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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
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 incorporation or organization) (I.R.S. Employer 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 Trading symbol(s) Name of each exchange on which registered
Common Stock, par value
$.10 per share
ALG New York Stock Exchange

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 requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

At October 29, 2021, 11,923,746 shares of common stock, $.10 par value, of the registrant were outstanding.


1

Alamo Group Inc. and Subsidiaries
 
INDEX
 
                                                                                                                                                                              
PART I.
FINANCIAL INFORMATION
PAGE
Item 1.
Interim Condensed Consolidated Financial Statements  (Unaudited)
3
September 30, 2021 and December 31, 2020
4
Three and Nine Months Ended September 30, 2021 and September 30, 2020
5
Three and Nine Months Ended September 30, 2021 and September 30, 2020
6
Three and Nine Months Ended September 30, 2021 and September 30, 2020
8
Nine Months Ended September 30, 2021 and September 30, 2020
9
Item 2.
17
Item 3.
23
Item 4.
24
PART II.
24
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
27

2

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(Unaudited) 
 
(in thousands, except share amounts)
September 30, 2021 December 31, 2020
As Adjusted
ASSETS
Current assets:
Cash and cash equivalents
$ 89,189  $ 50,195 
Accounts receivable, net
245,517  209,276 
Inventories, net
294,270  242,501 
Prepaid expenses and other current assets
6,741  7,382 
Income tax receivable
66  6,186 
Total current assets
635,783  515,540 
Rental equipment, net
36,244  42,266 
Property, plant and equipment
316,347  312,362 
Less:  Accumulated depreciation
(168,557) (156,928)
Total property, plant and equipment, net
147,790  155,434 
Goodwill
193,572  195,132 
Intangible assets, net
181,516  193,172 
Deferred income taxes
2,004  1,203 
Other non-current assets
20,869  19,112 
Total assets
$ 1,217,778  $ 1,121,859 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
$ 107,059  $ 75,317 
Income taxes payable
6,425  2,278 
Accrued liabilities
67,183  64,634 
Current maturities of long-term debt and finance lease obligations
15,059  15,066 
Total current liabilities
195,726  157,295 
Long-term debt and finance lease obligations, net of current maturities
279,215  270,320 
Long-term tax liability
4,408  3,954 
Deferred pension liability
963  1,731 
Other long-term liabilities
28,095  30,744 
Deferred income taxes
17,709  22,812 
Stockholders’ equity:
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,870,513 and 11,809,926 outstanding at September 30, 2021 and December 31, 2020, respectively
1,187  1,181 
Additional paid-in-capital
123,446  118,528 
Treasury stock, at cost; 82,600 shares at September 30, 2021 and December 31, 2020, respectively
(4,566) (4,566)
Retained earnings
616,235  560,186 
Accumulated other comprehensive loss
(44,640) (40,326)
Total stockholders’ equity
691,662  635,003 
Total liabilities and stockholders’ equity
$ 1,217,778  $ 1,121,859 

See accompanying notes.
3

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands, except per share amounts) 2021 2020 2021 2020
Net sales:
Industrial
$ 218,988  $ 196,241  $ 662,106  $ 608,473 
Agricultural
119,323  95,518  334,944  266,369 
Total net sales 338,311  291,759  997,050  874,842 
Cost of sales 252,015  213,123  746,188  649,441 
Gross profit 86,296  78,636  250,862  225,401 
Selling, general and administrative expenses 52,586  44,069  150,803  136,868 
Amortization expense 3,667  3,644  10,988  11,093 
Income from operations
30,043  30,923  89,071  77,440 
Interest expense (2,660) (3,461) (8,127) (12,921)
Interest income 296  306  877  968 
Other income (expense), net 36  (333) 2,659  720 
Income before income taxes
27,715  27,435  84,480  66,207 
Provision for income taxes 10,196  7,402  23,462  17,657 
Net Income
$ 17,519  $ 20,033  $ 61,018  $ 48,550 
Net income per common share:
Basic
$ 1.48  $ 1.70  $ 5.16  $ 4.12 
Diluted
$ 1.47  $ 1.69  $ 5.13  $ 4.10 
Average common shares:
Basic
11,842  11,788  11,835  11,776 
Diluted
11,900  11,851  11,895  11,840 
Dividends declared $ 0.14  $ 0.13  $ 0.42  $ 0.39 
 
 See accompanying notes.
 
4

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Net income $ 17,519  $ 20,033  $ 61,018  $ 48,550 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense of $(321) and zero, and $(436) and zero, respectively
(9,216) 8,606  (8,660) (6,244)
Recognition of deferred pension and other post-retirement benefits, net of tax expense of $(67) and $(51), and $(201) and $(155), respectively
251  194  754  582 
Unrealized income (loss) on derivative instruments, net of tax (expense) benefit of $(354) and $205, and $(955) and $1,586, respectively
1,331  (986) 3,592  (6,520)
Other comprehensive income (loss), net of tax
(7,634) 7,814  (4,314) (12,182)
Comprehensive income $ 9,885  $ 27,847  $ 56,704  $ 36,368 

See accompanying notes.


