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

                               Three Months Ended         Nine Months Ended
                                  September 30,             September 30,
(As Percentages of Net Sales)    2009         2008         2009        2008
North American
   Industrial                      41.3 %      43.6 %       40.4 %      46.0 %
   Agricultural                    18.3 %      19.9 %       18.9 %      21.8 %
European                           40.4 %      36.5 %       40.7 %      32.2 %
   Total sales, net               100.0 %     100.0 %      100.0 %     100.0 %

                                     Three Months Ended      Nine Months Ended
                                       September 30,           September 30,
(Cost Trends and Profit Margin, as
Percentages of Net Sales)              2009         2008       2009        2008

Gross margin                            23.3 %       19.9 %     21.5 %      19.6 %
Income from operations                   6.9 %        5.3 %      4.9 %       5.2 %
Income before income taxes               6.2 %        4.5 %      4.0 %       4.5 %
Net income                               4.2 %        3.0 %      2.7 %       3.0 %

Overview

This report contains forward-looking statements that are based on Alamo Group's current expectations. Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section.

During the nine months of 2009, the Company's net income was down due to the general weakness in the worldwide economy. The acquisition of Rivard was accretive to the Company in sales and net income during the nine months of the year. Sales in the Industrial Division were down 33% during the first nine months of 2009 due to budget constraints and revenue shortfalls of governmental entities and related contractors. Higher dollar items such as the excavator and sweeper products were particularly affected. The Agricultural Division also saw a 33% decrease as both dealers and end users were reluctant to make commitments due to the uncertainty in the economy. Excluding the acquisition of Rivard, sales in local currency for the European Division were essentially flat for the nine months of 2009.

The Company remains concerned that our markets for the remainder of 2009 could continue to be negatively affected by a variety of factors such as the downturn in the overall economy; constrained credit availability; increase in governmental regulations, changes in farm incomes due to commodity prices or governmental aid programs; outbreak of the H1N1 virus at one or more of the Company's facilities which could affect our manufacturing capabilities; adverse situations that could affect our customers such as cutback on dealer stocking levels; weather conditions such as droughts and floods; budget constraints or revenue shortfalls in governmental entities to which the Company sells its products and changes in our customer's buying habits due to lack of confidence in the economic outlook.

Results of Operations

Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008

Net sales for the third quarter of 2009 were $110,318,000, a decrease of $38,389,000 or 25.8% compared to $148,707,000 for the third quarter of 2008. The decrease was primarily attributable to the decline in the worldwide economy which continued to affect the markets which the Company serves.

Net North American Industrial sales decreased during the third quarter by $19,256,000 or 29.7% to $45,547,000 for 2009 compared to $64,803,000 during the same period in 2008. The majority of the decrease came from lower sales to governmental entities and related contractors of excavator, sweeper and mowing products. Compared to 2008, sales to cities and counties remained steadier than those to state agencies.

Net North American Agricultural sales were $20,158,000 in 2009 compared to $29,555,000 for the same period in 2008, a decrease of $9,397,000 or 31.8%. The decrease was the result of continued soft market conditions and lower commodity prices in the agricultural market. Market uncertainty and tighter credit has made dealers reluctant to stock inventory at historic levels.

Net European Sales for the third quarter of 2009 were $44,613,000, a decrease of $9,736,000 or 17.9% compared to $54,349,000 during the third quarter of 2008. The majority of the decrease was primarily due to softness in French markets as well as changes in the exchange rates.

Gross profit for the third quarter of 2009 was $25,649,000 (23.3% of net sales) compared to $29,610,000 (19.9% of net sales) during the same period in 2008, a decrease of $3,961,000. The decrease was due to decline in sales during the third quarter of 2009. The increase in gross margin percentage was a result of cost saving initiatives implemented earlier in the year along with favorable pricing of raw materials and purchased components.

Selling, general and administrative expense ("SG&A") was $17,983,000 (16.3% of net sales) during the third quarter of 2009 compared to $21,795,000 (14.7% of net sales) during the same period of 2008, a decrease of $3,812,000. The decrease came from reductions in headcounts despite severance costs along with lower commissions due to reduced sales volume.

