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, 20202021
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
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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)
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Securities registered pursuant to Section 12(b) of the Act: |
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| 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 |
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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.
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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 23, 2020, 11,879,34529, 2021, 11,923,746 shares of common stock, $.10 par value, of the registrant were outstanding.
Alamo Group Inc. and Subsidiaries
INDEX
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PART I. | FINANCIAL INFORMATION | PAGE |
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Item 1. | Interim Condensed Consolidated Financial Statements (Unaudited) | |
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| | September 30, 20202021 and December 31, 20192020 | |
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| | Three and Nine Months Ended September 30, 20202021 and September 30, 20192020 | |
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| | Three and Nine Months Ended September 30, 20202021 and September 30, 20192020 | |
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| | Three and Nine Months Ended September 30, 20202021 and September 30, 20192020 | |
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| | Nine Months Ended September 30, 20202021 and September 30, 20192020 | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. | | |
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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 | |
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Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(Unaudited)
| (in thousands, except share amounts) | (in thousands, except share amounts) | September 30, 2020 | December 31, 2019 | (in thousands, except share amounts) | September 30, 2021 | December 31, 2020 |
| | | As Adjusted | |
ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 93,515 | | | $ | 42,311 | | | Cash and cash equivalents | | $ | 89,189 | | | $ | 50,195 | | |
Accounts receivable, net | Accounts receivable, net | | 217,276 | | | 237,837 | | | Accounts receivable, net | | 245,517 | | | 209,276 | | |
Inventories, net | Inventories, net | | 243,529 | | | 267,674 | | | Inventories, net | | 294,270 | | | 242,501 | | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 7,064 | | | 10,099 | | | Prepaid expenses and other current assets | | 6,741 | | | 7,382 | | |
Income tax receivable | Income tax receivable | | 5,771 | | | 12,907 | | | Income tax receivable | | 66 | | | 6,186 | | |
Total current assets | Total current assets | | 567,155 | | | 570,828 | | | Total current assets | | 635,783 | | | 515,540 | | |
| Rental equipment, net | Rental equipment, net | | 44,774 | | | 56,467 | | | Rental equipment, net | | 36,244 | | | 42,266 | | |
| Property, plant and equipment | Property, plant and equipment | | 307,480 | | | 302,113 | | | Property, plant and equipment | | 316,347 | | | 312,362 | | |
Less: Accumulated depreciation | Less: Accumulated depreciation | | (152,276) | | | (141,388) | | | Less: Accumulated depreciation | | (168,557) | | | (156,928) | | |
Total property, plant and equipment, net | Total property, plant and equipment, net | | 155,204 | | | 160,725 | | | Total property, plant and equipment, net | | 147,790 | | | 155,434 | | |
| Goodwill | Goodwill | | 192,976 | | | 198,022 | | | Goodwill | | 193,572 | | | 195,132 | | |
Intangible assets, net | Intangible assets, net | | 195,966 | | | 206,272 | | | Intangible assets, net | | 181,516 | | | 193,172 | | |
Deferred income taxes | Deferred income taxes | | 1,675 | | | 1,078 | | | Deferred income taxes | | 2,004 | | | 1,203 | | |
Other non-current assets | Other non-current assets | | 15,709 | | | 19,371 | | | Other non-current assets | | 20,869 | | | 19,112 | | |
| Total assets | Total assets | | $ | 1,173,459 | | | $ | 1,212,763 | | | Total assets | | $ | 1,217,778 | | | $ | 1,121,859 | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Trade accounts payable | Trade accounts payable | | $ | 82,071 | | | $ | 81,986 | | | Trade accounts payable | | $ | 107,059 | | | $ | 75,317 | | |
Income taxes payable | Income taxes payable | | 3,625 | | | 2,362 | | | Income taxes payable | | 6,425 | | | 2,278 | | |
Accrued liabilities | Accrued liabilities | | 56,916 | | | 59,686 | | | Accrued liabilities | | 67,183 | | | 64,634 | | |
Current maturities of long-term debt and finance lease obligations | Current maturities of long-term debt and finance lease obligations | | 15,068 | | | 18,840 | | | Current maturities of long-term debt and finance lease obligations | | 15,059 | | | 15,066 | | |
| Total current liabilities | Total current liabilities | | 157,680 | | | 162,874 | | | Total current liabilities | | 195,726 | | | 157,295 | | |
| Long-term debt and finance lease obligations, net of current maturities | Long-term debt and finance lease obligations, net of current maturities | | 359,021 | | | 425,141 | | | Long-term debt and finance lease obligations, net of current maturities | | 279,215 | | | 270,320 | | |
Long-term tax liability | Long-term tax liability | | 6,778 | | | 7,432 | | | Long-term tax liability | | 4,408 | | | 3,954 | | |
Deferred pension liability | Deferred pension liability | | 1,274 | | | 1,844 | | | Deferred pension liability | | 963 | | | 1,731 | | |
Other long-term liabilities | Other long-term liabilities | | 25,817 | | | 19,254 | | | Other long-term liabilities | | 28,095 | | | 30,744 | | |
Deferred income taxes | Deferred income taxes | | 17,676 | | | 26,461 | | | Deferred income taxes | | 17,709 | | | 22,812 | | |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,803,055 and 11,752,509 outstanding at September 30, 2020 and December 31, 2019, respectively | | 1,180 | | | 1,175 | | | |
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 | | 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 | Additional paid-in-capital | | 117,339 | | | 113,666 | | | Additional paid-in-capital | | 123,446 | | | 118,528 | | |
Treasury stock, at cost; 82,600 shares at September 30, 2020 and December 31, 2019, respectively | | (4,566) | | | (4,566) | | | |
Treasury stock, at cost; 82,600 shares at September 30, 2021 and December 31, 2020, respectively | | Treasury stock, at cost; 82,600 shares at September 30, 2021 and December 31, 2020, respectively | | (4,566) | | | (4,566) | | |
Retained earnings | Retained earnings | | 544,280 | | | 500,320 | | | Retained earnings | | 616,235 | | | 560,186 | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (53,020) | | | (40,838) | | | Accumulated other comprehensive loss | | (44,640) | | | (40,326) | | |
Total stockholders’ equity | Total stockholders’ equity | | 605,213 | | | 569,757 | | | Total stockholders’ equity | | 691,662 | | | 635,003 | | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 1,173,459 | | | $ | 1,212,763 | | | Total liabilities and stockholders’ equity | | $ | 1,217,778 | | | $ | 1,121,859 | | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
| Net sales: | Net sales: | | Net sales: | |
Industrial | Industrial | $ | 196,241 | | | $ | 178,180 | | | $ | 608,473 | | | $ | 546,014 | | Industrial | $ | 218,988 | | | $ | 196,241 | | | $ | 662,106 | | | $ | 608,473 | |
Agricultural | Agricultural | 95,518 | | | 93,649 | | | 266,369 | | | 272,935 | | Agricultural | 119,323 | | | 95,518 | | | 334,944 | | | 266,369 | |
| Total net sales | Total net sales | 291,759 | | | 271,829 | | | 874,842 | | | 818,949 | | Total net sales | 338,311 | | | 291,759 | | | 997,050 | | | 874,842 | |
Cost of sales | Cost of sales | 213,123 | | | 203,119 | | | 649,441 | | | 613,798 | | Cost of sales | 252,015 | | | 213,123 | | | 746,188 | | | 649,441 | |
Gross profit | Gross profit | 78,636 | | | 68,710 | | | 225,401 | | | 205,151 | | Gross profit | 86,296 | | | 78,636 | | | 250,862 | | | 225,401 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 44,069 | | | 43,143 | | | 136,868 | | | 125,660 | | Selling, general and administrative expenses | 52,586 | | | 44,069 | | | 150,803 | | | 136,868 | |
Amortization expense | Amortization expense | 3,644 | | | 1,112 | | | 11,093 | | | 3,081 | | Amortization expense | 3,667 | | | 3,644 | | | 10,988 | | | 11,093 | |
Income from operations | Income from operations | 30,923 | | | 24,455 | | | 77,440 | | | 76,410 | | Income from operations | 30,043 | | | 30,923 | | | 89,071 | | | 77,440 | |