5


Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
 (Unaudited)

For nine months ended September 30, 2021
Common Stock
Additional
Paid-in Capital
Treasury Stock Retained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)
Shares Amount
Balance at December 31, 2020 11,727  $ 1,181  $ 118,528  $ (4,566) $ 560,186  $ (40,326) $ 635,003 
Other comprehensive income
—  —  —  —  17,462  (1,586) 15,876 
Stock-based compensation expense
—  —  1,240  —  —  —  1,240 
Stock-based compensation transactions
29  3  773  —  —  —  776 
Dividends paid ($0.14 per share)
—  —  —  —  (1,654) —  (1,654)
Balance at March 31, 2021 11,756  $ 1,184  $ 120,541  $ (4,566) $ 575,994  $ (41,912) $ 651,241 
Other comprehensive income —  —  —  —  26,037  4,906  30,943 
Stock-based compensation expense
—  —  1,316  —  —  —  1,316 
Stock-based compensation transactions
23  2  (604) —  —  —  (602)
Dividends paid ($0.14 per share)
—  —  —  —  (1,657) —  (1,657)
Balance at June 30, 2021 11,779  $ 1,186  $ 121,253  $ (4,566) $ 600,374  $ (37,006) $ 681,241 
Other comprehensive income —  —  —  —  17,519  (7,634) 9,885 
Stock-based compensation expense
—  —  2,840  —  —  —  2,840 
Stock-based compensation transactions
9  1  (647) —  —  —  (646)
Dividends paid ($0.14 per share)
—  —  —  —  (1,658) —  (1,658)
Balance at September 30, 2021 11,788  $ 1,187  $ 123,446  $ (4,566) $ 616,235  $ (44,640) $ 691,662 


6

For nine months ended September 30, 2020
Common Stock
Additional Paid-in Capital
Treasury Stock Retained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands) Shares Amount
Balance at December 31, 2019 11,670  $ 1,175  $ 113,666  $ (4,566) $ 500,320  $ (40,838) $ 569,757 
Other comprehensive income
—  —  —  —  15,528  (24,650) (9,122)
Stock-based compensation expense
—  —  933  —  —  —  933 
Stock-based compensation transactions
9  1  368  —  —  —  369 
  Dividends paid ($0.13 per share)
—  —  —  —  (1,528) —  (1,528)
Balance at March 31, 2020 11,679  $ 1,176  $ 114,967  $ (4,566) $ 514,320  $ (65,488) $ 560,409 
Other comprehensive income —  —  —  —  12,989  4,654  17,643 
Stock-based compensation expense
—  —  1,103  —  —  —  1,103 
Stock-based compensation transactions
25  3  (476) —  —  —  (473)
Dividends paid ($0.13 per share)
—  —  —  —  (1,531) —  (1,531)
Balance at June 30, 2020 11,704  $ 1,179  $ 115,594  $ (4,566) $ 525,778  $ (60,834) $ 577,151 
Other comprehensive income —  —  —  —  20,033  7,814  27,847 
Stock-based compensation expense
—  —  1,079  —  —  —  1,079 
Stock-based compensation transactions
16  1  666  —  —  —  667 
Dividends paid ($0.13 per share)
—  —  —  —  (1,531) —  (1,531)
Balance at September 30, 2020 11,720  $ 1,180  $ 117,339  $ (4,566) $ 544,280  $ (53,020) $ 605,213 


See accompanying notes.

7

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
(in thousands) 2021 2020
Operating Activities
Net income $ 61,018  $ 48,550 
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts
133  541 
Depreciation - Property, plant and equipment
15,798  14,237 
Depreciation - Rental equipment
6,562  7,504 
Amortization of intangibles
10,988  11,093 
Amortization of debt issuance
500  500 
Stock-based compensation expense
5,396  3,115 
Provision for deferred income tax (benefit) (6,705) (4,548)
Gain on sale of property, plant and equipment
(4,162) (1,037)
Changes in operating assets and liabilities:
Accounts receivable
(38,106) 17,612 
Inventories
(54,408) 22,893 
Rental equipment
(540) 4,189 
Prepaid expenses and other assets
(1,668) 5,765 
Trade accounts payable and accrued liabilities
36,331  (2,422)
Income taxes payable
10,266  8,432 
Long-term tax payable 454  (654)
Other assets and long-term liabilities, net
1,530  205 
Net cash provided by operating activities
43,387  135,975 
Investing Activities
Purchase of property, plant and equipment (14,584) (14,962)
Proceeds from sale of property, plant and equipment 9,287  3,433 
Purchase of patents (44) — 
Net cash used in investing activities (5,341) (11,529)
Financing Activities
Borrowings on bank revolving credit facility 128,000  98,000 
Repayments on bank revolving credit facility (108,000) (153,000)
Principal payments on long-term debt and finance leases (11,308) (15,094)
Dividends paid (4,969) (4,590)
Proceeds from exercise of stock options 1,485  1,272 
Common stock repurchased (1,957) (710)
Net cash provided (used) by financing activities 3,251  (74,122)
Effect of exchange rate changes on cash and cash equivalents (2,303) 880 
Net change in cash and cash equivalents 38,994  51,204 
Cash and cash equivalents at beginning of the year 50,195  42,311 
Cash and cash equivalents at end of the period $ 89,189  $ 93,515 
Cash paid during the period for:
Interest
$ 7,839  $ 14,149 
Income taxes
20,151  13,309 
See accompanying notes.
8

Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 2021
 
1.  Basis of Financial Statement Presentation

General

The accompanying unaudited interim condensed consolidated financial statements of Alamo Group Inc. and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.  The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020 (the "2020 10-K").

Effective July 1, 2021, the Company changed its method of accounting for its U.S. inventories currently accounted for under last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. The Company applied this change retrospectively for all prior periods presented and is discussed in further detail in Note 2.

Accounting Pronouncements Adopted on January 1, 2021

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” to simplify the accounting for income taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance became effective for us on January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. This Topic provides accounting relief for the transition away from LIBOR and certain other reference rates. The amendments for this update are effective through December 31, 2022. The Company is evaluating the impact the adoption of this standard will have on our financial statements.

2. Accounting Policies

Inventory Valuation

Inventories are stated at the lower of cost or net realizable value. Effective July 1, 2021, the Company changed its method of accounting for its U.S. inventories currently accounted for under the LIFO method to the FIFO method. Total U.S. inventories that utilized the LIFO cost method represented 41% of the Company's total inventory as of December 31, 2020 prior to this change in method. The Company believes the FIFO method is preferable because it: (i) more accurately matches cost of sales with the related revenues as the FIFO method more accurately resembles the physical flow of inventory and; (ii) conforms all of the Company’s consolidated inventory to a single method of accounting. The Company also notes that the revised policy improves comparability with many of the Company's peers.

