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ALAMO GROUP INC - Quarter Report: 2021 March (Form 10-Q)



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 MARCH 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____

Commission file number 0-21220

ALAMO GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware
74-1621248
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)

 1627 East Walnut, Seguin, Texas  78155
(Address of principal executive offices, including zip code)
 
830-379-1480
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value
$.10 per share
ALGNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐

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

At April 30, 2021, 11,923,212 shares of common stock, $.10 par value, of the registrant were outstanding.


1

Alamo Group Inc. and Subsidiaries
 
INDEX
 
                                                                                                                                                                              
PART I.
FINANCIAL INFORMATION
PAGE
Item 1.
Interim Condensed Consolidated Financial Statements  (Unaudited)
March 31, 2021 and December 31, 2020
Three Months Ended March 31, 2021 and March 31, 2020
Three Months Ended March 31, 2021 and March 31, 2020
Three Months Ended March 31, 2021 and March 31, 2020
Three Months Ended March 31, 2021 and March 31, 2020
Item 2.
Item 3.
Item 4.
PART II.
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

2

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(Unaudited) 
 
(in thousands, except share amounts)
March 31, 2021December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents
$105,265 $50,195 
Accounts receivable, net
242,971 209,276 
Inventories, net
250,250 229,971 
Prepaid expenses and other current assets
9,296 7,382 
Income tax receivable
4,051 6,186 
Total current assets
611,833 503,010 
Rental equipment, net
39,693 42,266 
Property, plant and equipment
313,757 312,362 
Less:  Accumulated depreciation
(160,970)(156,928)
Total property, plant and equipment, net
152,787 155,434 
Goodwill
194,025 195,132 
Intangible assets, net
188,955 193,172 
Deferred income taxes
1,080 1,203 
Other non-current assets
17,780 19,112 
Total assets
$1,206,153 $1,109,329 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
$93,899 $75,317 
Income taxes payable
2,749 2,278 
Accrued liabilities
60,681 64,634 
Current maturities of long-term debt and finance lease obligations
15,078 15,066 
Total current liabilities
172,407 157,295 
Long-term debt and finance lease obligations, net of current maturities
338,605 270,320 
Long-term tax liability
4,408 3,954 
Deferred pension liability
1,475 1,731 
Other long-term liabilities
27,600 30,744 
Deferred income taxes
19,777 19,642 
Stockholders’ equity:
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,838,746 and 11,809,926 outstanding at March 31, 2021 and December 31, 2020, respectively
1,184 1,181 
Additional paid-in-capital
120,541 118,528 
Treasury stock, at cost; 82,600 shares at March 31, 2021 and December 31, 2020, respectively
(4,566)(4,566)
Retained earnings
566,634 550,826 
Accumulated other comprehensive loss
(41,912)(40,326)
Total stockholders’ equity
641,881 625,643 
Total liabilities and stockholders’ equity
$1,206,153 $1,109,329 

See accompanying notes.
3

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)

Three Months Ended
March 31,
(in thousands, except per share amounts)20212020
Net sales:
Industrial
$211,911 $229,975 
Agricultural
99,278 84,473 
Total net sales311,189 314,448 
Cost of sales234,763 235,508 
Gross profit76,426 78,940 
Selling, general and administrative expenses47,330 51,248 
Amortization expense3,658 3,836 
Income from operations
25,438 23,856 
Interest expense(2,613)(5,519)
Interest income288 356 
Other income (expense), net(630)2,341 
Income before income taxes
22,483 21,034 
Provision for income taxes5,021 5,506 
Net Income
$17,462 $15,528 
Net income per common share:
Basic
$1.48 $1.32 
Diluted
$1.47 $1.31 
Average common shares:
Basic
11,820 11,761 
Diluted
11,882 11,827 
Dividends declared$0.14 $0.13 
 
 See accompanying notes.
 