| Interest expense | Interest expense | (3,461) | | | (1,837) | | | (12,921) | | | (5,222) | | Interest expense | (2,660) | | | (3,461) | | | (8,127) | | | (12,921) | |
Interest income | Interest income | 306 | | | 359 | | | 968 | | | 862 | | Interest income | 296 | | | 306 | | | 877 | | | 968 | |
Other income (expense), net | Other income (expense), net | (333) | | | 242 | | | 720 | | | (442) | | Other income (expense), net | 36 | | | (333) | | | 2,659 | | | 720 | |
Income before income taxes | Income before income taxes | 27,435 | | | 23,219 | | | 66,207 | | | 71,608 | | Income before income taxes | 27,715 | | | 27,435 | | | 84,480 | | | 66,207 | |
Provision for income taxes | Provision for income taxes | 7,402 | | | 5,801 | | | 17,657 | | | 18,270 | | Provision for income taxes | 10,196 | | | 7,402 | | | 23,462 | | | 17,657 | |
Net Income | Net Income | $ | 20,033 | | | $ | 17,418 | | | $ | 48,550 | | | $ | 53,338 | | Net Income | $ | 17,519 | | | $ | 20,033 | | | $ | 61,018 | | | $ | 48,550 | |
| Net income per common share: | Net income per common share: | | Net income per common share: | |
Basic | Basic | $ | 1.70 | | | $ | 1.48 | | | $ | 4.12 | | | $ | 4.55 | | Basic | $ | 1.48 | | | $ | 1.70 | | | $ | 5.16 | | | $ | 4.12 | |
Diluted | Diluted | $ | 1.69 | | | $ | 1.47 | | | $ | 4.10 | | | $ | 4.52 | | Diluted | $ | 1.47 | | | $ | 1.69 | | | $ | 5.13 | | | $ | 4.10 | |
Average common shares: | Average common shares: | | Average common shares: | |
Basic | Basic | 11,788 | | | 11,748 | | | 11,776 | | | 11,724 | | Basic | 11,842 | | | 11,788 | | | 11,835 | | | 11,776 | |
Diluted | Diluted | 11,851 | | | 11,813 | | | 11,840 | | | 11,796 | | Diluted | 11,900 | | | 11,851 | | | 11,895 | | | 11,840 | |
| Dividends declared | Dividends declared | $ | 0.13 | | | $ | 0.12 | | | $ | 0.39 | | | $ | 0.36 | | Dividends declared | $ | 0.14 | | | $ | 0.13 | | | $ | 0.42 | | | $ | 0.39 | |
See accompanying notes.
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) | 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 20,033 | | | $ | 17,418 | | | $ | 48,550 | | | $ | 53,338 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment | 8,606 | | | (9,791) | | | (6,244) | | | (7,877) | |
Net gain on pension and other post-retirement benefits | 245 | | | 215 | | | 737 | | | 645 | |
Unrealized (loss) gain on derivative instruments | (1,247) | | | 1,864 | | | (8,106) | | | 1,852 | |
Other comprehensive income (loss) before income tax expense | 7,604 | | | (7,712) | | | (13,613) | | | (5,380) | |
Income tax benefit (expense) related to items of other comprehensive income (loss) | 210 | | | (46) | | | 1,431 | | | (136) | |
Other comprehensive income (loss) | 7,814 | | | (7,758) | | | (12,182) | | | (5,516) | |
Comprehensive income | $ | 27,847 | | | $ | 9,660 | | | $ | 36,368 | | | $ | 47,822 | |
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| 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) | |
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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.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
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For nine months ended September 30, 2020 |
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| 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 | |
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Other comprehensive income | — | | — | | — | | — | | 15,528 | | (24,650) | | (9,122) | |
Stock-based compensation expense | — | | — | | 933 | | — | | — | | — | | 933 | |
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Stock-based compensation transactions | 9 | | 1 | | 368 | | — | | — | | — | | 369 | |
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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 | |
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Other comprehensive income | — | | — | | — | | — | | 12,989 | | 4,654 | | 17,643 | |
Stock-based compensation expense | — | | — | | 1,103 | | — | | — | | — | | 1,103 | |
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Stock-based compensation transactions | 25 | | 3 | | (476) | | — | | — | | — | | (473) | |
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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 | |
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Other comprehensive income | — | | — | | — | | — | | 20,033 | | 7,814 | | 27,847 | |
Stock-based compensation expense | — | | — | | 1,079 | | — | | — | | — | | 1,079 | |
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Stock-based compensation transactions | 16 | | 1 | | 666 | | — | | — | | — | | 667 | |
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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 | |
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For nine months ended September 30, 2021 |
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| 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 | |
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Other comprehensive income | — | | — | | — | | — | | 17,462 | | (1,586) | | 15,876 | |
Stock-based compensation expense | — | | — | | 1,240 | | — | | — | | — | | 1,240 | |
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Stock-based compensation transactions | 29 | | 3 | | 773 | | — | | — | | — | | 776 | |
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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 | |
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Other comprehensive income | — | | — | | — | | — | | 26,037 | | 4,906 | | 30,943 | |
Stock-based compensation expense | — | | — | | 1,316 | | — | | — | | — | | 1,316 | |
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Stock-based compensation transactions | 23 | | 2 | | (604) | | — | | — | | — | | (602) | |
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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 | |
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Other comprehensive income | — | | — | | — | | — | | 17,519 | | (7,634) | | 9,885 | |
Stock-based compensation expense | — | | — | | 2,840 | | — | | — | | — | | 2,840 | |
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Stock-based compensation transactions | 9 | | 1 | | (647) | | — | | — | | — | | (646) | |
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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 | |
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For nine months ended September 30, 2019 |
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| 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, 2018 | 11,620 | | $ | 1,166 | | $ | 108,422 | | $ | (426) | | $ | 443,040 | | $ | (44,831) | | $ | 507,371 | |
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Other comprehensive income | — | | — | | — | | — | | 15,253 | | 890 | | 16,143 | |
Stock-based compensation expense | — | | — | | 627 | | — | | — | | — | | 627 | |
Repurchased shares | (15) | | — | | — | | (1,490) | | — | | — | | (1,490) | |
Stock-based compensation transactions | 11 | | 1 | | 236 | | — | | — | | — | | 237 | |
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Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,404) | | — | | (1,404) | |
Balance at March 31, 2019 | 11,616 | | $ | 1,167 | | $ | 109,285 | | $ | (1,916) | | $ | 456,889 | | $ | (43,941) | | $ | 521,484 | |
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Other comprehensive income | — | | — | | — | | — | | 20,667 | | 1,352 | | 22,019 | |
Stock-based compensation expense | — | | — | | 948 | | — | | — | | — | | 948 | |
Repurchased shares | (15) | | — | | — | | (1,465) | | — | | — | | (1,465) | |
Stock-based compensation transactions | 64 | | 7 | | 1,243 | | — | | — | | — | | 1,250 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,404) | | — | | (1,404) | |
Balance at June 30, 2019 | 11,665 | | $ | 1,174 | | $ | 111,476 | | $ | (3,381) | | $ | 476,152 | | $ | (42,589) | | $ | 542,832 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive income | — | | — | | — | | — | | 17,418 | | (7,758) | | 9,660 | |
Stock-based compensation expense | — | | — | | 766 | | — | | — | | — | | 766 | |
Repurchased shares | (10) | | — | | — | | (1,185) | | — | | — | | (1,185) | |
Stock-based compensation transactions | 10 | | 1 | | 387 | | — | | — | | — | | 388 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,409) | | — | | (1,409) | |
Balance at September 30, 2019 | 11,665 | | $ | 1,175 | | $ | 112,629 | | $ | (4,566) | | $ | 492,161 | | $ | (50,347) | | $ | 551,052 | |
| | | | | | | | | | | | | | | | | | | | | | | |
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.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in thousands) | 2020 | | 2019 |
Operating Activities | | | |
Net income | $ | 48,550 | | | $ | 53,338 | |
Adjustment to reconcile net income to net cash provided by operating activities: | | | |
Provision for doubtful accounts | 541 | | | 280 | |