The Company applied this change retrospectively to all periods presented. There was an immaterial impact to the Company’s Consolidated Income Statement and Consolidated Statement of Cash Flows for the three and nine
months ended September 30, 2020 and 2021. The following financial statement line items in the Company's Consolidated Balance Sheet as of December 31, 2020 was adjusted as follows:
9


Consolidated Balance Sheets
(in thousands)
December 31, 2020
As Originally Reported Effect of Change As Adjusted
Inventories, net
$ 229,971  $ 12,530  $ 242,501 
Deferred income taxes (liability)
19,642  3,170  22,812 
Retained earnings 550,826  9,360  560,186 
3.  Accounts Receivable

Accounts receivable is shown net of sales discounts and the allowance for credit losses.

At September 30, 2021 the Company had $10.5 million in reserves for sales discounts compared to $13.5 million at December 31, 2020 related to products shipped to our customers under various promotional programs.
 
4.  Inventories
 
Net inventories consist of the following:
(in thousands)
September 30, 2021 December 31, 2020
As Adjusted
Finished goods
$ 253,430  $ 208,656 
Work in process
23,876  21,225 
Raw materials
16,964  12,620 
Inventories, net $ 294,270  $ 242,501 
 
Inventory obsolescence reserves were $10.7 million at September 30, 2021 and $12.0 million at December 31, 2020.

5. Rental Equipment

Rental equipment is shown net of accumulated depreciation of $20.8 million and $18.0 million at September 30, 2021 and December 31, 2020, respectively. The Company recognized depreciation expense of $2.1 million and $2.3 million for the three months ended September 30, 2021 and 2020, respectively and $6.6 million and $7.5 million for the nine months ended September 30, 2021 and 2020, respectively.

6.  Fair Value Measurements
 
The carrying values of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate their fair value because of the short-term nature of these items. The carrying value of our debt approximates the fair value as of September 30, 2021 and December 31, 2020, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.

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7. Goodwill and Intangible Assets

The following is the summary of changes to the Company's Goodwill for the nine months ended September 30, 2021:
Industrial Agricultural Consolidated
(in thousands)
Balance at December 31, 2020 $ 181,338  $ 13,794  $ 195,132 
Translation adjustment (1,244) (316) (1,560)
Balance at September 30, 2021 $ 180,094  $ 13,478  $ 193,572 

The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
(in thousands)
Estimated Useful Lives
September 30, 2021 December 31, 2020
Definite:
Trade names and trademarks
15-25 years
$ 67,264  $ 67,770 
Customer and dealer relationships
8-15 years
122,350  122,470 
Patents and drawings
3-12 years
28,593  28,764 
Favorable leasehold interests
7 years
4,200  4,200 
Total at cost 222,407  223,204 
Less accumulated amortization (46,391) (35,532)
Total net 176,016  187,672 
Indefinite:
Trade names and trademarks 5,500  5,500 
Total Intangible Assets $ 181,516  $ 193,172 

The Company recognized amortization expense of $3.7 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively, and $11.0 million and $11.1 million for the nine months ended September 30, 2021 and 2020, respectively.

8.  Leases

The Company leases office space and equipment under various operating and finance leases, which generally are expected to be renewed or replaced by other leases. The finance leases currently held are considered immaterial. The components of lease cost were as follows:
Components of Lease Cost
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Finance lease cost:
     Amortization of right-of-use assets $ 17  $ 22  $ 51  $ 70 
     Interest on lease liabilities 1  1  3  5 
Operating lease cost 1,464  1,216  3,985  3,624 
Short-term lease cost 365  150  822  608 
Variable lease cost 87  120  300  364 
Total lease cost $ 1,934  $ 1,509  $ 5,161  $ 4,671 

Rent expense for the three and nine months ended September 30, 2021 and 2020 was immaterial.

11

Maturities of operating lease liabilities were as follows:
Future Minimum Lease Payments
(in thousands) September 30, 2021 December 31, 2020
2021 $ 1,391  * $ 4,072 
2022 4,797  3,063 
2023 3,440  2,089 
2024 2,329  1,465 
2025 1,704  1,244 
Thereafter 4,182  3,622 
Total minimum lease payments $ 17,843  $ 15,555 
Less imputed interest (1,278) (1,310)
Total operating lease liabilities $ 16,565  $ 14,245 
*Period ended September 30, 2021 represents the remaining three months of 2021.
Future Lease Commencements

As of September 30, 2021, there are additional operating leases, primarily for buildings, that have not yet commenced in the amount of $1.2 million. These operating leases will commence in fiscal year 2021 with lease terms of 2 to 5 years.

Supplemental balance sheet information related to leases was as follows:
Operating Leases
(in thousands) September 30, 2021 December 31, 2020
Other non-current assets
$ 16,400  $ 14,144 
Accrued liabilities 4,742  3,680 
Other long-term liabilities 11,823  10,565 
    Total operating lease liabilities $ 16,565  $ 14,245 
Weighted Average Remaining Lease Term 5.14 years 5.83 years
Weighted Average Discount Rate 2.85  % 3.04  %

Supplemental Cash Flow information related to leases was as follows:
Nine Months Ended
September 30,
(in thousands) 2021 2020
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows from operating leases $ 3,603  $ 3,362 

12

9. Debt

The components of long-term debt are as follows:
 
(in thousands) 		September 30, 2021 December 31, 2020
Current Maturities:
    Finance lease obligations $ 59  $ 66 
    Term debt 15,000  15,000 
15,059  15,066 
Long-term debt:
     Finance lease obligations
33  87 
Term debt, net 254,182  265,233 
     Bank revolving credit facility 25,000  5,000 
         Total Long-term debt 279,215  270,320 
Total debt $ 294,274  $ 285,386 

As of September 30, 2021, $2.4 million 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 $191.6 million in available borrowings.

