============================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER 0-21220 ALAMO GROUP INC. (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) 1502 EAST WALNUT, SEGUIN, TEXAS 78155 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 830-379-1480 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENT FOR THE PAST 90 DAYS. YES X NO ___ ----- AT AUGUST 1, 2000, 9,700,209 SHARES OF COMMON STOCK, $.10 PAR VALUE, OF THE REGISTRANT WERE OUTSTANDING. ================================================================================ ALAMO GROUP INC. AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Interim Condensed Consolidated Statements of Income - 3 Three months and Six months ended June 30, 2000 and June 30, 1999 Interim Condensed Consolidated Balance Sheets - 4 June 30, 2000 and December 31, 1999 (Audited) Interim Condensed Consolidated Statements of Cash Flows - 5 Six months ended June 30, 2000 and June 30, 1999 Notes to Interim Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 10 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 15 PART II.OTHER INFORMATION Item 1. None Item 2. None Item 3. None Item 4. None Item 5. None Item 6. Exhibits and Reports on Form 8-K SIGNATURES 18 ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- JUNE 30, JUNE 30 JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ------------ ------------ --------- Net sales: North American Agricultural ............ $ 21,161 $ 20,151 $ 42,755 $ 39,294 Industrial .............. 28,735 19,244 46,569 32,602 European ................ 10,829 11,700 21,367 21,367 --------- --------- --------- --------- Total net sales ............ 60,725 51,095 110,691 93,263 Cost of sales .............. 45,409 37,750 82,730 69,840 --------- --------- --------- --------- Gross profit ............... 15,316 13,345 27,961 23,423 Selling,general and administrative expense...... 8,672 7,159 16,603 14,023 --------- --------- --------- --------- Income from operations ... 6,644 6,186 11,358 9,400 Interest expense ........... (681) (432) (1,041) (1,090) Interest income ............ 209 105 399 207 Other income (expense), net 31 (201) (163) (333) --------- --------- --------- --------- Income before income taxes 6,203 5,658 10,553 8,184 Provision for income taxes . 2,053 2,050 3,721 2,956 --------- --------- --------- --------- Net income ............... $ 4,150 $ 3,608 $ 6,832 $ 5,228 ========= ========= ========= ======== Net income per common share: Basic .................... $ 0.43 $ 0.37 $ 0.71 $ 0.54 ========= ========= ======== ========== Diluted .................. $ 0.43 $ 0.37 $ 0.71 $ 0.54 ========= ========= ======== ========== Average common shares: Basic .................... 9,695 9,736 9,695 9,736 ========= ========= ======== ========== Diluted .................. 9,754 9,736 9,747 9,736 ========= ========= ======== ========== Dividends declared ......... $ 0.06 $ 0.11 $ 0.12$ 0.22 ========= ========= ========= ========= See accompanying notes. ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) JUNE 30, DECEMBER 2000 31, 1999 (UNAUDITED) (AUDITED) -------------- ------------- ASSETS Current assets: Cash and cash equivalents.................. $ 2,766 $ 5,359 Accounts receivable........................ 60,053 41,764 Inventories................................ 52,949 45,570 Deferred income taxes...................... 4,335 4,193 Prepaid expenses.......................... 1,142 1,008 ------------ ----------- Total current assets................... 121,245 97,894 Property, plant and equipment............. 59,075 54,161 Less: Accumulated depreciation .......... (32,695) (32,343) ------------ ----------- 26,380 21,818 Goodwill .................................. 16,437 9,937 Other assets .............................. 4,514 3,146 ------------ ----------- Total assets .......................... $ 168,576 $ 132,795 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ................... 18,030 8,514 Income taxes payable...................... 2,289 1,080 Accrued liabilities ...................... 10,711 7,920 Current maturities of long-term debt...... 1,548 526 ------------ ----------- Total current liabilities ............. 32,578 18,040 Long-term debt, net of current maturities . 22,782 5,469 Deferred income taxes ..................... 1,318 1,256 Stockholders' equity: Common stock, $.10 par value,20,000,000 shares authorized 9,735,809 issued at June 30, 2000 and December 31,1999, respectively.... 974 974 Additional paid-in capital ................ 50,775 50,775 Treasury stock,at cost;40,600shares at (400) (400) June 30, 2000................................ Retained earnings ......................... 63,237 57,568 Accumulated other comprehensive income .... (2,688) (887) ------------ ----------- Total stockholders' equity ............ 111,898 108,030 ------------ ----------- Total liabilities and stockholders' equity $ 168,576 $ 132,795 ============ =========== See accompanying notes. ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED -------------------------- JUNE 30, JUNE 2000 30, 1999 ------------ ------------ OPERATING ACTIVITIES Net income ............................ $ 6,832 $ 5,228 Adjustment to reconcile net income to net cash provided (used) by operating activities: Provision for doubtful accounts ... 145 140 Depreciation ...................... 2,088 2,007 Amortization ...................... 804 598 Provision for deferred income tax 280 6 benefit................................ (Gain) loss on sale of equipment .. (171) (71) Changes in operating assets and liabilities: Accounts receivable ............... (16,437) (5,515) Inventories ....................... 352 9,013 Prepaid expenses and other assets . (319) 457 Trade accounts payable and accrued 7,451 3,180 liabilities ........................... Income taxes payable .............. 1,051 2,736 ------------ ------------ Net cash provided by operating activities 2,076 17,779 INVESTING ACTIVITIES Acquisitions, net of cash acquired..... (14,248) - Purchase of property, plant and equipment (9,504) (1,349) Proceeds from sale of property, plant and 403 128 equipment ............................. Sale of long-term investment........... (500) - ------------ ------------ Net cash (used) by investing activities (23,849) (1,221) FINANCING ACTIVITIES Net change in bank revolving credit 21,000 (15,600) facility .............................. Principal payments on long-term debt and (442) (226) capital leases ........................ Dividends paid ........................ (1,163) (2,142) Proceeds from sale of common stock .... - - Cost of common stock repurchased ...... - - ------------ ------------ Net cash provided (used) by financing 19,395 (17,968) activities............................. Effect of exchange rate changes on cash (215) (245) ------------ ------------ Net change in cash and cash equivalents (2,593) (1,655) Cash and cash equivalents at beginning of 5,359 2,748 the period ............................ -- -- ---------- ---------- Cash and cash equivalents at end of the $ 2,766 $ 1,093 period ................................ ============ ============ Cash paid during the period for: Interest ........................... $ 626 $ 979 Income taxes ....................... $ 2,539 $ 107 See accompanying notes. ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2000 1. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of Alamo Group Inc. and its subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. 2. ACCOUNTS RECEIVABLE Accounts Receivable is shown less allowance for doubtful accounts of $1,149,000 and $1,231,000 at June 30, 2000 and December 31, 1999, respectively. 3. INVENTORIES Inventories valued at LIFO cost represented 83% and 82% of total inventory at each of June 30, 2000 and December 31, 1999, respectively. The excess of current costs over LIFO valued inventories were $3,925,000 at both June 30, 2000 and December 31, 1999, respectively. Inventory obsolescence reserves were $4,537,000 at June 30, 2000 and $5,216,000 at December 31, 1999. Net inventories consist of the following (in thousands): JUNE DECEMBER 30, 31, 2000 1999 ------------ ------------ Finished goods ............... $ 41,284 $ 39,310 Work in process .............. 5,074 2,754 Raw materials ................ 6,591 3,506 -- -- --------- ---------- $ 52,949 $ 45,570 ============ ============ An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO must necessarily be based on management's estimates. ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2000 - (CONTINUED) 4. COMMON STOCK AND DIVIDENDS Dividends declared and paid on a per share basis were as follows: THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ----------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- --------- ---------- ---------- Dividends declared ..... $ 0.06 $ 0.11 $ 0.12 $ 0.22 Dividends paid ......... 0.06 0.11 0.12 0.22 5. EARNINGS PER SHARE The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net income per common share. Net income for basic and diluted calculations do not differ. (In thousands, except per share). THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- --------- ------ ----------- Net Income ........................ $4,150 $3,608 $6,832 $5,228 ====== ====== ====== ====== Average Common Shares: BASIC (weighted-average ........ 9,695 9,736 9,695 9,736 outstanding shares) Dilutive potential common shares from stock ........................ 59 -- 52 -- options and warrants ------ ------ ------- ----- Diluted (weighted-average ..... 9,754 9,736 9,747 9,736 outstanding shares) ====== ====== ======= ======= Basic earnings per share .......... $ 0.43 $ 0.37 $ 0.71 $ 0.54 ====== ====== ======= ======= Diluted earnings per share ........ $ 0.43 $ 0.37 $ 0.71 $ 0.54 ====== ====== ====== ======= ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2000 - (CONTINUED) 6. SEGMENT REPORTING The Company has recently undergone senior management changes and has subsequently determined that it is managed based on three principal reporting segments: Agricultural, Industrial and European. At June 30, 2000 the following unaudited financial information is segmented: (in thousands) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ ------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 --------- ---------- ------------ ---------- NET REVENUE Agricultural $ 21,161 $ 20,151 $ 42,755 $ 39,294 Industrial 28,735 19,244 46,569 32,602 European 10,829 11,700 21,367 21,367 --------- ---------- ------------ ---------- Consolidated 60,725 51,095 110,691 93,263 OPERATING INCOME Agricultural $ 1,744 $ 81 $ 2,562 $ 64 Industrial 3,612 4,269 6,222 6,442 European 1,288 1,836 2,574 2,894 --------- ---------- ------------ ---------- Consolidated 6,644 6,186 11,358 9,400 TOTAL IDENTIFIABLE ASSETS Agricultural $ 60,681 $ 68,488 $ 60,681 $ 68,488 Industrial 67,400 40,593 67,400 40,593 European 40,495 42,599 40,495 42,599 --------- ---------- ------------ ---------- Consolidated 168,576 151,680 168,576 151,576 7. NEW ACCOUNTING STANDARDS AND DISCLOSURES ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". In September 1999, the FASB agreed to defer the effective date of Statement No. 133 for one year citing concerns over interpretations of important implementation issues. The Company will be required to adopt statement No. 133 in the first quarter of its fiscal year 2001. The management of the Company, because of its minimal use of derivatives, does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the consolidated financial position of the Company. ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2000 - (CONTINUED) In December 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain SEC staff views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 will be effective for the Company in the first quarter of fiscal year 2001. The Company is currently evaluating any possible impact of SAB 101 on its financial condition and results of operations. 8. COMPREHENSIVE INCOME During the second quarter of 2000 and 1999, Comprehensive Income amounted to $3,262,000 and $2,766,000 and for this six months ended June 30, 2000 and 1999, it was $5,031,000 and $3,149,000 respectively. The components of COMPREHENSIVE INCOME, net of related tax are as follows: THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ --------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ----------- ---------- ---------- Net Income ................... $ 4,150 $ 3,608 $ 6,832 $ 5,228 Foreign currency translations (888) (842) (1,801) (2,079) adjustment ................... ------------ ----------- --------- -------- Comprehensive Income ......... $ 3,262 $ 2,766 $ 5,031 $ 3,149 ============ =========== ========== ========== The components of Accumulated Other Comprehensive Income as shown on the Balance Sheet are as follows (in thousands): JUNE 30, DECEMBER 31, 2000 1999 ------------------------ Foreign currency translation .. $ (2,688) $ (887) ------------------------ Accumulated other comprehensive $ (2,688) $ (887) income ......................... ======================== 9. CONTINGENT MATTERS The Company is subject to various unresolved legal actions which arise in the ordinary course of its business. The most prevalent of such actions relate to product liability which are generally covered by insurance. While amounts claimed may be substantial and the ultimate liability with respect to such litigation cannot be determined at this time, the Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated financial position. The Company was involved in a lawsuit between Rhino International and certain of its former dealers. This lawsuit involved claims against Rhino International totaling $3,800,000 million. In April 1998, a judgment was entered requiring the Company to pay $110,000, net of its recovery. The Company has reached a tentative settlement of the claims made in the lawsuit. It is anticipated that the settlement will be finalized during the third quarter of 2000 and that the terms of the final settlement will be confidential. The Company believes this matter will not have a material adverse effect on the Company's consolidated financial position. ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2000 - (CONTINUED) The Company is subject to numerous environmental laws and regulations concerning air emissions, discharges into waterways and the generation, handling, storage, transportation, treatment and disposal of waste materials. The Company's policy is to comply with all applicable environmental, health and safety laws and regulations, and the Company believes it is currently in material compliance with all such applicable laws and regulations. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the 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 material costs or liabilities will not be incurred by the Company as a result thereof. The Company has learned that the Indianola, Iowa property on which its Herschel facility operates is contaminated with chromium. The contamination likely resulted from chrome-plating operations which were discontinued several years before the Company purchased the property. The Company is working with an environmental consultant and the state of Iowa to develop and implement a plan to remediate the contamination. All present and future remediation costs have been or will be paid by the previous owner of the property pursuant to the agreement by which the Company purchased said property. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, certain financial data: THREE MONTHS ENDED SIX MONTHS ENDED --------------------- --------------------- SALES DATAIN JUNE 30, JUNE 30, JUNE 30, JUNE 30, THOUSANDS 2000 1999 2000 1999 ---------- --------- --------- --------- North American Agricultural ................. 34.9 % 39.4 % 38.6 % 42.1 % Industrial ................... 47.3 % 37.7 % 42.1 % 35.0 % European ....................... 17.8 % 22.9 % 19.3 % 22.9 % ---------- --------- --------- --------- Total sales, net ............. 100.0 % 100.0 % 100.0 % 100.0 % ========== ========= ========= ========= THREE MONTHS ENDED SIX MONTHS ENDED --------------------- --------------------- COST TRENDS AND PROFIT MARGIN, JUNE 30, JUNE 30, JUNE 30, JUNE 30, AS 2000 1999 2000 1999 PERCENTAGES OF NET SALES ---------- --------- --------- --------- Gross margin ................. 25.2 % 26.1% 25.3% 25.1% Income from operations ....... 10.9 % 12.1% 10.3% 10.1% Income before income taxes ... 10.2 % 11.1% 9.5% 8.8% Net income ................... 6.8 % 7.1% 6.2% 5.6% ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999 Net sales for the second quarter were $60,725,000, a increase of $9,630,000 or 18.8% compared to $51,095,000 for the second quarter of 1999. The increase was primarily attributable to the acquisition of Schwarze Industries, Inc. which was completed on February 29, 2000. Net North American Agricultural sales were $21,161,000 in 2000 compared to $20,151,000 for the same period in 1999, an increase of $1,010,000 or 5.0%. The increase in sales was primarily due to improved market conditions which have been impacted by the cyclical declines in the agricultural industry that began in late 1998. Products showing the most improvement were Rhino branded mowers and Herschel replacement parts. Net North American Industrial sales increased for the second quarter by $9,491,000 or 49.3% to $28,735,000 for 2000 compared to $19,244,000 during the same period in 1999. The increase was due to the addition of Schwarze Industries on February 29, 2000 reflecting a full second quarter of sales. Net European sales for the second quarter of 2000 were $10,829,000, a decrease of $871,000 or 7.4% compared to $11,700,000 during the second quarter of 1999. The decrease was a result of weakening U.K. market conditions during the quarter. Gross profit for the second quarter of 2000 was $15,316,000 (25.2% of net sales) compared to $13,345,000 (26.1% of net sales) during the same period of 1999, an increase of $1,971,000. The increase in gross profit is mainly attributable to the additional sales from Schwarze Industries during the quarter. The gross margin percentage was slightly lower due to lower margins on sweeper products. Selling, general and administrative expenses ("SG&A") were $8,672,000 (13.5% of net sales) during the second quarter of 2000 compared to $7,159,000 (13.4% of net sales) during the same period of 1999 an increase of $1,513,000. SG&A for the second quarter of 2000 included operating expenses relating to the addition of Schwarze Industries. Excluding these SG&A costs for 2000 would reflect comparable SG&A expenses to the second quarter of 1999. Interest expense was $681,000 for the second quarter of 2000 compared to $432,000 during the same period in 1999 an increase of 57.6 %. The increase was attributable to the acquisition of Schwarze Industries. Income taxes for the quarter ending June 30, 2000 were $2,053,000 (33.1%) compared to $2,050,000 (36.2%) in the second quarter ending June 30, 1999. The Company has filed amended tax returns for the years 1996 through 1999 seeking an estimated refund of approximately $150,000 for tax credits relating to research and development expenditures in those years. SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999 Net sales were up 18.7% to $110,691,000 for the first six months of 2000 compared to $93,263,000 for the first six months of 1999. The increase was a result of the acquisition of Schwarze Industries and increased sales in the Company's agricultural products. ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Net North American Agricultural sales were $42,755,000 for the first six months of 2000 compared to $39,294,000 for the first six months of 1999, representing an increase of $3,461,000 or 8.8%. The increase in sales was primarily due to slightly improved market conditions in some of our core markets, but we continue to be impacted by the cyclical decline in the overall agriculture industry. Net North American Industrial sales increased for the first six months of 2000 by $13,967,000 or 42.8% to $46,569,000 compared to $32,602,000 during the first six months of 1999. The increase was primarily due to reflecting a full quarter of sales from the purchase of Schwarze Industries on February 29th. Net European sales for the first six months of 2000 were $21,367,000, compared to $21,367,000 during the first six months of 1999, reflecting no change. The negative currency impact of the decline in the Euro and the French franc against the British pound sterling and U.S. dollar and the weakening U.K. market conditions during the second quarter contributed to a flat year to date sales. Gross profit for the first six months of 2000 was $27,961,000 (25.3% of net sales) compared to $23,423,000 (25.1% of net sales) during the first six months of 1999. The increase in gross profit was mainly attributable to the acquisition of Schwarze Industries and increased agricultural sales as stated above. Selling, general and administrative expenses (SG&A) for the first six months of 2000 were $16,603,000 compared to $14,023,000 in the first six months of 1999, an increase of $2,580,000 or 17.7%. The acquisition of Schwarze Industries was the main cause for the increase. The Company's net income after tax was $6,832,000 for the first six months of 2000 compared to $5,228,000 for the first six months of 1999, an increase of $1,604,000 or 30.7% from result of factors described above. LIQUIDITY AND CAPITAL RESOURCES In addition to normal operating expenses, the Company has on going cash requirements which are necessary to expand the Company's business including inventory purchases and capital expenditures. The Company's inventory and accounts payable levels typically build in the first half of the year and partly in the third quarter in anticipation of the spring and fall selling seasons. Accounts Receivable historically build in the first and fourth quarters of each year as a result of fall and out of season sales. These sales enhance the Company's production during the off season. Since the end of 1999, tighter requirements on inventory purchases as well as just in time inventory procedures for raw materials have aided in reducing inventory approximately $19,286,000. During the latter part of 1999, an inventory reduction plan was put in place to reduce excess and obsolete inventory levels that continued to hamper liquidity. As of June 30, 2000, the Company had working capital of $88,667,000 which represents an increase of $8,813,000 from working capital of $79,854,000 as of December 31, 1999. The increase in working capital was primarily from higher accounts receivable due to seasonality as well as the acquisition of Schwarze Industries on February 29, 2000. ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) Capital expenditures were $9,504,000 for the first six months of 2000, compared to $1,349,000 during the first six months of 1999. The significant increase is attributable to the purchase of the Company's Bomford manufacturing facility and adjacent land in the U. K. for approximately $5,300,000 which had been subject to a long term lease. Also included is approximately $875,000 for the rebuilding of the offices at the Company's Gibson City facility which was destroyed in January 1999 by a snowstorm which loss was covered by insurance. The majority of the remaining balance was used to purchase new equipment for manufacturing operations. The Company expects to fund expenditures from operating cash flows or through its revolving credit facility, described below. The Company has been authorized by its Board of Directors to repurchase up to 1,000,000 shares of the Company's common stock to be funded through working capital and credit facility borrowings. In 1997 the Company repurchased 79,840 shares. No shares were repurchased in 1998. In 1999, the Company repurchased 40,600 shares in the third quarter. No shares were repurchased during the first six months of 2000. Net cash provided by financing activities was $19,395,000 during the six-month period ending June 30, 2000 compared to $17,968,000 net cash used by financing activities for the same period in 1999. The change in activities is attributable primarily to the acquisition of Schwarze Industries. The Company has a $45,000,000 contractually committed, unsecured, long-term bank revolving credit facility under which the Company can borrow and repay until December 31, 2002, with interest at variable rate options based upon prime or libor rates, with such rates either floating on a daily basis or fixed