Depreciation - Property, plant and equipment | 14,237 | | | 10,583 | |
Depreciation - Rental equipment | 7,504 | | | 6,770 | |
Amortization of intangibles | 11,093 | | | 3,081 | |
Amortization of debt issuance | 500 | | | 166 | |
Stock-based compensation expense | 3,115 | | | 2,341 | |
Provision for deferred income tax (benefit) | (4,548) | | | (2,549) | |
Gain on sale of property, plant and equipment | (1,037) | | | (732) | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | 17,612 | | | (11,263) | |
Inventories | 22,893 | | | (8,413) | |
Rental equipment | 4,189 | | | (18,970) | |
Prepaid expenses and other assets | 5,765 | | | (5,377) | |
Trade accounts payable and accrued liabilities | (2,422) | | | 9,481 | |
Income taxes payable | 8,432 | | | 1,738 | |
Long-term tax payable | (654) | | | 590 | |
Other assets and long-term liabilities, net | 205 | | | 3,146 | |
Net cash provided by operating activities | 135,975 | | | 44,210 | |
| | | |
Investing Activities | | | |
Acquisitions, net of cash acquired | 0 | | | (58,531) | |
Purchase of property, plant and equipment | (14,962) | | | (19,488) | |
Proceeds from sale of property, plant and equipment | 3,433 | | | 1,987 | |
| | | |
Net cash used in investing activities | (11,529) | | | (76,032) | |
| | | |
Financing Activities | | | |
Borrowings on bank revolving credit facility | 98,000 | | | 141,000 | |
Repayments on bank revolving credit facility | (153,000) | | | (76,000) | |
Principal payments on long-term debt and finance leases | (15,094) | | | (97) | |
Proceeds from issuance of long-term debt and finance leases | 0 | | | 2 | |
| | | |
Dividends paid | (4,590) | | | (4,217) | |
Proceeds from exercise of stock options | 1,272 | | | 2,465 | |
Treasury stock repurchased | 0 | | | (4,140) | |
Common stock repurchased | (710) | | | (590) | |
Net cash (used in) provided by financing activities | (74,122) | | | 58,423 | |
| | | |
Effect of exchange rate changes on cash and cash equivalents | 880 | | | (365) | |
Net change in cash and cash equivalents | 51,204 | | | 26,236 | |
Cash and cash equivalents at beginning of the year | 42,311 | | | 34,043 | |
Cash and cash equivalents at end of the period | $ | 93,515 | | | $ | 60,279 | |
| | | |
Cash paid during the period for: | | | |
Interest | $ | 14,149 | | | $ | 5,327 | |
Income taxes | 13,309 | | | 18,431 | |
| | | | | | | | | | | |
| 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.
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 20202021
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, 2020.2021. The balance sheet at December 31, 20192020 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, 20192020 (the "2019"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, 2020
In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirements on fair value measurements. Among other things, the amendments added disclosures for changes in unrealized gains and losses on Level 3 fair value measurements and required additional disclosures on unobservable inputs associated with Level 3 assets. The guidance became effective for us on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” to improve information on credit losses for financial instruments. The ASU replaces the previous incurred loss impairment methodology with a methodology that reflects expected credit losses. This guidance became effective for us on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-14, “Compensation, Defined Benefit Plans", which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The update removes certain disclosures that are no longer considered cost beneficial and adds disclosure requirements identified as relevant. The guidance will become effective for us on January 1, 2021 with early adoption permitted for any financial statements that have not been issued. The impacts that adoption of the ASU is expected to have on our financial disclosures is being evaluated.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” to simplify the accounting for income taxes. The amendments in this Updateupdate 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. TheThis guidance will becomebecame effective for us on January 1, 2021 with early adoption permitted for any financial statements that have not been issued.2021. The impacts that 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 expected toevaluating the impact the adoption of this standard will have on our financial disclosures is being evaluated.statements.
2. Business CombinationsAccounting Policies
Morbark, LLC.Inventory Valuation
On October 24, 2019,Inventories are stated at the lower of cost or net realizable value. Effective July 1, 2021, the Company completedchanged its method of accounting for its U.S. inventories currently accounted for under the acquisition of 100%LIFO method to the FIFO method. Total U.S. inventories that utilized the LIFO cost method represented 41% of the outstanding capital sharesCompany's total inventory as of Morbark, LLC. ("Morbark")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 former portfolio companysingle method of Stellex Capital Management. Morbark manufacturers equipment and aftermarket parts for forestry, tree maintenance, biomass, land management and recycling markets. These products are marketed underaccounting. The Company also notes that the Morbark, Rayco, Denis Cimaf and Boxer Equipment brand names. The total consideration forrevised policy improves comparability with many of the purchase was approximately $354.0 million on a debt free basis and subject to certain post-closing adjustments.Company's peers.
The primary reasonCompany 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 acquisition was to expandthree and complement our range of vegetation maintenance equipment in an adjacent market along with accelerating Morbark's international growth using the Company's existing presence in Europe, Brazil and Australia.nine
The acquisition was accounted for in accordance with ASC Topic 805 Business Combinations ("ASC Topic 805"). The total purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed, including deferred taxes, based on their estimated fair values as of October 24, 2019. The Company will finalize goodwill and deferred tax amounts related to the completed final partnership return for Morbark.
The valuation of Morbark resulted in goodwill of $98.6 million, all of which has been assigned to the Company's Industrial reporting segment, $93.0 million of goodwill is tax deductible, the remaining balance is not. During the third quarter, the Company adjusted goodwill due to ongoing evaluation of tax balances.
During the nine months ended September 30, 2020 Morbark generated approximately $143.7 million of net sales and $6.0 million of net income. The Company has included the operating results of Morbark in its consolidated financial statements since the date of acquisition.
2021. The following table reflectsfinancial statement line items in the estimated fair value of the assets acquired and liabilities assumedCompany's Consolidated Balance Sheet as of the acquisition date (in thousands):
| | | | | |
| |
Accounts receivable | $ | 13,966 | |
Inventory | 72,972 | |
Prepaid and other assets | 5,180 | |
Rental Equipment | 1,133 | |
Property, plant and equipment | 42,969 | |
Intangible assets | 149,790 | |
Deferred tax liability | (4,982) | |
Other liabilities assumed | (30,056) | |
| |
Net assets assumed | $ | 250,972 | |
| |
Goodwill | 98,604 | |
Total Acquisition Price net cash | $ | 349,576 | |
Plus: Cash | 4,735 | |
Total Consideration | $ | 354,311 | |
Dutch Power Company B.V.
On March 4, 2019, the Company acquired 100% of the issued and outstanding equity interests of Dutch Power Company B.V. ("Dutch Power"). Dutch Power designs, manufactures and sells a variety of landscape and vegetation management machines primarily in Europe. The primary reason for the Dutch Power acquisitionDecember 31, 2020 was to enhance the Company's platform for growth by increasing both the Company's product portfolio and capabilities in the European market. The acquisition price was approximately $53.0 million.adjusted as follows:
The Company completed its review of the valuation of the purchase price allocation for Dutch Power during the first quarter of 2020. The Company found that no additional changes were necessary and that the values disclosed in the 2019 10-K were final.
| | | | | | | | | | | |
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, 20202021 the Company had $13.2$10.5 million in reserves for sales discounts compared to $16.9$13.5 million at December 31, 20192020 related to products shipped to our customers under various promotional programs.
The decrease was primarily due to the reduced sales within the Company's agricultural division.