10.  Common Stock and Dividends
 
Dividends declared and paid on a per share basis were as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2021 2020 2021 2020
Dividends declared
$ 0.14  $ 0.13  $ 0.42  $ 0.39 
Dividends paid
$ 0.14  $ 0.13  $ 0.42  $ 0.39 

On October 1, 2021, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.14 per share, which was paid on October 28, 2021, to shareholders of record at the close of business on October 15, 2021.
 
11.  Earnings Per Share

The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net income per common share.  Net income for basic and diluted calculations do not differ.
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(In thousands, except per share)
2021 2020 2021 2020
Net Income
$ 17,519  $ 20,033  $ 61,018  $ 48,550 
Average Common Shares:
Basic (weighted-average outstanding shares)
11,842  11,788  11,835  11,776 
Dilutive potential common shares from stock options
58  63  60  64 
Diluted (weighted-average outstanding shares)
11,900  11,851  11,895  11,840 
Basic earnings per share
$ 1.48  $ 1.70  $ 5.16  $ 4.12 
Diluted earnings per share
$ 1.47  $ 1.69  $ 5.13  $ 4.10 

13

12.  Revenue and Segment Information

Revenues from Contracts with Customers

Disaggregation of revenue is presented in the tables below by product type and by geographical location. Management has determined that this level of disaggregation would be beneficial to users of the financial statements.
Revenue by Product Type
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Net Sales
Wholegoods
$ 251,712  $ 212,918  $ 761,674  $ 663,306 
Parts
74,009  71,419  201,601  188,712 
Other
12,590  7,422  33,775  22,824 
Consolidated $ 338,311  $ 291,759  $ 997,050  $ 874,842 

Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.
Revenue by Geographical Location
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Net Sales
United States
$ 249,024  $ 216,550  $ 710,814  $ 651,226 
France
21,236  20,075  69,252  58,686 
Canada
15,499  16,392  60,383  44,789 
United Kingdom
15,524  14,127  43,840  38,135 
Netherlands 6,624  5,547  22,789  19,433 
Brazil
9,212  3,937  23,396  12,200 
Australia
4,999  2,587  14,588  7,777 
Germany 2,665  2,233  6,497  7,081 
Other
13,528  10,311  45,491  35,515 
Consolidated $ 338,311  $ 291,759  $ 997,050  $ 874,842 

Net sales are attributed to countries based on the location of the customer.

14

Segment Information

The following includes a summary of the unaudited financial information by reporting segment at September 30, 2021:  
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(in thousands) 2021 2020 2021 2020
Net Sales
Industrial
$ 218,988  $ 196,241  $ 662,106  $ 608,473 
Agricultural
119,323  95,518  334,944  266,369 
Consolidated $ 338,311  $ 291,759  $ 997,050  $ 874,842 
Income from Operations
Industrial
$ 15,951  $ 19,238  $ 52,004  $ 51,453 
Agricultural
14,092  11,685  37,067  25,987 
Consolidated $ 30,043  $ 30,923  $ 89,071  $ 77,440 
(in thousands)
September 30, 2021 December 31, 2020
Goodwill
Industrial
$ 180,094  $ 181,338 
Agricultural
13,478  13,794 
Consolidated $ 193,572  $ 195,132 
Total Identifiable Assets
       Industrial
$ 920,525  $ 875,081 
       Agricultural
297,253  246,778 
Consolidated $ 1,217,778  $ 1,121,859 


13.  Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component, net of tax, were as follows:
Three Months Ended September 30,
2021 2020
(in thousands) Foreign Currency Translation Adjustment Defined Benefit Plans Items Gaines (Losses) on Cash Flow Hedges Total Foreign Currency Translation Adjustment Defined Benefit Plans Items Gaines (Losses) on Cash Flow Hedges Total
Balance as of beginning of period $ (26,041) $ (6,352) $ (4,613) $ (37,006) $ (50,309) $ (5,601) $ (4,924) $ (60,834)
Other comprehensive income (loss) before reclassifications (9,216) —  2,013  (7,203) 8,606  —  (341) 8,265 
Amounts reclassified from accumulated other comprehensive loss —  251  (682) (431) —  194  (645) (451)
Other comprehensive income (loss) (9,216) 251  1,331  (7,634) 8,606  194  (986) 7,814 
Balance as of end of period $ (35,257) $ (6,101) $ (3,282) $ (44,640) $ (41,703) $ (5,407) $ (5,910) $ (53,020)


15

Nine Months Ended September 30,
2021 2020
(in thousands) Foreign Currency Translation Adjustment Defined Benefit Plans Items Gaines (Losses) on Cash Flow Hedges Total Foreign Currency Translation Adjustment Defined Benefit Plans Items Gaines (Losses) on Cash Flow Hedges Total
Balance as of beginning of period $ (26,597) $ (6,855) $ (6,874) $ (40,326) $ (35,459) $ (5,989) $ 610  $ (40,838)
Other comprehensive income (loss) before reclassifications (8,660) —  5,593  (3,067) (6,244) —  (5,479) (11,723)
Amounts reclassified from accumulated other comprehensive loss —  754  (2,001) (1,247) —  582  (1,041) (459)
Other comprehensive income (loss) (8,660) 754  3,592  (4,314) (6,244) 582  (6,520) (12,182)
Balance as of end of period $ (35,257) $ (6,101) $ (3,282) $ (44,640) $ (41,703) $ (5,407) $ (5,910) $ (53,020)


14.  Subsequent Events

On October 26, 2021, the Company announced that it acquired 100% of the outstanding capital shares of Timberwolf Limited (“Timberwolf”) in the U.K for approximately $18.0 million. Timberwolf manufactures a broad range of commercial wood chippers, primarily serving markets in the U.K. and the European Union.


