RETIREMENT BENEFIT PLANS

Defined Benefit Plans

In connection with the February 3, 2006 purchase of all the net assets of the Gradall excavator business, the Company assumed sponsorship of two Gradall non-contributory defined benefit pension plans, both of which are frozen with respect to both future benefit accruals and future new entrants.

The Gradall Company Hourly Employees’ Pension Plan covers approximately 330 former employees and 150 current employees who (i) were formerly employed by JLG Industries, Inc., (ii) were covered by a collective bargaining agreement and (iii) first participated in the plan before April 6, 1997. An amendment ceasing all future benefit accruals was effective April 6, 1997.

The Gradall Company Employees’ Retirement Plan covers approximately 235 former employees and 94 current employees who (i) were formerly employed by JLG Industries, Inc., (ii) were not covered by a collective bargaining agreement and (iii) first participated in the plan before December 31, 2004. An amendment ceasing future benefit accruals for certain participants was effective December 31, 2004. A second amendment discontinued all future benefit accruals for all participants effective April 24, 2006.

The following tables set forth the change in plan assets, change in projected benefit obligation, rate assumptions and components of net periodic benefit cost as of December 31 with respect to these plans. The measurement dates of the assets and liabilities of both plans were December 31 of the respective years presented.



	Year Ended December 31, 2011
(in thousands)	Hourly Employees’ Pension Plan			Employees’ Retirement Plan			Total
Change in projected benefit obligation
Benefit obligation at beginning of year	$	9,511		$	16,427		$	25,938
Service cost	8			4			12
Interest cost	469			858			1,327
Liability actuarial (gain)/loss	1,098			2,650			3,748
Benefits paid	(632		)	(701		)	(1,333		)
Benefit obligation at end of year	10,454			19,238			29,692
Change in fair value of plan assets
Fair value of plan assets at beginning of year	6,303			12,485			18,788
Return on plan assets	(73		)	(65		)	(138		)
Employer contributions	1,065			519			1,584
Benefits paid	(632		)	(702		)	(1,334		)
Fair value of plan assets at end of year	6,663			12,237			18,900
Underfunded status – December 31, 2011	$	(3,791	)	$	(7,001	)	$	(10,792	)
Accumulated benefit obligation – December 31, 2011	$	10,454		$	19,238		$	29,692



	Year Ended December 31, 2010
(in thousands)	Hourly Employees’ Pension Plan			Employees’ Retirement Plan			Total
Change in projected benefit obligation
Benefit obligation at beginning of year	$	9,067		$	15,056		$	24,123
Service cost	6			3			9
Interest cost	498			864			1,362
Liability actuarial (gain)/loss	578			1,119			1,697
Benefits paid	(638		)	(615		)	(1,253		)
Benefit obligation at end of year	9,511			16,427			25,938
Change in fair value of plan assets
Fair value of plan assets at beginning of year	5,560			10,922			16,482
Return on plan assets	678			1,319			1,997
Employer contributions	702			859			1,561
Benefits paid	(638		)	(615		)	(1,253		)
Fair value of plan assets at end of year	6,302			12,485			18,787
Underfunded status – December 31, 2010	$	(3,209	)	$	(3,942	)	$	(7,151	)
Accumulated benefit obligation – December 31, 2010	$	9,511		$	16,427		$	25,938

The Company recognizes the overfunded or underfunded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of defined benefit postretirement plans as an asset or liability in its statement of financial position and recognized changes in the funded status in the year in which the changes occur. The Company measures the funded status of a plan as of the date of its year-end statement of financial position.

The underfunded status of the plan of $10,792,000 and $7,151,000 as of December 31, 2011 and 2010, respectively, is recognized in the accompanying consolidated balance sheets as long-term accrued pension liability because plan assets are less than the value of benefit obligations expected to be paid.

The accumulated benefit obligation for our pension plans represents the actuarial present value of benefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels.

In determining the projected benefit obligation and the net pension cost, we used the following significant weighted-average assumptions:

Assumptions used to determine benefit obligations at December 31:



	Hourly Employees’ Pension Plan		Employees’ Retirement Plan
	2011	2010	2011	2010
Discount rate	4.06%	5.12%	4.18%	5.30%
Composite rate of compensation increase	N/A	N/A	N/A	N/A

Assumptions used to determine net periodic benefit cost for the years ended December 31:



	Hourly Employees’ Pension Plan		Employees’ Retirement Plan
	2011	2010	2011	2010
Discount rate	5.12%	5.67%	5.30%	5.83%
Long-term rate of return on plan assets	7.75%	7.75%	7.75%	7.75%
Composite rate of compensation increase	N/A	N/A	N/A	N/A

The Company employs a building block approach in determining the expected long-term rate on return on plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.