4. Inventories
Inventories valued at LIFO cost represented 43% and 42% of total inventory at September 30, 2020 and December 31, 2019, respectively. The excess of current cost over LIFO valued inventories was approximately $10.9 million at September 30, 2020 and December 31, 2019. An actual valuation of inventory under the LIFO method is made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO must be based, to some extent, on management's estimates at each quarter end. Net inventories consist of the following:
| (in thousands) | (in thousands) | September 30, 2020 | December 31, 2019 | (in thousands) | September 30, 2021 | December 31, 2020 |
| | | As Adjusted |
| Finished goods | Finished goods | | $ | 207,939 | | | $ | 227,823 | | | Finished goods | | $ | 253,430 | | | $ | 208,656 | | |
Work in process | Work in process | | 23,509 | | | 21,918 | | | Work in process | | 23,876 | | | 21,225 | | |
Raw materials | Raw materials | | 12,081 | | | 17,933 | | | Raw materials | | 16,964 | | | 12,620 | | |
Inventories, net | Inventories, net | | $ | 243,529 | | | $ | 267,674 | | | Inventories, net | | $ | 294,270 | | | $ | 242,501 | | |
Inventory obsolescence reserves were $10.5$10.7 million at September 30, 20202021 and $8.2$12.0 million at December 31, 2019.2020.
5. Rental Equipment
Rental equipment is shown net of accumulated depreciation of $16.9$20.8 million and $14.6$18.0 million at September 30, 20202021 and December 31, 2019,2020, respectively. The Company recognized depreciation expense of $2.3$2.1 million and $2.4$2.3 million for the three months ended September 30, 20202021 and September 30, 2019,2020, respectively and $7.5$6.6 million and $6.8$7.5 million for the nine months ended September 30, 20202021 and September 30, 2019,2020, 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, 20202021 and December 31, 2019,2020, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.
7. Goodwill and Intangible Assets
The following is the summary of changes to the Company's Goodwill for the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial | | Agricultural | | | | Consolidated |
(in thousands) | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 183,307 | | | | $ | 14,715 | | | | | | | $ | 198,022 | |
Translation adjustment | | 740 | | | | (1,728) | | | | | | | (988) | |
Goodwill adjustment | | (4,058) | | | | 0 | | | | | | | (4,058) | |
Balance at September 30, 2020 | | $ | 179,989 | | | | $ | 12,987 | | | | | | | $ | 192,976 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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 | |
| | | | | | | | | | | |
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The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
| (in thousands) | (in thousands) | Estimated Useful Lives | September 30, 2020 | December 31, 2019 | (in thousands) | Estimated Useful Lives | September 30, 2021 | December 31, 2020 |
Definite: | Definite: | | Definite: | |
Trade names and trademarks | Trade names and trademarks | 15-25 years | | $ | 67,251 | | | $ | 67,222 | | Trade names and trademarks | 15-25 years | | $ | 67,264 | | | $ | 67,770 | |
Customer and dealer relationships | Customer and dealer relationships | 8-15 years | | 122,168 | | | 121,508 | | Customer and dealer relationships | 8-15 years | | 122,350 | | | 122,470 | |
Patents and drawings | Patents and drawings | 3-12 years | | 28,520 | | | 28,485 | | Patents and drawings | 3-12 years | | 28,593 | | | 28,764 | |
Favorable leasehold interests | Favorable leasehold interests | 7 years | | 4,200 | | | 4,200 | | Favorable leasehold interests | 7 years | | 4,200 | | | 4,200 | |
Total at cost | Total at cost | | 222,139 | | | 221,415 | | Total at cost | | 222,407 | | | 223,204 | |
Less accumulated amortization | Less accumulated amortization | | (31,673) | | | (20,643) | | Less accumulated amortization | | (46,391) | | | (35,532) | |
Total net | Total net | | 190,466 | | | 200,772 | | Total net | | 176,016 | | | 187,672 | |
Indefinite: | Indefinite: | | Indefinite: | |
Trade names and trademarks | Trade names and trademarks | | 5,500 | | | 5,500 | | Trade names and trademarks | | 5,500 | | | 5,500 | |
Total Intangible Assets | Total Intangible Assets | | $ | 195,966 | | | $ | 206,272 | | Total Intangible Assets | | $ | 181,516 | | | $ | 193,172 | |
The Company recognized amortization expense of $3.6$3.7 million and $1.1$3.6 million for the three months endingended September 30, 20202021 and 2019,2020, respectively, and $11.1$11.0 million and $3.1$11.1 million for the nine months ended September 30, 2021 and 2020, and 2019, respectively. The increase in amortization is related to the intangible assets acquired in the Morbark acquisition.
As of September 30, 2020, the Company had $196.0 million of intangible assets, which represents 17% of total assets.
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 | Components of Lease Cost | Components of Lease Cost |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Finance lease cost: | Finance lease cost: | | Finance lease cost: | |
Amortization of right-of-use assets | Amortization of right-of-use assets | | $ | 22 | | | $ | 33 | | | $ | 70 | | | $ | 98 | | Amortization of right-of-use assets | | $ | 17 | | | $ | 22 | | | $ | 51 | | | $ | 70 | |
Interest on lease liabilities | Interest on lease liabilities | | 1 | | | 3 | | | 5 | | | 8 | | Interest on lease liabilities | | 1 | | | 1 | | | 3 | | | 5 | |
Operating lease cost | Operating lease cost | | 1,216 | | | 1,095 | | | 3,624 | | | 3,207 | | Operating lease cost | | 1,464 | | | 1,216 | | | 3,985 | | | 3,624 | |
Short-term lease cost | Short-term lease cost | | 150 | | | 79 | | | 608 | | | 311 | | Short-term lease cost | | 365 | | | 150 | | | 822 | | | 608 | |
Variable lease cost | Variable lease cost | | 120 | | | 120 | | | 364 | | | 347 | | Variable lease cost | | 87 | | | 120 | | | 300 | | | 364 | |
| Total lease cost | Total lease cost | | $ | 1,509 | | | $ | 1,330 | | | $ | 4,671 | | | $ | 3,971 | | Total lease cost | | $ | 1,934 | | | $ | 1,509 | | | $ | 5,161 | | | $ | 4,671 | |
Rent expense for the three and nine months endingended September 30, 20202021 and 20192020 was immaterial.
Maturities of operating lease liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Future Minimum Lease Payments |
| | September 30, 2020 | | December 31, 2019 |
(in thousands) | | Operating Leases | | Finance Leases | | Operating Leases | | Finance Leases |
2020 | | $ | 1,092 | | (a) | $ | 46 | | (a) | $ | 4,305 | | | $ | 97 | |
2021 | | 3,198 | | | 72 | | | 2,718 | | | 83 | |
2022 | | 2,240 | | | 34 | | | 2,051 | | | 45 | |
2023 | | 1,557 | | | 11 | | | 1,459 | | | 22 | |
2024 | | 1,054 | | | 9 | | | 941 | | | 19 | |
Thereafter | | 2,657 | | | 8 | | | 2,587 | | | 14 | |
Total minimum lease payments | | $ | 11,798 | | | $ | 180 | | | $ | 14,061 | | | $ | 280 | |
Less imputed interest | | (926) | | | (7) | | | (1,100) | | | (16) | |
Total lease liabilities | | $ | 10,872 | | | $ | 173 | | | $ | 12,961 | | | $ | 264 | |
(a) Amounts represent remaining three months of payments due for 2019. | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
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, 2020,2021, there are additional operating leases, primarily for buildings, that have not yet commenced in the amount of $4.3$1.2 million. These operating leases will commence in fiscal year 20202021 with lease terms of 2 to 105 years.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
Operating Leases |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Other non-current assets | | $ | 10,770 | | | $ | 12,858 | |
| | | | |
Accrued liabilities | | 3,309 | | | 3,972 | |
Other long-term liabilities | | 7,563 | | | 8,989 | |
Total operating lease liabilities | | $ | 10,872 | | | $ | 12,961 | |
| | | | |
Finance Leases |
(in thousands) | | September 30, 2020 | | December 31, 2019 |
Property, plant and equipment, gross | | $ | 420 | | | $ | 524 | |
Accumulated Depreciation | | (283) | | | (265) | |
Property, plant and equipment, net | | $ | 137 | | | $ | 259 | |
| | | | |
Current maturities of long-term debt and finance lease obligations | $ | 68 | | | $ | 90 | |
Long-term debt and finance lease obligations, net of current maturities | 105 | | | 174 | |
Total finance lease liabilities | | $ | 173 | | | $ | 264 | |
| | | | |
Weighted Average Remaining Lease Term | | | | |
Operating leases | | 4.84 years | | 5.10 years |
Finance leases | | 2.72 years | | 3.47 years |
| | | | |
Weighted Average Discount Rate | | | | |
Operating leases | | 3.19 | % | | 3.29 | % |
Finance leases | | 3.34 | % | | 3.39 | % |
| | | | | | | | | | | | | | |
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 | |
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|
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| | | | |
| | | | |
| | | |
| | | |
| | | | |
| | | | |
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) | | 2020 | | 2019 |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from finance leases | | $ | 5 | | | $ | 11 | |
Operating cash flows from operating leases | | 3,362 | | | 3,146 | |
Financing cash flows from finance leases | | 69 | | | 97 | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
| | 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 | |
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| | | | |
9. Debt
The components of long-term debt are as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | September 30, 2020 | December 31, 2019 |
Current Maturities: | | | | | |
Finance lease obligations | | $ | 68 | | | | $ | 90 | |
Term debt | | 15,000 | | | | 18,750 | |
| | 15,068 | | | | 18,840 | |
Long-term debt: | | | | | |
Finance lease obligations | | 105 | | | | 174 | |
Term debt, net | | 268,916 | | | | 279,967 | |
Bank revolving credit facility | | 90,000 | | | | 145,000 | |
Total Long-term debt | | 359,021 | | | | 425,141 | |
Total debt | | $ | 374,089 | | | | $ | 443,981 | |
| | | | | | | | | | | | | | | | | |
(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, 2020, $3.62021, $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 $186.3$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, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Dividends declared | $ | 0.13 | | | $ | 0.12 | | | $ | 0.39 | | | $ | 0.36 | |
Dividends paid | $ | 0.13 | | | $ | 0.12 | | | $ | 0.39 | | | $ | 0.36 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020,2021, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.13$0.14 per share, which was paid on October 28, 2020,2021, to shareholders of record at the close of business on October 15, 2020.2021.