16

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
September 30, 		Nine Months Ended
September 30,
As a
Percent of Net Sales
2021 2020 2021 2020
Industrial 64.7  % 67.3  % 66.4  % 69.6  %
Agricultural 35.3  % 32.7  % 33.6  % 30.4  %
Total sales, net
100.0  % 100.0  % 100.0  % 100.0  %
Three Months Ended
September 30, 		Nine Months Ended
September 30,
Cost Trends and Profit Margin, as
Percentages of Net Sales
2021 2020 2021 2020
Gross profit 25.5  % 27.0  % 25.2  % 25.8  %
Income from operations 8.9  % 10.6  % 8.9  % 8.9  %
Income before income taxes 8.2  % 9.4  % 8.5  % 7.6  %
Net income 5.2  % 6.9  % 6.1  % 5.5  %
 
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. Unless the context otherwise requires, the terms the "Company", "we", "our" and "us" means Alamo Group Inc.
 
We experienced continued strong demand for our products during the third quarter of 2021. COVID-19 variant cases have generally fallen since the summer peak levels and we have experienced less disruption in our business as a direct result of COVID-19 illness. However, we continue to struggle with the indirect consequences of the pandemic and we expect that these issues will persist, at least in the near-term. Our top line performance was constrained by supply chain disruptions and labor shortages. While we have elevated engagement with our key suppliers and taken other actions to mitigate supply chain disruptions, we expect these challenges to continue for at least the remainder of 2021. We also experienced a shortage of skilled labor along with higher material and transportation costs, all of which negatively impacted our operations and financial results during the quarter.

For the first nine months of 2021, the Company's net sales increased by 14%, and net income increased by 26% compared to the same period in 2020. The increase in both net sales and net income was primarily due to a strong recovery in customer demand for our products compared to the prior year which was materially impacted by the COVID-19 pandemic. Offsetting the increase were disruptions in our supply chain, labor shortages, significant input cost inflation, and logistics issues.

The Company's Industrial Division experienced a 9% increase in sales for the first nine months of 2021 compared to the first nine months of 2020 due to increased customer demand and to a lesser extent pricing actions. The Division's new orders and backlog improved in all product lines, though cases of COVID-19 in certain facilities caused some operational delays during the first half of 2021. The Division's income from operations for the first nine months of 2021 was up 1% versus the same period in 2020, due to increased demand but offset by higher input costs and supply chain disruptions which negatively affected manufacturing efficiencies.

The Company's Agricultural Division sales increased in the first nine months of 2021 by 26% compared to the first nine months of 2020. Agricultural sales continue to rebound due to improved commodity prices, government subsidies, and increased customer demand for our products aided by lower dealer inventory. Negatively impacting this Division were higher input costs and supply chain disruptions which affected manufacturing efficiencies. Notwithstanding these challenges, the Division's income from operations recorded a 43% improvement compared to the first nine months of 2020.
17


Consolidated income from operations was $89.1 million in the first nine months of 2021 compared to $77.4 million in the first nine months of 2020. The results of the first nine months of 2021 included a $1.1 million expense related to an acceleration of stock expense. The 2020 first nine months results included a $3.5 million non-cash inventory step-up expense related to the Morbark acquisition which was completed in October of 2019. The Company's backlog increased 154% to $645.1 million at the end of the third quarter of 2021 versus a backlog of $254.5 million at the end of the third quarter of 2020. The increase in the Company's backlog was primarily attributable to improved market conditions and an increase in customer demand for our products in both Divisions as outlined above.

There remain many uncertainties regarding the COVID-19 pandemic, including the anticipated duration and severity of the pandemic, the spread of an increasing number of virus variants, the extent of worldwide social, political and economic disruption it may continue to cause and the distribution of vaccines and other treatment options to address the virus. The broader implications of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows cannot be determined at this time, and ultimately will be affected by a number of evolving factors including the length of time that the pandemic continues, the impact of treatment options and of virus variants, the pandemic’s effect on our markets, our supply chain, and our manufacturing capacity, as well as the impact of governmental regulations imposed in response to the pandemic. While we have generally seen a decline of COVID-19 cases in our facilities and in the markets we serve, a continuing resurgence of cases could negatively impact us in the future by, among other things, reducing overall customer demand or creating operational disruptions that could lead to delayed deliveries or negative cost impacts. We also face several ongoing challenges, including supply chain and logistics challenges, the unavailability of certain raw materials and key product components, and input cost inflation. We believe many of these issues are likely to persist in the near-term. These issues may negatively impact our business and financial results.

While the direct and indirect consequences of the COVID-19 pandemic will certainly pose the greatest risk for the Company during the remainder of 2021, the Company may also be negatively affected by several other factors such as changes in tariff regulations and the imposition of new tariffs, ongoing trade disputes, further supply chain issues, changes in U.S. fiscal policy such as changes in the federal tax rate, weakness in the overall world-wide economy, significant changes in currency exchange rates, negative economic impacts resulting from geopolitical events, changes in trade policy, increased levels of government regulations, weakness in the agricultural sector, acquisition integration issues, budget constraints or revenue shortfalls in governmental entities, and other risks and uncertainties as described in “Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K").

Results of Operations
 
Three Months Ended September 30, 2021 vs. Three Months Ended September 30, 2020
 
Net sales for the third quarter of 2021 were $338.3 million, an increase of $46.5 million or 16% compared to $291.8 million for the third quarter of 2020. Net sales during the third quarter of 2021 improved due to increased customer demand for our products versus the third quarter of 2020 which was negatively affected by the COVID-19 pandemic.
 