The following tables present the components of net periodic benefit cost (gains are denoted with parentheses and losses are not):



	Year Ended December 31, 2011
(in thousands)	Hourly Employees’ Pension Plan			Employees’ Retirement Plan			Total
Service cost	$	8		$	4		$	12
Interest cost	469			858			1,327
Expected return on plan assets	(514		)	(963		)	(1,477		)
Amortization of prior service cost	—			—			—
Amortization of net (gain)/loss	117			77			194
Net periodic benefit cost	$	80		$	(24	)	$	56



	Year Ended December 31, 2010
(in thousands)	Hourly Employees’ Pension Plan			Employees’ Retirement Plan			Total
Service cost	$	6		$	3		$	9
Interest cost	499			864			1,363
Expected return on plan assets	(431		)	(850		)	(1,281		)
Amortization of prior service cost	—			—			—
Amortization of net (gain)/loss	96			33			129
Net periodic benefit cost	$	170		$	50		$	220

The Company estimates that $659,000 of unrecognized actuarial expense will be amortized from accumulated other comprehensive income into net periodic benefit costs during 2012.

The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalizations. Other assets such as real estate, private equity, and hedge funds are used judiciously to enhance long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies.

The pension plans' weighted-average asset allocations as a percentage of plan assets at December 31 are as follows:



	Hourly Employees’ Pension Plan		Employees’ Retirement Plan
	2011	2010	2011	2010
Equity securities	56%	47%	56%	47%
Debt securities	38%	45%	38%	45%
Short-term investments	1%	3%	1%	3%
Other	5%	5%	5%	5%
Total	100%	100%	100%	100%

As of December 31, 2011, we used the following valuation techniques to measure fair value for assets. There were no changes to these methodologies during 2011: Level 1 - Assets were valued using the closing price reported in the active market in which the individual security was traded. Level 2 - Assets were valued using quoted prices in markets that are not active, broker dealer quotations, net asset value of shares held by the plans, and other methods by which all significant input were observable at the measurement date. Level 3 - Assets were valued using valuation reports from the respective institutions at the measurement date. The following table presents the hierarchy levels for our postretirement benefit plan investments as of December 31,:



(in thousands)	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual Funds:
Small Cap	$	1,321	$	1,321	$	—	$—
Mid Cap	1,238		1,238
Large Cap	7,130		7,130
International	1,835		1,835

Common/Collective:
Liability Driven Solution	2,614		—		2,614		—
Wells Fargo International Equity Index Fund	906				906
Wells Fargo Large Cap Growth Index Fund	1,085				1,085
Wells Fargo Large Cap Value Index Fund	1,108				1,108
Wells Fargo Russell 2000 Index Fund	656				656
Wells Fargo S&P Mid Cap Index Fund	734				734

Cash & Short-term Investments	265		265
Total	$	18,892	$	11,789	$	7,103	$—



(in thousands)	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Mutual Funds:
Small Cap	$	1,418	$	1,418	$	—	$	—
Mid Cap	1,737		1,737
Large Cap	6,567		6,567

Common/Collective:
Liability Driven Solution	4,266		—		4,266		—
Wells Fargo International Equity Index Fund	703				703
Wells Fargo Large Cap Growth Index Fund	1,273				1,273
Wells Fargo Large Cap Value Index Fund	1,223				1,223
Wells Fargo Russell 2000 Index Fund	466				466
Wells Fargo S&P Mid Cap Index Fund	483				483

Cash & Short-term Investments	652		652
Total	$	18,788	$	10,374	$	8,414	$	—

Our interests in the common collective trust investments are managed by one custodian. Consistent with our investment strategy, the custodian has invested the assets across a widely diversified portfolio of U.S. and international equity and fixed income securities. Fair values of each security within the collective trust as of December 31, 2011 were obtained from the custodian and are based on quoted market prices of individual investments; however, since the fund itself does not have immediate liquidity or a quoted market price, these assets are considered Level 2.

The common collective funds noted in the above table have estimated fair value using the net asset value per share of investments. Investments can be redeemed immediately at the current net asset value per share based on the fair value of the underlying assets. Redemption frequency is daily. The categories contain investments in equity securities of smaller growing companies, medium-sized U.S. companies, large value-oriented and growth-oriented companies and foreign companies traded on international markets.

