2,422
)
Interest income
 
186

 
234

 
247

Other income (expense), net
 
1,626

 
(517
)
 
848

Income before income taxes
 
51,388

 
43,446

 
48,129

 
 
 
 
 
 
 
Provision for income taxes
 
15,294

 
14,543

 
15,442

Net income
 
$
36,094

 
$
28,903

 
$
32,687

 
 
 
 
 
 
 
Net income per common share:
 
 

 
 

 
 

Basic
 
$
3.00

 
$
2.43

 
$
2.76

Diluted
 
$
2.96

 
$
2.40

 
$
2.73

Average common shares:
 
 
 
 
 
 
Basic
 
12,050

 
11,899

 
11,848

Diluted
 
12,212

 
12,058

 
11,966

 
See accompanying notes.

46


Alamo Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income


 
 
 
 
Year Ended December 31,
(in thousands, except per share amounts)
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net income
 
$
36,094

 
$
28,903

 
$
32,687

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
479

 
4,445

 
(2,788
)
 
Unrealized gains on derivative instruments
 

 

 
144

 
Net gain (loss) on pension and other postretirement benefits
 
6,706

 
(574
)
 
(6,533
)
 
 
Other comprehensive income (loss) before income tax expense (benefit)
 
7,185

 
3,871

 
(9,177
)
 
 
Income tax expense (benefit) related to items of other comprehensive income (loss)
 
(2,516
)
 
121

 
2,021

 
 
Other comprehensive income (loss)
 
4,669

 
$
3,992

 
$
(7,156
)
Comprehensive income
 
$
40,763

 
$
32,895

 
$
25,531


47


Alamo Group Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
 
 
Common Stock
Additional
Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated
Other
Comprehensive Income
Total Stock-
holders’ Equity
(in thousands)
Shares
Amount
Balance at December 31, 2010
11,830

$
1,187

$
84,377

$
(426
)
$
166,589

$
1,533

$
253,260

Net income




32,687


32,687

Translation adjustment





(2,788
)
(2,788
)
Unrealized derivative gain, net of taxes





144

144

Net actuarial loss arising during period net of taxes





(4,512
)
(4,512
)
Tax effect of non-qualified stock options


63




63

Stock-based compensation


986




986

Exercise of stock options
30

3

278




281

Dividends paid ($.24 per share)




(2,845
)

(2,845
)
Balance at December 31, 2011
11,860

$
1,190

$
85,704

$
(426
)
$
196,431

$
(5,623
)
$
277,276

Net income




28,903


28,903

Translation adjustment





4,445

4,445

Net actuarial loss arising during period net of taxes





(453
)
(453
)
Tax effect of non-qualified stock options


(102
)



(102
)
Stock-based compensation


940




940

Exercise of stock options
126

13

2,118




2,131

Dividends paid ($.24 per share)




(2,854
)

(2,854
)
Balance at December 31, 2012
11,986

$
1,203

$
88,660

$
(426
)
$
222,480

$
(1,631
)
$
310,286

Net income




36,094


36,094

Translation adjustment





479

479

Net actuarial gain arising during period net of taxes





4,190

4,190

Tax effect of non-qualified stock options







Stock-based compensation


1,501




1,501

Exercise of stock options
85

8

1,278




1,286

Dividends paid ($.24 per share)




(3,371
)

(3,371
)
Balance at December 31, 2013
12,071

$
1,211

$
91,439

$
(426
)
$
255,203

$
3,038

$
350,465

 
See accompanying notes.



Alamo Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
Operating Activities
 
 
 
 
 
Net income
$
36,094

 
$
28,903

 
$
32,687

Adjustments to reconcile net income to cash provided by
    operating activities:
 

 
 

 
 

Provision for doubtful accounts
31

 
253

 
992

Depreciation
8,898

 
9,948

 
10,418

Amortization of debt issuance
126

 
126

 
188

Gain on bargain purchase

 

 
(8,616
)
Goodwill impairment charge

 
656

 
1,898

Stock-based compensation
1,501

 
940

 
985

Excess tax benefits from stock-based payment arrangements

 
102

 
(63
)
Provision for deferred income tax expense (benefit)
(877
)
 
(405
)
 
850

Gain (Loss) on sale of equipment
(237
)
 
155

 
(263
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

 
 

       Accounts receivable
(10,515
)
 
4,770

 
(15,152
)
Inventories
776

 
6,932

 
(8,680
)
Prepaid expenses and other
(925
)
 
(2,376
)