Net Industrial sales increased by $22.8 million or 12% to $219.0 million for the third quarter of 2021 compared to $196.2 million during the same period in 2020. The increase was due to strong customer demand for the Company's Industrial products and to a lesser extent pricing actions. Governmental sales were strong during the third quarter of 2021 as both state and municipal governmental budgets recovered at a faster pace than was expected, but have not yet recovered to pre-pandemic levels. Non-governmental sales were also up as forestry and tree care markets were stronger as compared to the third quarter of 2020 where those markets were materially impacted by the COVID-19 pandemic. Supply chain and logistics disruptions, which affected our manufacturing efficiencies, had an overall negative impact during the third quarter of 2021.
 
Net Agricultural sales were $119.3 million in the third quarter of 2021 compared to $95.5 million for the same period in 2020, an increase of $23.8 million or 25%. The increase was mainly due to the continued strengthening of the agricultural market that began in the second half of 2020 and recent price increases.
18

This Division also experienced supply chain disruptions in the third quarter of 2021 including delays in receiving component parts from supply chain partners and logistics issues.

Gross profit for the third quarter of 2021 was $86.3 million (26% of net sales) compared to $78.6 million (27% of net sales) during the same period in 2020, an increase of $7.7 million.  The increase in gross profit during the third quarter of 2021 compared to the third quarter of 2020 was due to higher sales volume. This was offset by higher input costs, mainly from steel, along with higher costs of component parts which also had a negative affect on the gross margin percentage during the third quarter of 2021. The third quarter of 2020 included $0.9 million of charges on sales of inventory that had been previously stepped-up related to the Morbark acquisition.

Selling, general and administrative expenses (“SG&A”) were $52.6 million (16% of net sales) during the third quarter of 2021 compared to $44.1 million (15% of net sales) during the same period of 2020, an increase of $8.5 million. The increase in SG&A expense in the third quarter of 2021 compared to the third quarter of 2020 was attributable to higher administrative and marketing expenses as the Company returned to pre-pandemic expense levels. Included in the 2021 SG&A expenses, are additional stock based compensation in the amount of $1.1 million related to the acceleration of restricted stock awards of our former CEO. Amortization expense in the third quarter of 2021 was $3.7 million compared to $3.6 million in the same period in 2020, an increase of $0.1 million.

Interest expense was $2.7 million for the third quarter of 2021 compared to $3.5 million during the same period in 2020, a decrease of $0.8 million. The decrease in interest expense during the third quarter of 2021 versus the third quarter of 2020 was attributable to the Company's continued reduction of debt levels.
 
Other income (expense), net was $36.0 thousand of income for the third quarter of 2021 compared to $0.3 million of expense during the same period in 2020.  The income in 2021 was primarily the result of changes in currency exchange rates and the expense in 2020 was primarily the result of changes in currency exchange rates.
                                         
Provision for income taxes was $10.2 million (37% of income before income tax) in the third quarter of 2021 compared to $7.4 million (27% of income before income tax) during the same period in 2020. The increase in the tax rate for 2021 was due to a provision made for stock-based compensation in anticipation of a 28% full year effective tax rate and a non-deductible acceleration of restricted stock awards related to the retirement of our former CEO.
    
The Company’s net income after tax was $17.5 million or $1.47 per share on a diluted basis for the third quarter of 2021 compared to $20.0 million or $1.69 per share on a diluted basis for the third quarter of 2020.  The decrease of $2.5 million resulted from the factors described above.

Nine Months Ended September 30, 2021 vs. Nine Months Ended September 30, 2020

Net sales for the first nine months of 2021 were $997.1 million, an increase of $122.3 million or 14% compared to $874.8 million for the first nine months of 2020. The increase was attributable to a strong recovery in customer demand for our products in both the Industrial and Agricultural Divisions and to a lesser extent pricing actions. The Company's performance during the first nine months of 2020 were materially impacted by the COVID-19 pandemic.

Net Industrial sales increased during the first nine months by $53.6 million or 9% to $662.1 million for 2021 compared to $608.5 million during the same period in 2020. The increase came from higher customer demand during the second and third quarter of 2021 which more than offset lower sales in the first quarter of 2021 due to the negative effects from the COVID-19 pandemic which began at the end of the first quarter of 2020. Supply chain disruptions, logistics issues and unfavorable input cost changes constrained this Division during the first nine months of 2021.

Net Agricultural sales were $334.9 million during the first nine months of 2021 compared to $266.4 million for the same period in 2020, an increase of $68.5 million or 26%. The increase in sales for the first nine months of 2021 compared to the first nine months of 2020 was attributable to increased customer demand aided by low dealer inventories. North American and European markets not only continued to remain strong, but Brazil and Australian markets have shown solid increases as our presence in those markets has steadily improved since early last year. This Division was also negatively affected by supply chain disruptions and higher input costs.

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Gross profit for the first nine months of 2021 was $250.9 million (25% of net sales) compared to $225.4 million (26% of net sales) during the same period in 2020, an increase of $25.5 million. The increase in gross profit was due to higher sales volume during the first nine months of 2021. This was offset by inflationary pressures, mainly from steel, along with higher costs relating to delivery of component parts, such as airfreighting charges to meet customer deliveries. This also had a negative impact on gross margin percent for the first nine months of 2021. Negatively affecting the gross margin and gross margin percentage during the first nine months of 2020 was $3.5 million of charges on sales of inventory that had been previously stepped-up related to the Morbark acquisition.

SG&A expenses were $150.8 million (15% of net sales) during the first nine months of 2021 compared to $136.9 million (16% of net sales) during the same period of 2020, an increase of $13.9 million. The first nine months of 2021 included higher administrative and marketing expenses as the Company returned to pre-pandemic expense levels. Amortization expense in the first nine months of 2021 was $11.0 million compared to $11.1 million in the same period in 2020, a decrease of $0.1 million.