Expected benefit payments are estimated using the same assumptions used in determining our benefit obligation as of December 31, 2011. The following table illustrates the estimated pension benefit payments which reflect expected future service, as appropriate, that are projected to be paid:



(in thousands)	Hourly Employees’ Pension Plan		Employees’ Retirement Plan		Total
2012	$	662	$	769	$	1,431
2013	656		803		1,459
2014	654		873		1,527
2015	646		900		1,546
2016	648		945		1,593
Years 2017 through 2021	$	3,246	$	5,589	$	8,835

Supplemental Retirement Plan

The Board of Directors of the Company adopted the Alamo Group Inc. Supplemental Executive Retirement Plan (the “SERP”), effective as of January 3, 2011. The SERP will benefit certain key management or other highly compensated employees of the Company and/or certain subsidiaries who are selected by the Compensation Committee and approved by the Board to participate.

The SERP is intended to provide a benefit from the Company upon retirement, death or disability, or a change in control of the Company. Accordingly, the SERP obligates the Company to pay to a participant a Retirement Benefit (as defined in the SERP) upon the occurrence of certain payment events to the extent a participant has a vested right thereto. A participant’s right to his or her Retirement Benefit becomes vested in the Company’s contributions upon 10 years of Credited Service (as defined in the SERP) or a change in control of the Company. The Retirement Benefit is based on 20% of the final three-year average salary of each participant on or after his or her normal retirement age (65 years of age). In the event of the participant’s death or a change in control, the participant’s vested retirement benefit will be paid in a lump sum to the participant or his or her estate, as applicable, within 90 days after the participant’s death or a change in control, as applicable. In the event the participant is entitled to a benefit from the SERP due to disability, retirement or other termination of employment, the benefit will be paid in monthly installments over a period of fifteen years.

The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other assumptions, including discount rates, rate of compensation increases, retirement dates and life expectancies. The net periodic costs are recognized as employees render the services necessary to earn the SERP benefits.

In connection with the initiation of the SERP, the Company recorded an unfunded long-term liability of $1,964,301, a deferred tax asset of $746,000 and $1,218,301 in accumulated other comprehensive income. The $1,964,301 represents prior service cost which will be amortized over the average remaining service periods of the employees. The prior service cost is included as a component of net periodic pension cost. The prior service cost expected to be amortized for the year ended December 31, 2011 is $263,665.

The change in the Projected Benefit Obligation (BPO) as of December 31, 2011 is shown below in thousands:



Benefit obligation at January 1, 2011	$	—
Service cost	108
Interest cost	103
Liability actuarial (gain)/loss	409
Plan Amendments	1,964
Benefit obligation at December 31, 2011	$	2,584

The components of net periodic pension expense were as follows in thousands:



	2011
Service Cost	$	108
Interest Cost	103
Amortization of Prior Service Cost	264
Net Periodic Benefit Cost	$	475

The Net Periodic Pension Expense is based on the following assumptions: 4.04% discount rate; 3% rate of compensation increases and a 7.45 year amortization period for 2011.

Future estimated benefits expected to be paid from the plan over the next ten years as follows in thousands:



2012	$	10
2013	42
2014	43
2015	50
2016	98
Years 2017 through 2021	$	1,069

Defined Contribution Plans

The Company has three defined contribution plans, The Gradall Salaried Employees’ Savings and Investment Plan (“Salary Plan”), The Gradall Hourly Employees’ Savings and Investment Plan (“Hourly Plan”) and The International Association of Machinist and Aerospace Retirement Plan (“IAM Plan”). The Company contributed $356,000 and $269,000 to the IAM Plan for the plan years ended December 31, 2011 and 2010, respectively. The Company converted the Salary Plan into its 401(k) retirement and savings plan and put the Hourly Plan into a separate 401(k) retirement and savings plan.

The Company provides a defined contribution 401(k) retirement and savings plan for eligible U.S. employees. Company matching contributions are based on a percentage of employee contributions. Company contributions to the plan during 2011, 2010 and 2009 were $992,000, $481,000, and $1,330,000, respectively. A U.S. subsidiary of the Company had an Hourly Employee Pension Plan of Trust covering collective bargaining which was terminated on December 31, 2006. As of January 1, 2006 the employees were added to the existing 401(k) retirement and salary plan.

Three of the Company’s international subsidiaries also participate in a defined contribution and savings plan covering eligible employees. The Company’s international subsidiaries contribute between 3% and 10% of the participant’s salary up to a specific limit. Total contributions made to the above plan were $676,000, $607,000, and $537,000 for the year ended December 31, 2011, 2010 and 2009, respectively.