4

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

Three Months Ended
March 31,
(in thousands)20212020
Net income$17,462 $15,528 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense of $(115) and zero, respectively
(4,010)(20,454)
Recognition of deferred pension and other post-retirement benefits, net of tax expense of $(67) and $(52), respectively
251 194 
Unrealized income (loss) on derivative instruments, net of tax (expense) benefit of $(578) and $1,308, respectively
2,173 (4,390)
Other comprehensive losses, net of tax
(1,586)(24,650)
Comprehensive income (loss)$15,876 $(9,122)

See accompanying notes.

5


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


For three months ended March 31, 2021
Common Stock
Additional
Paid-in Capital
Treasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)
SharesAmount
Balance at December 31, 202011,727 $1,181 $118,528 $(4,566)$550,826 $(40,326)$625,643 
Other comprehensive income
— — — — 17,462 (1,586)15,876 
Stock-based compensation expense
— — 1,240 — — — 1,240 
Stock-based compensation transactions
29 3 773 — — — 776 
Dividends paid ($0.14 per share)
— — — — (1,654)— (1,654)
Balance at March 31, 202111,756 $1,184 $120,541 $(4,566)$566,634 $(41,912)$641,881 



For three months ended March 31, 2020
Common Stock
Additional Paid-in Capital
Treasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)SharesAmount
Balance at December 31, 201911,670 $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, 202011,679 $1,176 $114,967 $(4,566)$514,320 $(65,488)$560,409 


See accompanying notes.

6

Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
(in thousands)20212020
Operating Activities
Net income$17,462 $15,528 
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts
(113)197 
Depreciation - Property, plant and equipment
5,247 4,624 
Depreciation - Rental equipment
2,207 2,516 
Amortization of intangibles
3,658 3,836 
Amortization of debt issuance
167 167 
Stock-based compensation expense
1,240 933 
Provision for deferred income tax (benefit)(502)(4,095)
Gain on sale of property, plant and equipment
(615)(745)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(34,239)(16,306)
Inventories
(21,552)(11,675)
Rental equipment
365 1,906 
Prepaid expenses and other assets
(712)(1,139)
Trade accounts payable and accrued liabilities
16,021 2,833 
Income taxes payable
2,629 5,829 
Long-term tax payable454 (654)
Other assets and long-term liabilities, net
(318)1,819 
Net cash (used in) provided by operating activities
(8,601)5,574 
Investing Activities
Purchase of property, plant and equipment(3,477)(7,378)
Proceeds from sale of property, plant and equipment681 2,385 
Net cash used in investing activities(2,796)(4,993)
Financing Activities
Borrowings on bank revolving credit facility86,000 74,000 
Repayments on bank revolving credit facility(14,000)(24,000)
Principal payments on long-term debt and finance leases(3,766)(3,791)
Dividends paid(1,654)(1,528)
Proceeds from exercise of stock options776 369 
Net cash provided by financing activities67,356 45,050 
Effect of exchange rate changes on cash and cash equivalents(889)(3,517)
Net change in cash and cash equivalents55,070 42,114 
Cash and cash equivalents at beginning of the year50,195 42,311 
Cash and cash equivalents at end of the period$105,265 $84,425 
Cash paid during the period for:
Interest
$2,557 $5,513 
Income taxes
2,758 2,690 
See accompanying notes.
7

Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
March 31, 2021
 
1.  Basis of Financial Statement Presentation

General

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

Accounting Pronouncements Adopted on January 1, 2021

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

Accounting Pronouncements Not Yet Adopted

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

2.  Accounts Receivable

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

At March 31, 2021 the Company had $14.5 million in reserves for sales discounts compared to $13.5 million at December 31, 2020 related to products shipped to our customers under various promotional programs. The increase was primarily due to higher sales within the Company's Agricultural Division.
 
8

3.  Inventories
 
Inventories valued at LIFO cost represented 58% and 41% of total inventory at March 31, 2021 and December 31, 2020, respectively. The excess of current cost (market value) over LIFO valued inventories was approximately $12.5 million at March 31, 2021 and December 31, 2020. 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)
March 31, 2021December 31, 2020
Finished goods
$213,327 $196,126 
Work in process
23,574 21,225 
Raw materials
13,349 12,620 
Inventories, net$250,250 $229,971 
 
Inventory obsolescence reserves were $11.1 million at March 31, 2021 and $12.0 million at December 31, 2020.