Interest expense was $8.1 million for the first nine months of 2021 compared to $12.9 million during the same period in 2020, a decrease of $4.8 million. The decrease during the first nine months of 2021 compared to the first nine months of 2020 was attributable to the Company's continued reduction of debt levels.

Other income (expense), net was $2.7 million of income during the first nine months of 2021 compared to $0.7 million of income in the first nine months of 2020. The income in 2021 is primarily from changes in exchange rates and the sale of a facility in the Netherlands for $3.4 million. The income in 2020 were primarily the result of changes in exchange rates and to a lesser extent the gain on the sale of two properties, one in the U.S. and one in Canada.

Provision for income taxes was $23.5 million (28% of income before income taxes) in the first nine months of 2021 compared to $17.7 million (27% of income before income taxes) during the same period in 2020.
    
The Company's net income after tax was $61.0 million or $5.13 per share on a diluted basis for the first nine months of 2021 compared to $48.6 million or $4.10 per share on a diluted basis for the first nine months of 2020. The increase of $12.4 million 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, particularly in our Agricultural Division.  Preseason sales, primarily in the Agricultural Division, help level the Company’s production during the off season.
 
As of September 30, 2021, the Company had working capital of $440.1 million which represents an increase of $81.9 million from working capital of $358.2 million at December 31, 2020. The increase in working capital was primarily a result of volume-driven and inflation increases in accounts receivable and inventory levels.

Capital expenditures were $14.6 million for the first nine months of 2021, compared to $15.0 million during the first nine months of 2020. In response to the COVID-19 pandemic, we limited new capital expenditures in projects in 2020, however, for the full year of 2021 we expect to approve a more normalized capital expenditure level. The Company will fund any future expenditures from operating cash flows or through our revolving credit facility, described below.
Net cash used for investing activities was $5.3 million during the first nine months of 2021 compared to $11.5 million during the first nine months of 2020.
Net cash provided by financing activities was $3.3 million and net cash used in financing activities was $74.1 million during the nine month periods ended September 30, 2021 and September 30, 2020, respectively. Higher Net cash provided by financing activities for the first nine months of 2021 relates to increase borrowings on the revolving credit facility for increased working capital in support of elevated backlog levels.

The Company had $85.0 million in cash and cash equivalents held by its foreign subsidiaries as of September 30, 2021. The majority of these funds are at our European and Canadian facilities. The Company will continue to repatriate European and Canadian cash and cash equivalents in excess of amounts needed to fund
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operating and investing activities, but will need to monitor exchange rates to determine the appropriate timing of such repatriation given the current relative value of the U.S. dollar. Repatriated funds will initially be used to reduce funded debt levels under the Company's current credit facility and subsequently used to fund working capital, capital investments and acquisitions company-wide.

On October 24, 2019, the Company, as Borrower, and each of its domestic subsidiaries as guarantors, entered into a Second Amended and Restated Credit Agreement (the Credit Agreement) with Bank of America, N.A., as Administrative Agent. The Credit Agreement provides the Company with the ability to request loans and other financial obligations in an aggregate amount of up to $650.0 million and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional $200.0 million. Pursuant to the Credit Agreement, the Company borrowed $300.0 million pursuant to a Term Facility repayable at a percentage of the initial principal amount of the Term Facility equal to 5.0% per year along with interest payable quarterly. The remaining principal amount is due in 2024. Up to $350.0 million is available under the Credit Agreement pursuant to a Revolver Facility. The Agreement requires the Company to maintain two financial covenants, a maximum consolidated leverage ratio and a minimum consolidated fixed charge 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 Agreement also contains other customary covenants, representations and events of defaults. The expiration date of the Term Facility and the Revolver Facility is October 24, 2024. As of September 30, 2021, $295.0 million was outstanding under the Credit Agreement, $270.0 million on the Term Facility and $25.0 million on the Revolver Facility. On September 30, 2021, $2.4 million 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 $191.6 million in available borrowings. The Company is in compliance with the covenants under the Agreement as of September 30, 2021.

Management believes the Agreement 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, future challenges affecting the banking industry and credit markets in general could 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, particularly given the uncertainty created by the COVID-19 pandemic.
 
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 that of the Company's significant accounting policies, which are set forth in Note 1 of the Notes to Consolidated Financial Statements in the 2020 Form 10-K, the policies relating to the business combinations involve a higher degree of judgment and complexity. There have been no material changes to the nature of estimates, assumptions and levels of subjectivity and judgment related to critical accounting estimates disclosed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Form 10-K.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are likely to have a current or future material effect on our financial condition.

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Forward-Looking Information

Part I of this Quarterly Report on Form 10-Q and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Quarterly Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company.

Statements that are not historical are forward-looking.  When used by or on behalf of the Company, the words “estimate,” "anticipate," "expect," “believe,” “intend”, "will", "would", "should", "could" 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 include changes in market conditions; the ongoing direct and indirect impacts of the COVID-19 pandemic; changes in tariff regulations and the imposition of new tariffs; a strong U.S. dollar; increased competition; trade wars or other negative economic impacts resulting from geopolitical events; decreases in the prices of agricultural commodities, which could affect our customers' income levels; increase in input costs; weakness in our Industrial Division due to changes in customer behavior; our inability to increase profit margins through continuing production efficiencies and cost reductions; repercussions from the exit by the U.K. from the European Union (EU); acquisition integration issues; budget constraints or income shortfalls which could affect the purchases of our type of equipment by governmental customers; credit availability for both the Company and its customers, adverse weather conditions such as droughts, floods, snowstorms, etc. which can affect buying patterns of the Company’s customers and related contractors; the price and availability of raw materials and product components, particularly steel and steel products; energy cost; increased cost of governmental regulations which effect corporations including related fines and penalties (such as the European General Data Protection Regulation and the California Consumer Privacy Act); the potential effects on the buying habits of our customers due to animal disease outbreaks and other epidemics; the Company’s ability to develop and manufacture new and existing products profitably; market acceptance of new and existing products; the Company’s ability to maintain good relations with its employees; the Company's ability to successfully complete acquisitions and operate acquired businesses or assets; the ability to hire and retain quality skilled employees; cyber security risks affecting information technology or data security breaches; and the possible effects of events beyond our control, such as political unrest, acts of terror, natural disasters and pandemics, on the Company or its customers, suppliers and the economy in general. The Company continues to experience the impacts of COVID-19 on its markets and operations including, most notably, supply chain disruptions and skilled labor shortages. The full extent to which COVID-19 will continue to adversely impact the Company’s business depends on future developments, which are highly uncertain and unpredictable.