Interest expense was $1,005,000 for the third quarter of 2009 compared to $2,024,000 during the same period in 2008, a decrease of $1,019,000. The decrease was from lower borrowings and lower interest rates in 2009 compared to 2008.

Other income (expense) was $134,000 of income during the third quarter of 2009 compared to $222,000 of income in the third quarter of 2008. The gains in both 2009 and 2008 are entirely from changes in exchange rates.

Provision for income taxes was $2,227,000 (32.7% of income before taxes) for the third quarter of 2009 compared to $2,251,000 (33.6% of income before taxes) in the third quarter of 2008.

The Company's net income after tax was $4,583,000 or $.46 per share on a diluted basis for the third quarter of 2009 compared to $4,453,000 or $.45 per share on a diluted basis for the third quarter of 2008. The increase of $130,000 resulted from the factors described above.

Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008

Net sales for the first nine months of 2009 were $333,704,000, a decrease of $100,944,000 or 23.2% compared to $434,648,000 for the first nine months of 2008. The decrease was primarily from continued weakness in the economy which has continued since the fourth quarter of 2008.

Net North American Industrial sales decreased during the first nine months by $65,129,000 or 32.6% to $134,737,000 for 2009 compared to $199,866,000 during the same period in 2008. The decrease was due from lower sales of excavator, vacuum truck, sweeper and mowing equipment as governmental entities continue to be affected by budget constraints and revenue shortfalls.

Net North American Agricultural sales were $63,263,000 in 2009 compared to $94,826,000 for the same period in 2008, a decrease of $31,563,000 or 33.3%. The decrease was mainly due to dealer reluctance to stock farm equipment at historical levels as a result of the slowdown in the agricultural sector and concerns about the overall economy.

Net European Sales for the first nine months of 2009 were $135,704,000, a decrease of $4,252,000 or 3.0% compared to $139,956,000 during the same period of 2008. The decrease was primarily due to changes in exchange rates and softness in the French markets. The Rivardacquisition added to sales for the year and to a lesser extent higher export sales outside our core markets.

Gross profit for the first nine months of 2009 was $71,705,000 (21.5% of net sales) compared to $85,095,000 (19.6% of net sales) during the same period in 2008, a decrease of $13,390,000. The decrease was mainly due to reduced sales during 2009, which was somewhat offset by the Rivard acquisition. Gross margin percentages improved over 2008 as a result of favorable pricing in both raw material and purchased components and continued improvements from efficiency initiatives.

Selling, general and administrative expense ("SG&A") were $55,478,000 (16.6% of net sales) during the first nine months of 2009 compared to $62,518,000 (14.4% of net sales) during the same period of 2008, a decrease of $7,040,000. The decrease in SG&A for the nine months of 2009 was due to reductions in workforce despite severance costs, reductions in insurance premiums and audit fees, and reduced commissions from lower sales volumes.

Interest expense was $3,248,000 for the first nine months of 2009 compared to $5,748,000 during the same period in 2008, a decrease of $2,500,000. The decrease was due to reduced borrowings and lower interest rates in 2009.

Other income (expense) was $130,000 of income during the first nine months of 2009 compared to $881,000 of income in the first nine months of 2008. The gains in both 2009 and 2008 are entirely from changes in exchange rates.

Provision for income taxes was $4,328,000 (32.2% of income before taxes) for 2009 compared to $6,490,000 (33.6% of income before taxes) in 2008.

The Company's net income after tax was $9,118,000 or $.91 per share on a diluted basis for the first nine months of 2009 compared to $12,850,000 or $1.29 per share on a diluted basis for the first nine months of 2008. The decrease of $3,732,000 resulted from the factors described above.

Liquidity and Capital Resources

In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to operate the Company's business, including inventory purchases and capital expenditures. The Company's inventory and accounts payable levels typically build in the first half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts receivable historically build in the first and fourth quarters of each year as a result of fall preseason sales programs and out of season sales in certain of our operations. These sales level the Company's production during the off season.