4. Rental Equipment

Rental equipment is shown net of accumulated depreciation of $19.4 million and $18.0 million at March 31, 2021 and December 31, 2020, respectively. The Company recognized depreciation expense of $2.2 million and $2.5 million for the three months ended March 31, 2021 and March 31, 2020.

5.  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 March 31, 2021 and December 31, 2020, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.

6. Goodwill and Intangible Assets

The following is the summary of changes to the Company's Goodwill for the three months ended March 31, 2021:
IndustrialAgriculturalConsolidated
(in thousands)
Balance at December 31, 2020$181,338 $13,794 $195,132 
Translation adjustment(848)(259)(1,107)
Balance at March 31, 2021$180,490 $13,535 $194,025 

9

The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:

(in thousands)
Estimated Useful Lives
March 31, 2021December 31, 2020
Definite:
Trade names and trademarks
15-25 years
$67,374 $67,770 
Customer and dealer relationships
8-15 years
122,395 122,470 
Patents and drawings
3-12 years
28,607 28,764 
Favorable leasehold interests
7 years
4,200 4,200 
Total at cost222,576 223,204 
Less accumulated amortization(39,121)(35,532)
Total net183,455 187,672 
Indefinite:
Trade names and trademarks5,500 5,500 
Total Intangible Assets$188,955 $193,172 

The Company recognized amortization expense of $3.7 million and $3.8 million for the three months ending March 31, 2021 and 2020, respectively.

As of March 31, 2021, the Company had $189.0 million of intangible assets, which represents 16% of total assets. 

7.  Leases

The Company leases office space and equipment under various operating and finance leases, which generally are expected to be renewed or replaced by other leases. The finance leases currently held are considered immaterial. The components of lease cost were as follows:
Components of Lease Cost
Three Months Ended
March 31,
(in thousands)20212020
Finance lease cost:
     Amortization of right-of-use assets$17 $24 
     Interest on lease liabilities1 2 
Operating lease cost1,233 1,225 
Short-term lease cost214 235 
Variable lease cost116 118 
Total lease cost$1,581 $1,604 

Rent expense for the three months ending March 31, 2021 and 2020 was immaterial.

10

Maturities of operating lease liabilities were as follows:
Future Minimum Lease Payments
(in thousands)March 31, 2021December 31, 2020
2021$3,908 *$4,072 
20222,905 3,063 
20232,014 2,089 
20241,398 1,465 
20251,247 1,244 
Thereafter3,348 3,622 
Total minimum lease payments$14,820 $15,555 
Less imputed interest(1,229)(1,310)
Total operating lease liabilities$13,591 $14,245 
*Period ending March 31, 2021 represents the remaining nine months of 2021.
Future Lease Commencements

As of March 31, 2021, there are additional operating leases, primarily for buildings, that have not yet commenced in the amount of $2.3 million. These operating leases will commence in fiscal year 2021 with lease terms of 1 to 7 years.

Supplemental balance sheet information related to leases was as follows:

Operating Leases
(in thousands)March 31, 2021December 31, 2020
Other non-current assets
$13,479 $14,144 
Accrued liabilities3,584 3,680 
Other long-term liabilities10,007 10,565 
    Total operating lease liabilities$13,591 $14,245 
Weighted Average Remaining Lease Term5.73 years5.83 years
Weighted Average Discount Rate3.01 %3.04 %

Supplemental Cash Flow information related to leases was as follows:
Three Months Ended
March 31,
(in thousands)20212020
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows from operating leases$1,121 $1,122 

11

8. Debt

The components of long-term debt are as follows:
 
(in thousands)		March 31, 2021December 31, 2020
Current Maturities:
    Finance lease obligations$78 $66 
    Term debt15,000 15,000 
15,078 15,066 
Long-term debt:
     Finance lease obligations
56 87 
Term debt, net261,549 265,233 
     Bank revolving credit facility77,000 5,000 
         Total Long-term debt338,605 270,320 
Total debt$353,683 $285,386 

As of March 31, 2021, $2.2 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 $98.2 million in available borrowings.