for periods up to 180 days. Proceeds may be used for general corporate purposes or, subject to certain limitations, acquisition activities. The loan agreement contains certain financial covenants which are customary in credit facilities of this nature including minimum financial ratio requirements and limitations on dividends, indebtedness, liens and investments. The Company is in compliance with all such covenants as of June 30, 2000. As of June 30, 2000, $21,000,000 was borrowed under the revolving credit and, $1,591,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by certain vendors contracts. The Company's borrowing levels for working capital are seasonal with the greatest utilization generally occurring in the first quarter and early spring. Management believes that the bank credit facility and the Company's ability to internally generate funds from operations should be sufficient to meet the Company's cash requirements for the foreseeable future. EURO CONVERSION On January 1, 1999, the European Economic and Monetary Union (EMU) entered a three-year transition phase during which a new common currency, the "euro," was introduced in participating countries which established fixed conversion rates through the European Central Bank (ECB) between existing local currencies and the euro. From that date, the euro is traded on currency exchanges. Following the introduction of the euro, local currencies will remain legal tender until December 31, 2001. During this transition period, goods and services may be paid for with the euro or the local currency under the EMU's "no compulsion, no prohibition" principle. France was a participating country in the first group to adopt the EMU, which effects the Company's French operations. The U.K. is currently not a part of the EMU. Based on its evaluation to date, management believes that the euro will not have a material adverse impact on the Company's financial position, results of operations or cash flows. However, uncertainty exists as to the effects the euro will have on the marketplace, and there is no guarantee that all issues will be foreseen and corrected or that other third parties will address the conversion successfully. ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The Company has reviewed its information systems software and identified modifications necessary to ensure business transactions can be conducted consistent with the requirements of the conversion to the euro. Certain of these modifications have been implemented, and others will be implemented during the course of the transition period. The Company expects that modifications not yet implemented will be made on a timely basis and expects the incremental cost of the euro conversion to be immaterial. Any costs associated with implementing changes to comply with the euro conversion are expensed as incurred. The Company anticipates the euro will simplify financial issues related to cross-border trade in the EMU and reduce the transaction costs and administrative time necessary to manage this trade and related risks. However, the Company believes that the associated savings will not be material to corporate results. FORWARD-LOOKING INFORMATION Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 3. "Quantitative and Qualitative Disclosures About Market Risks" contained in this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company. Statements that are not historical are forward-looking. When used by or on behalf of the Company, the words "estimate", "anticipate", "believe", "intend" and similar expressions generally identify forward-looking statements made by or on behalf of the Company. Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses operating in a global market, as well as matters specific to the Company and the markets it serves. Particular risks and uncertainties facing the Company at the present include continued deterioration in the Company's United States agricultural market and softening in its international markets; increased competition in the Company's businesses from competitors that may have greater financial resources; the impact of the strong dollar and British pound which increase the cost of the Company's products in foreign markets; competitive implications and price transparencies related to the euro conversion; the Company's ability to develop and manufacture new and existing products profitably; market acceptance of existing and new products; the Company's ability to maintain good relations with its employees; and the ability to retain and hire quality employees. In addition, the Company is subject to risks and uncertainties facing its industry in general, including changes in business and political conditions and the economy in general in both foreign and domestic markets; weather conditions affecting demand; slower growth in the Company's markets; financial market changes including increases