As of September 30, 2009, the Company had working capital of $160,232,000 which represents a decrease of $20,109,000 from working capital of $180,341,000 as of December 31, 2008. The decrease in working capital was primarily from reductions in current assets, mainly trade receivables from a decrease in sales volume compared to 2008 and lower inventory levels from reduced levels of activity.

Capital expenditures were $2,661,000 for the first nine months of 2009, compared to $5,052,000 during the first nine months of 2008. Capital expenditures for 2009 are expected to be below 2008 levels. The Company expects to fund expenditures from operating cash flows or through its revolving credit facility, described below.

The Company was authorized by its Board of Directors in 1997 to repurchase up to 1,000,000 shares of the Company's common stock to be funded through working capital and credit facility borrowings. There were no shares purchased in 2008 or the nine months of 2009. The authorization to repurchase up to 1,000,000 shares remains available less 42,600 shares previously repurchased.

Net cash used by financing activities was $36,809,000 during the nine month period ending September 30, 2009, compared to net cash provided of $10,300,000 for the same period in 2008. The decrease in financing activities in 2009 was from paydowns on the bank credit facility due to cash provided by operating activities.

On August 25, 2004, the Company entered into a five-year $70 million Amended and Restated Revolving Credit Agreement with its lenders, Bank of America, JPMorgan Chase Bank, and Guaranty Bank. This contractually committed, unsecured facility allows the Company to borrow and repay amounts drawn at floating or fixed interest rates based upon Prime or LIBOR rates. Proceeds may be used for general corporate purposes or, subject to certain limitations, acquisitions. The loan agreement contains among other things the following financial covenants:
Minimum Fixed Charge Coverage Ratios, Minimum Consolidated Tangible Net Worth, Consolidated Funded Debt to EBITDA Ratio and Minimum Asset Coverage Ratio, along with limitations on dividends, other indebtedness, liens, investments and capital expenditures.

On February 3, 2006, the Company amended and restated the credit agreement to increase the Company's existing credit facility from $70 million to $125 million. Pursuant to the terms of the Amended and Restated Revolving Credit Agreement, the Company has the ability to request an increase in commitments by $25 million. In addition, the existing credit facility was modified in other respects, including reducing the asset coverage ratio and lowering the interest margins.

On March 30, 2006 the Company entered into the Fourth Amendment of the Amended and Restated Revolving Credit Agreement, dated March 30, 2006 (the "Amended and Restated Revolving Credit Agreement"), between the Company and Bank of America, N.A., JPMorgan Chase Bank and Guaranty Bank, as its lenders. Pursuant to the terms of the Amended and Restated Revolving Credit Agreement, the Company added Gradall Industries, Inc., formerly Alamo Group (OH) Inc., and N.P. Real Estate Inc. as members of the Obligated Group. The Amendment also allows for capital expenditures not to exceed $14 million for the fiscal year ending 2006 and $10 million in the aggregate during each fiscal year thereafter.

On May 7, 2007, the Company entered into the Fifth Amended and Restated Revolving Credit Agreement with Bank of America, N.A., JPMorgan Chase Bank, Guaranty Bank and Rabobank, as its lenders. The Amended and Restated Revolving Credit Agreement provides for a $125 million unsecured revolving line of credit for five years with the ability to expand the facility to $175 million, subject to bank approval. In addition to the extended term of the loan to 2012, other major changes were improvements in the leverage ratio, minimum asset coverage ratio and increase in annual allowable capital expenditures up to $17.5 million. The banks agreed to eliminate the fixed charge coverage ratio and minimum net worth requirement along with a reduction in the applicable interest rate margin. The applicable interest margin fluctuates quarterly either up or down based upon the Company's leverage ratio.

On October 14, 2008, the Company entered into the Sixth Amendment and Waiver under the Amended and Restated Revolving Credit Agreement. The purpose of the amendment and waiver was to clarify company names within the obligated group after merging or dissolving some subsidiaries, to define operating cash flow and defining quarterly operating cash flow for Rivard through March 31, 2009. Beginning June 30, 2009, Rivard's actual operating cash flow will be used in the calculation of consolidated operating cash flow.