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) | 2020 | | 2019 | | 2020 | | 2019 |
Net Income | $ | 20,033 | | | $ | 17,418 | | | $ | 48,550 | | | $ | 53,338 | |
Average Common Shares: | | | | | | | |
Basic (weighted-average outstanding shares) | 11,788 | | | 11,748 | | | 11,776 | | | 11,724 | |
Dilutive potential common shares from stock options | 63 | | | 65 | | | 64 | | | 72 | |
Diluted (weighted-average outstanding shares) | 11,851 | | | 11,813 | | | 11,840 | | | 11,796 | |
| | | | | | | |
Basic earnings per share | $ | 1.70 | | | $ | 1.48 | | | $ | 4.12 | | | $ | 4.55 | |
Diluted earnings per share | $ | 1.69 | | | $ | 1.47 | | | $ | 4.10 | | | $ | 4.52 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
12. Income Taxes
Tax Rate Methodology
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full year to income for the interim period. Given the significant uncertainty with respect to the impact of the COVID-19 outbreak on our business and results of operations, we were not able to estimate our annual effective income tax rate for the first half of 2020and applied the actual effective tax rate for the year to date. For the third quarter 2020, the Company was able to calculate a reliable estimate of income taxes for the year and prepared the provision for income taxes by applying an estimate of the annual effective tax rate.
13. 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 | Revenue by Product Type | Revenue by Product Type |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Net Sales | Net Sales | | Net Sales | |
Wholegoods | Wholegoods | $ | 212,918 | | | $ | 207,461 | | | $ | 663,306 | | | $ | 644,042 | | Wholegoods | $ | 251,712 | | | $ | 212,918 | | | $ | 761,674 | | | $ | 663,306 | |
Parts | Parts | 71,419 | | | 58,093 | | | 188,712 | | | 155,965 | | Parts | 74,009 | | | 71,419 | | | 201,601 | | | 188,712 | |
Other | Other | 7,422 | | | 6,275 | | | 22,824 | | | 18,942 | | Other | 12,590 | | | 7,422 | | | 33,775 | | | 22,824 | |
Consolidated | Consolidated | $ | 291,759 | | | $ | 271,829 | | | $ | 874,842 | | | $ | 818,949 | | 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 | Revenue by Geographical Location | Revenue by Geographical Location |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| Net Sales | Net Sales | | Net Sales | |
United States | United States | $ | 216,550 | | | $ | 187,320 | | | $ | 651,226 | | | $ | 561,285 | | United States | $ | 249,024 | | | $ | 216,550 | | | $ | 710,814 | | | $ | 651,226 | |
France | France | 20,075 | | | 22,719 | | | 58,686 | | | 76,273 | | France | 21,236 | | | 20,075 | | | 69,252 | | | 58,686 | |
Canada | Canada | 16,392 | | | 17,700 | | | 44,789 | | | 49,005 | | Canada | 15,499 | | | 16,392 | | | 60,383 | | | 44,789 | |
United Kingdom | United Kingdom | 14,127 | | | 14,327 | | | 38,135 | | | 42,207 | | United Kingdom | 15,524 | | | 14,127 | | | 43,840 | | | 38,135 | |
Netherlands | Netherlands | 5,547 | | | 6,704 | | | 19,433 | | | 19,511 | | Netherlands | 6,624 | | | 5,547 | | | 22,789 | | | 19,433 | |
Brazil | Brazil | 3,937 | | | 3,924 | | | 12,200 | | | 13,899 | | Brazil | 9,212 | | | 3,937 | | | 23,396 | | | 12,200 | |
Australia | Australia | 2,587 | | | 1,549 | | | 7,777 | | | 5,872 | | Australia | 4,999 | | | 2,587 | | | 14,588 | | | 7,777 | |
Germany | Germany | 2,233 | | | 2,262 | | | 7,081 | | | 5,603 | | Germany | 2,665 | | | 2,233 | | | 6,497 | | | 7,081 | |
| Other | Other | 10,311 | | | 15,324 | | | 35,515 | | | 45,294 | | Other | 13,528 | | | 10,311 | | | 45,491 | | | 35,515 | |
Consolidated | Consolidated | $ | 291,759 | | | $ | 271,829 | | | $ | 874,842 | | | $ | 818,949 | | Consolidated | $ | 338,311 | | | $ | 291,759 | | | $ | 997,050 | | | $ | 874,842 | |
Net sales are attributed to countries based on the location of the customer.
Segment Information
The following includes a summary of the unaudited financial information by reporting segment at September 30, 2020: 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 | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | | | | |
(in thousands) | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | September 30, 2021 | | December 31, 2020 |
Net Sales | | |
Goodwill | | Goodwill | |
Industrial | Industrial | $ | 196,241 | | | $ | 178,180 | | | $ | 608,473 | | | $ | 546,014 | | Industrial | $ | 180,094 | | | $ | 181,338 | |
Agricultural | Agricultural | 95,518 | | | 93,649 | | | 266,369 | | | 272,935 | | Agricultural | 13,478 | | | 13,794 | |
| Consolidated | Consolidated | $ | 291,759 | | | $ | 271,829 | | | $ | 874,842 | | | $ | 818,949 | | Consolidated | $ | 193,572 | | | $ | 195,132 | |
| Income from Operations | | |
Total Identifiable Assets | | Total Identifiable Assets | |
Industrial | Industrial | $ | 19,238 | | | $ | 14,583 | | | $ | 51,453 | | | $ | 53,068 | | Industrial | $ | 920,525 | | | $ | 875,081 | |
Agricultural | Agricultural | 11,685 | | | 9,872 | | | 25,987 | | | 23,342 | | Agricultural | 297,253 | | | 246,778 | |
| Consolidated | Consolidated | $ | 30,923 | | | $ | 24,455 | | | $ | 77,440 | | | $ | 76,410 | | Consolidated | $ | 1,217,778 | | | $ | 1,121,859 | |
| | | | | | | | | | | |
(in thousands) | September 30, 2020 | | December 31, 2019 |
Goodwill | | | |
Industrial | $ | 179,989 | | | $ | 183,307 | |
Agricultural | 12,987 | | | 14,715 | |
| | | |
Consolidated | $ | 192,976 | | | $ | 198,022 | |
| | | |
Total Identifiable Assets | | | |
Industrial | $ | 909,188 | | | $ | 922,738 | |
Agricultural | 264,271 | | | 290,025 | |
| | | |
Consolidated | $ | 1,173,459 | | | $ | 1,212,763 | |
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) | |
| | | | | | | | | |
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| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
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14. Contingent MattersSubsequent Events
TheOn October 26, 2021, the Company is subject to various legal actions which have arisenannounced that it acquired 100% of the outstanding capital shares of Timberwolf Limited (“Timberwolf”) in the ordinary course of its business. The most prevalent of such actions relate to product liability, which are generally covered by insurance after various self-insured retention amounts. While amounts claimed might be substantial and the ultimate liability with respect to such litigation cannot be determined at this time, the Company believes that the final outcome of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations; however, the ultimate resolution cannot be determined at this time.