9.  Common Stock and Dividends
 
Dividends declared and paid on a per share basis were as follows:
Three Months Ended
March 31,
20212020
Dividends declared
$0.14 $0.13 
Dividends paid
$0.14 $0.13 

On April 1, 2021, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.14 per share, which was paid on April 29, 2021, to shareholders of record at the close of business on April 15, 2021.
 
10.  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
March 31,
(In thousands, except per share)
20212020
Net Income
$17,462 $15,528 
Average Common Shares:
Basic (weighted-average outstanding shares)
11,820 11,761 
Dilutive potential common shares from stock options
62 66 
Diluted (weighted-average outstanding shares)
11,882 11,827 
Basic earnings per share
$1.48 $1.32 
Diluted earnings per share
$1.47 $1.31 

12

11.  Revenue and Segment Information

Revenues from Contracts with Customers

Disaggregation of revenue is presented in the tables below by product type and by geographical location. Management has determined that this level of disaggregation would be beneficial to users of the financial statements.

Revenue by Product Type
Three Months Ended
March 31,
(in thousands)20212020
Net Sales
Wholegoods
$239,297 $243,531 
Parts
63,538 59,610 
Other
8,354 11,307 
Consolidated$311,189 $314,448 

Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.

Revenue by Geographical Location
Three Months Ended
March 31,
(in thousands)20212020
Net Sales
United States
$219,429 $234,159 
France
24,952 22,083 
Canada
19,209 13,612 
United Kingdom
12,499 13,229 
Netherlands7,485 7,647 
Brazil
5,881 4,546 
Australia
4,793 2,353 
Germany1,939 2,344 
Other
15,002 14,475 
Consolidated$311,189 $314,448 

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

13

Segment Information

The following includes a summary of the unaudited financial information by reporting segment at March 31, 2021:  
Three Months Ended
March 31,
(in thousands)
20212020
Net Sales
Industrial
$211,911 $229,975 
Agricultural
99,278 84,473 
Consolidated$311,189 $314,448 
Income from Operations
Industrial
$16,091 $18,123 
Agricultural
9,347 5,733 
Consolidated$25,438 $23,856 

(in thousands)
March 31, 2021December 31, 2020
Goodwill
Industrial
$180,490 $181,338 
Agricultural
13,535 13,794 
Consolidated$194,025 $195,132 
Total Identifiable Assets
       Industrial
$912,201 $868,688 
       Agricultural
293,952 240,641 
Consolidated$1,206,153 $1,109,329 


12.  Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component, net of tax, were as follows:

Three Months Ended March 31,
20212020
(in thousands)Foreign Currency Translation AdjustmentDefined Benefit Plans ItemsGaines (Losses) on Cash Flow HedgesTotalForeign Currency Translation AdjustmentDefined Benefit Plans ItemsGaines (Losses) on Cash Flow HedgesTotal
Balance as of beginning of period$(26,597)$(6,855)$(6,874)$(40,326)$(35,459)$(5,989)$610 $(40,838)
Other comprehensive income (loss) before reclassifications(4,010)— 2,823 (1,187)(20,454)— (4,455)(24,909)
Amounts reclassified from accumulated other comprehensive loss— 251 (650)(399)— 194 65 259 
Other comprehensive (loss) income(4,010)251 2,173 (1,586)(20,454)194 (4,390)(24,650)
Balance as of end of period$(30,607)$(6,604)$(4,701)$(41,912)$(55,913)$(5,795)$(3,780)$(65,488)


14

13.  Contingent Matters

  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2020 (the "2020 10-K").