On November 6, 2009, the Company entered into the Seventh Amendment of the Amended and Restated Revolving Credit Agreement with Bank of America, N.A., Wells Fargo Bank, N.A., BBVA Compass Bank, and Rabobank, as its lenders. Prior to the execution of this Amendment, BBVA Compass Bank acquired certain assets of Guaranty Bank which included this credit facility and JPMorgan Chase Bank assigned its interest to Well Fargo Bank, N.A. The purpose of the amendment was to add Bush Hog as a member of the Obligated Group and pledge a first priority security interest in certain U.S. assets (accounts receivable, inventory, equipment, trademarks and trade names) of the Borrower and each member of the Obligated Group. The Lenders agreed to increase the operating leverage ratio during the next three quarters and to add a new EBIT to Interest Expense covenant in exchange for a commitment fee and an increase in the Applicable Interest Margin over LIBOR or Prime Rate advances.

On May 13, 2008, Alamo Group Europe Limited entered into a £5.5 million overdraft facility with Lloyd's TSB Bank plc. The facility expires on October 31, 2009 and is in the process of being renewed. Outstandings bear interest at Lloyd's Base Rate plus 1.1% per annum. The facility is unsecured but guaranteed by the U.K. subsidiaries of Alamo Group Europe Limited. As of September 30, 2009, there was no outstanding balance borrowed against the U.K. overdraft facility.

As of September 30, 2009, there was $59,000,000 borrowed under the Revolving Credit Facility. At September 30, 2009, $917,000 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 approximately $42,000,000 in available borrowings.

There are additional lines of credit, for the Company's French operations in the amount of 9,300,000 Euros, which includes the Rivard credit facilities, for our Canadian operation in the amount of 3,500,000 Canadian dollars, and for our Australian operation in the amount of 800,000 Australian dollars. As of September 30, 2009, 1,233,000 Euros were borrowed against the French line of credit, 2,593,000 Canadian dollars were outstanding on the Canadian line of credit and 500,000 Australian dollars were outstanding under its facility. The Canadian and Australian revolving credit facilities are guaranteed by the Company.

As of September 30, 2009, the Company was in compliance with the terms and conditions of its credit facilities.

Management believes the bank credit facilities and the Company's ability to internally generate funds from operations should be sufficient to meet the Company's cash requirements for the foreseeable future. However, the challenges affecting the banking industry and credit markets in general can potentially cause changes to credit availability which creates a level of uncertainty.

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical Accounting Policies

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

Allowance for Doubtful Accounts

The Company evaluates the collectibility of its accounts receivable based on a combination of factors. In circumstances where it is aware of a specific customer's inability to meet its financial obligations, it records a specific reserve to reduce the amounts recorded to what it believes will be collected. For all other customers, it recognizes reserves for bad debt based on historical experience of bad debts as a percent of revenues for each business unit, adjusted for relative improvements or deteriorations in the agings and changes in current economic conditions.

The Company evaluates all aged receivables that are over 60 days old and reserves specifically on a 90-day basis. The Company's U.S. operations have Uniform Commercial Code ("UCC") filings on practically all wholegoods each dealer purchases. This allows the Company in times of a difficult economy when the customer is unable to pay or has filed for bankruptcy (usually Chapter 11), to repossess the customer's inventory. This also allows Alamo Group to maintain a reserve over its cost which usually represents the margin on the original sales price.

The bad debt reserve balance was $2,506,000 at September 30, 2009 and $2,430,000 at December 31, 2008.

Sales Discounts

At September 30, 2009 the Company had $3,957,000 in reserves for sales discounts compared to $6,849,000 at December 31, 2008 on products shipped to our customers under various promotional programs. The decrease was due primarily from lower additional discounts reserved on the Company's agricultural products during the pre-season, which runs from September to December of each year and orders are shipped through the first quarter of 2010. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time.

The Company bases its reserves on historical data relating to discounts taken by the customer under each program. Historically between 85% and 95% of the Company's customers who qualify for each program, actually take the discount that is available.