in interests rates and fluctuations in foreign currency exchange rates; unanticipated problems or costs associated with the transition of European currencies to the euro currency; actions of competitors; unanticipated problems or costs associated with accommodations of the Year 2000 in computer applications or products; the inability of the Company's supplier, customers, creditors, government agencies, public utility providers and financial service organizations to implement computer applications accommodating the Year 2000; seasonal factors that could materially affect the Company's industry; unforeseen litigation; government actions including budget levels, regulations and legislation, primarily legislation relating to the environment, commerce, infrastructure spending, health and safety; and availability of materials. ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The Company wishes 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, as well as others not now anticipated. The foregoing statements are not exclusive, and further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results may emerge from time to time. It is not possible for management to predict all risk factors for to assess the impact of such risk factors on the Company's businesses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to various markets 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 AS A RESULT OF FOREIGN SALES A portion of the Company's operations consist of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the United States, U.K. and France. 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. operations are denominated in other European currencies. As a result, the Company's financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions, in order to mitigate the short-term effect of changes in currency exchange rates on the Company's functional currency based sales, the Company regularly hedges by entering into foreign exchange forward contracts to hedge approximately 80% of its future net foreign currency receivables covering a period of approximately six months. As of June 30, 2000, the Company had $1,684,000 in outstanding forward exchange contracts. However, since these contracts hedge foreign currency denominated transactions, any change in the market value of the contracts would be offset by changes in the underlying value of the transaction being hedged. AS A RESULT OF FOREIGN TRANSLATION The Company's earnings and financial position are affected by foreign currency exchange rate fluctuations related to its wholly-owned subsidiaries in the U.K. and France as the British pound and French franc are the functional currencies of these subsidiaries. Changes in the foreign currency exchange rate between the U.S. dollar and the British pound or French franc can impact the Company's results of operations and financial position. The impact of a hypothetical change in the foreign currency exchange rate of 5% between the U.S. dollar and the British pound or French franc would change the market value to an approximate range between $500,000 and $2,000,000. Any percentage greater than 5% could not be justified in this hypothetical calculation due to historical information not supporting a larger percent change. The translation adjustment during the second quarter of 2000 was a loss of $26,000 which was primarily caused due to the weakening of the French franc to the British pound. On June 30, 2000, the British pound closed at 0.6591 relative to 1.00 U.S. dollar, and the French Franc closed at 0.0965 relative to 1.00 British pound. By comparison, on June 30, 1999, the British pound closed at 0.6340 relative 1.00 U.S. dollar, and the French franc closed at 0.0997 relative to 1.00 British pound. No assurance can be given as to future valuation of the British pound or French franc or how further movements in those currencies could affect future earnings or the financial position of the Company. ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) INTEREST RATE RISK At June 30, 2000, the Company's long-term debt bears interest at variable rates. Accordingly, the Company's net income is affected by changes in interest rates. Assuming the current level of borrowings at variable rates and a two percentage point change in the second quarter 2000 average interest rate under these borrowings, the Company's interest expense would have changed by approximately $60,000. In the event of an adverse change in interest rates, management could take actions to mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. ALAMO GROUP INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are included herein: (27.1) Financial Data Schedule (b) Reports on Form 8-K None ALAMO GROUP INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Alamo Group Inc. (Registrant) /S/____________________________ Ronald A. Robinson President and CEO Principal Accounting Officer