Like other manufacturers, the Company is subject toU.K for approximately $18.0 million. Timberwolf manufactures a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways,commercial wood chippers, primarily serving markets in the U.K. and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, as well as the remediation of contamination associated with releases of hazardous substances at the Company’s facilities and off-site disposal locations, workplace safety and equal employment opportunities. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the effect that changes to such laws and regulations may have on the Company in the future. Like other industrial concerns, the Company’s manufacturing operations entail the risk of noncompliance, and there can be no assurance that the Company will not incur material costs or other liabilities as a result thereof.European Union.
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, |
As a Percent of Net Sales | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Industrial | 67.3 | % | | 65.5 | % | | 69.6 | % | | 66.7 | % |
Agricultural | 32.7 | % | | 34.5 | % | | 30.4 | % | | 33.3 | % |
| | | | | | | |
Total sales, net | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Cost Trends and Profit Margin, as Percentages of Net Sales | Cost Trends and Profit Margin, as Percentages of Net Sales | 2020 | | 2019 | | 2020 | | 2019 | Cost Trends and Profit Margin, as Percentages of Net Sales | 2021 | | 2020 | | 2021 | | 2020 |
| Gross profit | Gross profit | 27.0 | % | | 25.3 | % | | 25.8 | % | | 25.1 | % | Gross profit | 25.5 | % | | 27.0 | % | | 25.2 | % | | 25.8 | % |
Income from operations | Income from operations | 10.6 | % | | 9.0 | % | | 8.9 | % | | 9.3 | % | Income from operations | 8.9 | % | | 10.6 | % | | 8.9 | % | | 8.9 | % |
Income before income taxes | Income before income taxes | 9.4 | % | | 8.5 | % | | 7.6 | % | | 8.7 | % | Income before income taxes | 8.2 | % | | 9.4 | % | | 8.5 | % | | 7.6 | % |
Net income | Net income | 6.9 | % | | 6.4 | % | | 5.5 | % | | 6.5 | % | 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.
In March 2020,We experienced continued strong demand for our products during the World Health Organization categorizedthird quarter of 2021. COVID-19 variant cases have generally fallen since the current coronavirus disease (“COVID-19”)summer peak levels and we have experienced less disruption in our business as a pandemic, anddirect result of COVID-19 illness. However, we continue to struggle with the President of the United States declared the COVID-19 outbreak a national emergency. The Company continues to navigate the new environment brought about by the COVID-19 pandemic. While the outbreak continues, we remain focused on the ongoing health and safety of our employees while diligently engaged in meeting customer demand as efficiently as possible. Early-on at the outsetindirect consequences of the pandemic someand 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 our facilities were forced to close for varying periods2021. We also experienced a shortage of time due to government ordersskilled labor along with higher material and other pandemic related reasons. However, business activity has gradually improved over the last few months, which has allowed us to resume more regular operations. Currently,transportation costs, all of which negatively impacted our manufacturing plants are operating at varying levels of production based on demand. In general, our Industrial Division has continued to experience some softness in customer demand while markets in our Agricultural Division seem to be improving. Shouldoperations and financial results during the pandemic worsen, we expect softness in the markets we serve with a reduction in demand for our products. We also recognize that case surges could lead to new restrictions or lockdowns, which may limit our operational capabilities in the future. All of this is dependent on future developments relating to the pandemic, which are highly uncertain and unpredictable at this time.quarter.
For the first nine months of 2020,2021, the Company's net sales increased by 6.8%14%, butand net income decreasedincreased by 9.0%26% compared to the same period in 2019.2020. The increase in both net sales was due to the acquisitions of MorbarkandDutch Power. The decrease in net income was attributableprimarily 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 which began to materially affectpandemic. Offsetting the increase were disruptions in our operations in March of this yearsupply chain, labor shortages, significant input cost inflation, and continued to negatively impact the Company's overall financial performance during the first nine months of 2020.logistics issues.
The Company's Industrial Division experienced an 11.4%a 9% increase in sales for the first nine months of 20202021 compared to the first nine months of 20192020 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 acquisitionsfirst half of Morbark and Dutch Power. Without factoring in contributions2021. The Division's income from Morbark and Dutch Power, sales across all legacy Industrial product groups (with the exception of vegetation control, which was slightly up) were down duringoperations for the first nine months of 2020 compared to2021 was up 1% versus the same period in 2019, mostly2020, due to the adverse impacts of the COVID-19 pandemicincreased demand but offset by higher input costs and supply chain disruptions which included temporary plant closures in the U.S., France, and Canada during the second quarter of 2020, other operational disruptions across
the Division and softness in customer demand. The Division has shown signs of improvement, though not evenly across product lines, as some areas, such as forestry, are increasing above average while others, such as excavators and vacuum trucks continue to be soft.negatively affected manufacturing efficiencies.
The Company's Agricultural Division sales were downincreased in the first nine months of 20202021 by 2.4%26% compared to the first nine months of 2019.2020. 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 negativelyhigher input costs and supply chain disruptions which affected bymanufacturing efficiencies. Notwithstanding these challenges, the COVID-19 pandemic, which beganDivision's income from operations recorded a 43% improvement compared to hurt Agricultural sales as well as operations in late March of this year. During the second quarter of 2020, North American sales and profitability in the Agricultural Division showed some improvement and have continued to show signs of recovering during the third quarterfirst nine months of 2020. The Division's operations in the UK and France, which experienced temporary plant closures and operational disruptions during the months of March and April, have also shown signs of improvement during the third quarter of 2020.
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 whichfirst nine months results included a $3.5 million of non-cash inventory step-up expense related to the Morbark acquisition. Thisacquisition which was a 1.3% increase when compared to the first nine monthscompleted in October of 2019. The Company's backlog increased 18.2%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 versus the backlog of $215.3 million at the end of the third quarter of 2019.2020. The increase in the Company's backlog was primarily attributable to improved market conditions specificallyand an increase in the Agricultural Division, offset by adverse effects from the COVID-19 pandemic, which has hurt the Company's sales and profitability.customer demand for our products in both Divisions as outlined above.
We believeThere remain many uncertainties regarding the COVID-19 pandemic, will continue to adversely impact our business for the remainder of 2020. At this time, however, it is not clear how significant these impacts will be given the current level of uncertainty. The impacts will depend on numerous evolving factors which cannot be predicted, including the duration and scope of the pandemic, the effectiveness of containment and treatment efforts, and the immediate and longer term economic consequences felt by our dealers and government customers, which could result in budgetary tightening and weaker demand for our products. In light of the current situation and outlook, we have taken various steps to contain costs, improve cash flow and reduce overall debt, which include, among other things, restricting travel, reducing inventory levels to match current demand, limiting capital expenditures, temporarily suspending the Company's share repurchase program and delaying other discretionary spending. We will continue to focus on improving our financial stability while ensuring the continued health and safety of our employees. We feel confident there will be a continuing need for products such as ours that are critical for agricultural operations and infrastructure maintenance and believe that our current focus on employee well-being and financial stability will allow us to be well positioned for long term growth after the pandemic situation eases. However, since we cannot reasonably estimate theanticipated 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 we cannot predict the ultimate impact it will have 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 condition. results.