Inventories - Obsolescence and Slow Moving

The Company had $8,829,000 at September 30, 2009 and $8,978,000 at December 31, 2008 in reserve to cover obsolescence and slow moving inventory. The decrease in reserve for obsolescence was mainly due to inventory written off in the Company's European operations. The obsolescence and slow moving policy states that the reserve is to be calculated on a basis of: 1) no inventory usage over a three year period and inventory with quantity on hand is deemed obsolete and reserved at 100 percent and 2) slow moving inventory with little usage requires a 100 percent reserve on items that have a quantity greater than a three year supply. There are exceptions to the obsolete and slow moving classifications if approved by an officer of the Company based on specific identification of an item or items that are deemed to be either included or excluded from this classification.

In cases where there is no historical data, management makes a judgment based on a specific review of the inventory in question to determine what reserves, if any are appropriate. New products or parts are generally excluded from the reserve policy until a three year history has been established.

The reserve is reviewed and if necessary, adjustments made, on a quarterly basis. The Company relies on historical information to support its reserve.
Once the inventory is written down, the Company does not adjust the reserve balance until the inventory is sold.

Warranty

The Company's warranty policy is generally to provide its customers warranty for up to one year on all equipment and 90 days for parts, though some products or components may have extended terms.

Warranty reserve, as a percent of sales, is calculated by taking the current twelve months of expenses and prorating that based on twelve months of sales with a six month lag period. The Company's historical experience is that a customer takes approximately ninety days to six months from the time the unit is received and put into operation to file any warranty claim. A warranty reserve is established for each different marketing group. Reserve balances are evaluated on a quarterly basis and adjustments are made when required.

The current warranty reserve balance was $5,186,000 at September 30, 2009 and $5,409,000 at December 31, 2008. The majority of the decrease came from lower reserves in the Company's U.S. Industrial Division. The Company has a long-term liability for extended warranty policies sold to customers in the amount of $299,000 at September 30, 2009 and $331,000 at December 31, 2008 with a life expectancy of 1 to 5 years.

Product Liability

At September 30, 2009 the Company had accrued $387,000 in reserves for product liability cases compared to $85,000 at December 31, 2008. The Company accrues primarily on a case by case basis and adjusts the balance quarterly.

During most of 2009, the self insured retention (S.I.R.) for U.S. product liability coverage for all products was at $100,000 per claim. On September 30, 2009 the Company renewed its insurance coverage and the S.I.R. for all products remained at $100,000. The Company also carries product liability coverage in Europe, Canada and Australia which contain substantially lower S.I.R.'s or deductibles.

Goodwill

Under ASC 350, Intangible-Goodwill and Other, goodwill is no longer amortized; however, it must be tested for impairment at least annually. In the fourth quarter of each year, or when events and circumstances warrant such a review, the Company tests the goodwill of all of its reporting units for impairment. The goodwill impairment test is determined using a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill (Step 1). If the fair value of a reporting unit exceeds its carrying value amount, goodwill of the reporting unit is not considered to have a potential impairment and the second step is not necessary. However, if the carrying amount of the reporting unit exceeds its fair value, the second step (Step 2) is performed to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. Step 2 compares the implied fair value of goodwill with the carrying amount of goodwill. If the implied value of goodwill is less than the carrying amount of goodwill, then a charge is recorded to reduce goodwill to the implied goodwill. The implied goodwill is calculated based on a hypothetical purchase price allocation similar to the requirements of Statement of Financial Accounting Standards No.141R, Business Combinations, in that it takes the implied fair value of the reporting unit and allocates such fair value to the fair value of the assets and liabilities of the reporting unit.

The Company estimated the fair value of its reporting units using various valuation techniques, with one technique being 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. The Company believes that the assumptions and estimates used to determine the estimated fair values of each of its reporting units are reasonable. However, different assumptions could materially affect the estimated fair value. The Company recognized goodwill impairment of $5,010,000 in the Agricultural segment in 2008. No goodwill impairment was recorded in 2007 or . . .