In addition, the Company is subject to risks and uncertainties facing the industry in general, including changes in business and political conditions and the economy in general in both domestic and international markets; weather conditions affecting demand; slower growth in the Company’s markets; financial market changes including increases in interest rates and fluctuations in foreign exchange rates; actions of competitors; the inability of the Company’s suppliers, customers, creditors, public utility providers and financial service organizations to deliver or provide their products or services to the Company; seasonal factors in the Company’s industry; litigation; government actions including budget levels, regulations and legislation, primarily relating to the environment, commerce, infrastructure spending, health and safety; and availability of materials.

The Company wishes to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results.  Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated.  The foregoing statements are not exclusive and further information concerning the Company and its businesses, including factors that could potentially materially affect the Company’s financial results, may emerge from time to time.  It is not possible for management to predict all risk factors or to assess the impact of such risk factors on the Company’s businesses.
 
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Item 3.  Quantitative and Qualitative Disclosures About Market Risks

The Company is exposed to various market risks.  Market risks are the potential losses arising from adverse changes in market prices and rates.  The Company does not enter into derivative or other financial instruments for trading or speculative purposes.

Foreign Currency Risk        

International Sales

A portion of the Company’s operations consists of manufacturing and sales activities in international jurisdictions. The Company primarily manufactures its products in the U.S., U.K., France, Canada, Brazil, Australia and the Netherlands.  The Company sells its products primarily in the functional currency within the markets where the products are produced, but certain sales from the Company's U.K. and Canadian operations are denominated in other foreign 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. Foreign exchange rates and economic conditions in these foreign markets may be further impacted by the effects of the COVID-19 pandemic.

Exposure to Exchange Rates

The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive income within the statement of stockholders’ equity. The total foreign currency translation adjustment for the current quarter decreased stockholders’ equity by $9.2 million.

The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in Europe and Canada, as a result of the sales of its products in international markets.  Forward currency contracts are used to hedge against the earnings effects of such fluctuations.  The result of a uniform 10% strengthening or 10% decrease in the value of the dollar relative to the currencies in which the Company’s sales are denominated would result in a change in gross profit of $6.7 million for the nine month period ended September 30, 2021.  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 include 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. 

In March 2019, the Company entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €40 million ($45 million) maturing December 2021.

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Interest Rate Risk

The Company’s long-term debt bears interest at variable rates.  Accordingly, the Company’s net income is affected by changes in interest rates.  Assuming the current level of borrowings at variable rates and a two percentage point change for the third quarter 2021 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1.5 million.  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.

In January 2020, the Company entered into an interest rate swap agreement with three of its total lenders that hedge future cash flows related to its outstanding debt obligations. As of September 30, 2021, the Company had $295.0 million outstanding under the Credit Agreement of which $200.0 million was hedged in a three year interest rate swap contract with a fixed LIBOR base rate of 1.43%.

Item 4. 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, Controller and Treasurer, (Principal Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon the evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer) and Vice President, Controller and Treasurer, (Principal Accounting Officer) concluded that the Company’s design and operation of these disclosure controls and procedures were effective at the end of the period covered by this report.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1. - Legal Proceedings

For a description of legal proceedings, 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, 2020 (the "2020 10-K").

Item 1A. - Risk Factors

There have not been any material changes from the risk factors previously disclosed in the 2020 Form 10-K for the year ended December 31, 2020.

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Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides a summary of the Company's repurchase activity for its common stock during the three months ended September 30, 2021:
Issuer Purchases of Equity Securities
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly announced Plans or Programs
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a)
July 1-31, 2021 —  —  —  $25,861,222
August 1-31, 2021 —  —  —  $25,861,222
September 1-30, 2021 —  —  —  $25,861,222
(a) On December 13, 2018, the Board authorized a stock repurchase program of up to $30.0 million of the Company's common stock. The program shall have a term of five (5) years, terminating on December 12, 2023.


Item 3. - Defaults Upon Senior Securities

None.

Item 4. - Mine Safety Disclosures

Not Applicable

Item 5. - Other Information

(a) Reports on Form 8-K

None.
 
(b) Other Information
 
None.

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Item 6. - Exhibits

(a)   Exhibits
Exhibits Exhibit Title
Incorporated by Reference From the Following Documents
18.1 — Filed Herewith
31.1 — Filed Herewith
31.2 — Filed Herewith
32.1 — Filed Herewith
32.2 — Filed Herewith
101.INS — XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document Filed Herewith
101.SCH — XBRL Taxonomy Extension Schema Document Filed Herewith
101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document Filed Herewith
101.DEF — XBRL Taxonomy Extension Definition Linkbase Document Filed Herewith
101.LAB — XBRL Taxonomy Extension Label Linkbase Document Filed Herewith
101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document Filed Herewith
104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Filed Herewith

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Alamo Group Inc.

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.
November 3, 2021
Alamo Group Inc.
(Registrant)
 
 
/s/ Jeffery A. Leonard
Jeffery A. Leonard
President & Chief Executive Officer
 
 
/s/ Richard J. Wehrle
Richard J. Wehrle
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
 
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