While the direct and indirect consequences of the COVID-19 pandemic will certainly pose the greatest risk for the Company during 2020,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, election uncertainty,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;issues, budget constraints or revenue shortfalls in governmental entities, and other risks and uncertainties as described in “Risk Factors" section in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 20192020 (the "2019"2020 Form 10-K").
Results of Operations
Three Months Ended September 30, 20202021 vs. Three Months Ended September 30, 20192020
Net sales for the third quarter of 20202021 were $291.8$338.3 million, an increase of $20.0$46.5 million or 7.3%16% compared to $271.8$291.8 million for the third quarter of 2019. The acquisition of Morbark contributed $43.9 million in net sales 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 werewhich was negatively affected by the ongoing COVID-19 pandemic which continued to impact the business since the first quarter.pandemic.
Net Industrial sales increased by $18.0$22.8 million or 10.1%12% to $196.2$219.0 million for the third quarter of 20202021 compared to $178.2$196.2 million during the same period in 2019.2020. The acquisition of Morbark added $43.9 million of netincrease 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 2020.2021 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 impact from COVID-19 issues negatively affectedincrease was mainly due to the Division's net sales since the endcontinued strengthening of the first quarteragricultural market that began in the second half of 2020.2020 and recent price increases.
Net Agricultural sales were $95.5 millionThis Division also experienced supply chain disruptions in the third quarter of 2020 compared to $93.6 million for the same period2021 including delays in 2019, an increase of $1.9 million or 2.0%. North American operations experienced modest growth over the prior year's third quarterreceiving component parts from supply chain partners and benefited from the contribution of Dixie Chopper but the division was hurt by both the U.K. and French Agricultural businesses as they experienced softness particularly early in the third quarter due to the COVID-19 pandemic.logistics issues.
Gross profit for the third quarter of 20202021 was $78.6$86.3 million (27.0%(26% of net sales) compared to $68.7$78.6 million (25.3%(27% of net sales) during the same period in 2019,2020, an increase of $9.9$7.7 million. The increase in gross profit and margin percentage during the third quarter of 2021 compared to the third quarter of 2020 was primarily 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 theMorbark acquisition. Negatively affecting the gross margin and gross margin percentage during the third quarter of 2021. The third quarter of 2020 wasincluded $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 $44.1$52.6 million (15.1%(16% of net sales) during the third quarter of 20202021 compared to $43.1$44.1 million (15.9%(15% of net sales) during the same period of 2019,2020, an increase of $1.0$8.5 million. The increase in SG&A expense in the third quarter of 2021 compared to the third quarter of 2020 includes $6.3 million of additionalwas attributable to higher administrative and marketing expenses as the Company returned to pre-pandemic expense levels. Included in the 2021 SG&A expenseexpenses, are additional stock based compensation in the amount of $1.1 million related to Morbark. The third quarterthe acceleration of 2019 included $0.8 millionrestricted stock awards of acquisition expenses related to Morbark and Dutch Power.our former CEO. Amortization expense in the third quarter of 20202021 was $3.6$3.7 million compared to $1.1$3.6 million in the same period in 2019,2020, an increase of $2.5$0.1 million. The increased amortization expense was primarily attributable to the
Morbark acquisition.
Interest expense was $3.5$2.7 million for the third quarter of 20202021 compared to $1.8$3.5 million during the same period in 2019, an increase2020, a decrease of $1.7$0.8 million. The increasedecrease in interest expense during the third quarter of 2021 versus the third quarter of 2020 resulted from increased borrowings duewas attributable to the Morbark acquisition which was completed in OctoberCompany's continued reduction of 2019.debt levels.
Other income (expense), net was $0.3 million$36.0 thousand of expenseincome for the third quarter of 20202021 compared to $0.2$0.3 million of incomeexpense during the same period in 2019.2020. 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. The income in 2019 was primarily due to a gain on the sale of property for $350,000.
Provision for income taxes was $7.4$10.2 million (27.0%(37% of income before income tax) in the third quarter of 20202021 compared to $5.8$7.4 million (25.0%(27% of income before income tax) during the same period in 2019.2020. The increase in the tax rate for 20202021 was due to the reversala provision made for stock-based compensation in anticipation of a FIN 48 benefit recognized in 2019 partially offset by28% full year effective tax rate and a non-deductible acceleration of restricted stock awards related to the benefitretirement of the final GILTI regulations issued in July of 2020.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 compared to $17.4 million or $1.47 per share on a diluted basis for the third quarter2020. The decrease of 2019. The increase of $2.6$2.5 million resulted from the factors described above.
Nine Months Ended September 30, 20202021 vs. Nine Months Ended September 30, 20192020
Net sales for the first nine months of 20202021 were $874.8$997.1 million, an increase of $55.9$122.3 million or 6.8%14% compared to $818.9$874.8 million for the first nine months of 2019.2020. The increase was attributable to a strong recovery in customer demand for our products in both the acquisitions of MorbarkIndustrial and Dutch Power which together contributed net sales of $149.2 million. Negatively affecting salesAgricultural Divisions and to a lesser extent pricing actions. The Company's performance during the first nine months of 2020 was the outbreak ofwere materially impacted by the COVID-19 pandemic which began to affect the Company's operations late in the first quarter.pandemic.
Net Industrial sales increased during the first nine months by $62.5$53.6 million or 11.4%9% to $608.5$662.1 million for 20202021 compared to $546.0$608.5 million during the same period in 2019.2020. The increase came from higher customer demand during the acquisitionssecond and third quarter of Morbark and Dutch Power mentioned above. Impacts from the COVID-19 pandemic began to materially affect the Division late2021 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. This included temporary plant closures inSupply chain disruptions, logistics issues and unfavorable input cost changes constrained this Division during the U.S., France and Canada along and other operational disruptions throughout the countries we sell in mainly from health concerns and governmental directives, governmental spending and customer delivery restrictions.first nine months of 2021.
Net Agricultural sales were $266.4$334.9 million during the first nine months of 20202021 compared to $272.9$266.4 million for the same period in 2019, a decrease2020, an increase of $6.5$68.5 million or 2.4%26%. The decreaseincrease in sales for the first nine months of 20202021 compared to the first nine months of 20192020 was a result of the COVID-19 pandemic. Before the onset of the pandemic, sales during the first twoattributable to increased customer demand aided by low dealer inventories. North American and a half months of 2020 had begunEuropean markets not only continued to show signs of improvement from the soft agricultural market conditions thatremain 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 impacted thisaffected by supply chain disruptions and higher input costs.
Division for the last several years. This Division's North American operations did reasonably well and benefited from the contributions of Dixie Chopper but the ongoing pandemic affected both sales and operations in the later part of the first quarter of 2020 and specifically hurt both the U.K. and French Agricultural business as they experienced temporary plant closures.
Gross profit for the first nine months of 20202021 was $225.4$250.9 million (25.8%(25% of net sales) compared to $205.2$225.4 million (25.1%(26% of net sales) during the same period in 2019,2020, an increase of $20.2$25.5 million. The increase in gross profit andwas 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 percentagepercent for the first nine months of 2020 came from the acquisitions of Morbark and Dutch Power.2021. Negatively affecting the gross margin and gross margin percentage during the first nine months of 2020 werewas $3.5 million of charges on sales of inventory that had been previously stepped-up related to the Morbark acquisition.
SG&A expenses were $136.9$150.8 million (15.6%(15% of net sales) during the first nine months of 20202021 compared to $125.7$136.9 million (15.3%(16% of net sales) during the same period of 2019,2020, an increase of $11.2$13.9 million. Morbark and Dutch Power accounted for $21.6 million of net additional SG&A expense during theThe first nine months of 2020. The first nine months 20192021 included $1.2 million of acquisition expenses related to the Morbark higher administrative and Dutch Power.marketing expenses as the Company returned to pre-pandemic expense levels. Amortization expense in the first nine months of 20202021 was $11.1$11.0 million compared to $3.1$11.1 million in the same period in 2019, an increase2020, a decrease of $8.0$0.1 million. The increased amortization expense was primarily from the acquisitions of Morbark and Dutch Power.
Interest expense was $12.9$8.1 million for the first nine months of 20202021 compared to $5.2$12.9 million during the same period in 2019, an increase2020, a decrease of $7.7$4.8 million. The increasedecrease during the first nine months of 2020 came from increased borrowings due2021 compared to the Morbark acquisition in Octoberfirst nine months of 2019.2020 was attributable to the Company's continued reduction of debt levels.
Other income (expense), net was $0.7$2.7 million of income during the first nine months of 20202021 compared to $0.4$0.7 million of expenseincome in the first nine months of 2019.2020. 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 iswere primarily fromthe 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 the expenseone in 2019 were primarily the result of changes in exchange rates.Canada.
Provision for income taxes was $17.7$23.5 million (26.7%(28% of income before income taxes) in the first nine months of 20202021 compared to $18.3$17.7 million (25.5%(27% of income before income taxes) during the same period in 2019. The increase in the tax rate for 2020 was due to the reversal of a FIN 48 benefit recognized in 2019 partially offset by the benefit of the final GILTI regulations issued in July of 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 compared to $53.3 million or $4.52 per share on a diluted basis for the first nine months2020. The increase of 2019. The decrease of $4.7$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, 2020,2021, the Company had working capital of $409.5$440.1 million which represents an increase of $1.5$81.9 million from working capital of $408.0$358.2 million at December 31, 2019.2020. The increase in working capital was primarily from an increasea result of volume-driven and inflation increases in cash partially offset by reductions of accounts receivable and inventory levels which were made in response to the COVID-19 pandemic.levels.
Capital expenditures were $15.0$14.6 million for the first nine months of 2020,2021, compared to $19.5$15.0 million during the first nine months of 2019. The Company initially expected to continue capital expenditures at a rate consistent with the rate of spending for the entire year of 2019.2020. In response to the COVID-19 pandemic, we began to limitlimited new capital expenditures in the first quarter ofprojects in 2020, however, any previously approved projects and related spending have carried over.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.
Ne
Nett 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 compared to $76.02020.
Net cash provided by financing activities was $3.3 million during the first nine months of 2019. The 2019 amount included in the use of funds was to acquire Dutch Power which was approximately $52.5 million.
Netand net cash used in financing activities was $74.1 million and net cash provided by financing activities was $58.4 million during the nine month periods ended September 30, 20202021 and September 30, 2019,2020, respectively. Higher Net cash used inprovided by financing activities for the first nine months of 20202021 relates to the increase repaymentsborrowings on the revolving credit facility and the principal payments on long-term debt and financing leases. The majorityfor increased working capital in support of the net cash provided by financing activities in 2019 was due to borrowings to finance the acquisition of Dutch Power.elevated backlog levels.
The Company had $80.8$85.0 million in cash and cash equivalents held by its foreign subsidiaries as of September 30, 2020.2021. 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
operating and investing activities, but will need to monitor exchange rates to determine the appropriate timing of such repatriation given the current relative strengthvalue 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 has borrowed $300.0 million pursuant to a Term Facility repayable with interest quarterly at a percentage of the initial principal amount of the Term Facility ofequal to 5.0% per year along with theinterest payable quarterly. The remaining principal amount is due in 5 years.2024. Up to $350.0 million is available under the Credit Agreement pursuant to a Revolver Facility which terminates in 5 years.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, 2020, $375.02021, $295.0 million was outstanding under the Credit Agreement, $285.0$270.0 million on the Term Facility and $90.0$25.0 million on the Revolver Facility. On September 30, 2020, $3.62021, $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 $186.3$191.6 million in available borrowings. The Company is in compliance with the covenants under the Agreement as of September 30, 2020.2021.
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 20192020 Form 10-K, the policies relating to the business combinations sales discounts, and goodwill and other intangible assets involvedinvolve 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 20192020 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.
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 impactongoing direct and indirect impacts of the current COVID-19 outbreak; ongoing weakness in the industrial and agricultural sector; election uncertainty;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 pending 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 critical 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 continuedcontinues to experience the impacts of COVID-19 on its markets and operations including, operational disruptionmost notably, supply chain disruptions and softening demand.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, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While this situation will negatively impact the Company’s results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the full financial impact cannot be reasonably estimated at this time.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.
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.
To mitigate the short-term effect of changes in currency exchange rates on the Company’s functional currency-based sales, the Company’s U.K. subsidiaries regularly enter into foreign exchange forward contracts to hedge approximately 90% of its future net foreign currency collections over a period of nine months. As of September 30, 2020, the Company had $1.2 million outstanding in forward exchange contracts related to accounts receivable. A 15% fluctuation in exchange rates for these currencies would change the fair value of these contracts by approximately $0.2 million. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts should be offset by changes in the underlying value of the transaction being hedged.
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 increaseddecreased stockholders’ equity by $8.6$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 $6.2$6.7 million for the nine month period endingended September 30, 2020.2021. 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.
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 20202021 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1.9$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, 2020,2021, the Company had $375.0$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, see Note 14 Contingent Mattersrefer to our interim condensedthe consolidated financial statements.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
Our business has been and will continue to be adversely affected by the COVID-19 pandemic.
In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the COVID-19 pandemic on our business, and there is no guarantee our efforts to address the adverse impacts of COVID-19 will be effective. We have experienced operational interruptions as a result of the
pandemic, including the temporary suspension or reduced capacity of operations due to health concerns and government imposed restrictions, which have had and will have an adverse effect on the productivity and profitability of such manufacturing facilities, and in turn is expected to have an adverse effect on our business and financial results. Moreover, a prolonged pandemic, or the threat thereof, could result in continued operational and other disruptions for us and for our customers and suppliers. We may also incur significant costs to remedy damages caused by operational and supply chain disruptions, performance delays, and payment defaults or bankruptcy of our customers and suppliers, all of which could adversely affect our financial condition and results of operations.
The rapid spread of COVID-19 has also created significant uncertainty and global economic disruption. The extent to which the COVID-19 pandemic impacts our business, operations, financial results, financial condition and prospects will depend on numerous evolving factors which cannot be predicted, including: the duration and scope of the pandemic; governmental, business and individual actions taken in response; the short and long term effects on the operational and financial condition of our dealers and our governmental and other customers; and the impact on the overall demand for our products. Any of the above factors could result in negative direct and indirect impacts on our business which could have a material adverse effect on our financial condition and results of operations. In addition, the impact of COVID-19 on macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity and energy prices, and interest rates. Even after the COVID-19 pandemic has subsided, we may continue to experience material adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Any of these events could amplify the other risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2019 and could otherwise materially adversely affect our business, financial condition, results of operations, prospects and/or stock price.
Other than as set forth under this Item 1A, thereThere have not been any material changes from the risk factors previously disclosed in the 20192020 Form 10-K for the year ended December 31, 2019.2020.
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, 2020:
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, 20202021 | — | | — | | — | | $25,861,222 |
August 1-31, 20202021 | — | | — | | — | | $25,861,222 |
September 1-30, 20202021 | — | | — | | — | | $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.
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 |
31.3 | — | | | Filed Herewith |
32.1 | — | | | Filed Herewith |
32.2 | — | | | Filed Herewith |
32.3 | — | | | 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 |
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.
| | | | | |
October 28, 2020November 3, 2021 | Alamo Group Inc. |
| (Registrant) |
| |
| /s/ RonaldJeffery A. RobinsonLeonard |
| RonaldJeffery A. RobinsonLeonard |
| President & Chief Executive Officer |
| | | | | |
| /s/ Dan E. Malone |
| Dan E. Malone |
| Executive Vice President & Chief Financial Officer |
| (Principal Financial Officer) |
| | | | | |
| /s/ Richard J. Wehrle |
| Richard J. Wehrle |
| Executive Vice President Controller & TreasurerChief Financial Officer |
| (Principal AccountingFinancial Officer) |