15

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
March 31,
As a
Percent of Net Sales
20212020
Industrial68.1 %73.1 %
Agricultural31.9 %26.9 %
Total sales, net
100.0 %100.0 %

Three Months Ended
March 31,
Cost Trends and Profit Margin, as
Percentages of Net Sales
20212020
Gross profit24.6 %25.1 %
Income from operations8.2 %7.6 %
Income before income taxes7.2 %6.7 %
Net income5.6 %4.9 %
 
Overview
 
This report contains forward-looking statements that are based on Alamo Group’s current expectations.  Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section. Unless the context otherwise requires, the terms the "Company", "we", "our" and "us" means Alamo Group Inc.
 
We continue to monitor the effects of the COVID-19 pandemic on our business while maintaining our focus on the health and safety of our employees. Though the outbreak continues, we have seen steadily improving overall business conditions in the markets we serve and we are diligently engaged in meeting customer demand as efficiently as possible. We experienced isolated outbreaks of the disease at certain manufacturing plants during the first quarter of 2021, but we are currently operating at full or nearly full capacity at most of our facilities worldwide. Both new orders and backlogs in our Industrial and Agricultural Divisions have improved and are at record levels.

For the first three months of 2021, the Company's net sales decreased by 1.0%, but net income increased by 12.5% compared to the same period in 2020. The decrease in net sales was primarily due to disruptions in our supply chain, logistics issues and COVID-19 pandemic operational disruptions. The increase in net income was attributable to lower operating and interest expenses.

The Company's Industrial Division experienced a 7.9% decrease in sales for the first three months of 2021 compared to the first three months of 2020 due to supply chain issues and the impact of the COVID-19 pandemic. The Division's new orders and backlog improved in all product lines, though cases of COVID-19 in certain facilities have caused operational delays. We anticipate that the recent economic stimulus package in the U.S. will help cities, counties and states which are the Division's biggest end-users of its infrastructure maintenance equipment.

The Company's Agricultural Division sales were up in the first three months of 2021 by 17.5% compared to the first three months of 2020. Agricultural sales rebounded due to improved commodity prices, government subsidies and increased customer demand for our products. Lower dealer inventories also helped fuel demand for our products. This resulted in a 63% improvement in income from operations compared to the first quarter of 2020.

Consolidated income from operations was $25.4 million in the first three months of 2021 compared to $23.9 million in the first three months of 2020. The 2020 first quarter results included a $2.0 million non-cash inventory step-up expense related to the Morbark acquisition which was completed in October of 2019. The Company's
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backlog increased 94.5% to $452.5 million at the end of the first quarter of 2021 versus a backlog of $232.6 million at the end of the first quarter of 2020. The increase in the Company's backlog was primarily attributable to improved market conditions and supply chain constraints in both Divisions as outlined above.

We believe the COVID-19 pandemic will continue to impact our business during 2021. However, the nature and severity of the impact will remain uncertain for some time and will depend on numerous evolving factors which cannot be predicted, including the duration and scope of the pandemic, the availability, effectiveness and acceptance of treatment efforts and vaccines, and the immediate and longer term economic consequences felt by our dealers and government customers, which could result in changes in demand for our products. We are seeing steady demand for our products as indicated by our current record backlog levels. However, as a consequence of the pandemic, we are contending with various challenges in meeting the increased customer demand. Several of our plants have had to manage through quarantines involving a portion of their employee population, while our business units continue to experience multiple supply chain and logistics challenges including shipping bottlenecks (on both sea and land) as well as the unavailability of certain raw materials and key product components. These issues can lead to delays in shipment, cost increases and other effects that can negatively impact us. In addition, we are experiencing continued inflationary pressure on input costs and a tightening labor market. Despite the various challenges, we anticipate that we will be able to meet our customer demand effectively.

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

Results of Operations
 
Three Months Ended March 31, 2021 vs. Three Months Ended March 31, 2020
 
Net sales for the first quarter of 2021 were $311.2 million, a decrease of $3.2 million or 1.0% compared to $314.4 million for the first quarter of 2020. Net sales during the first quarter of 2021 were negatively affected by the ongoing COVID-19 pandemic which continued to impact the business since the first quarter of 2020.
 
Net Industrial sales decreased by $18.1 million or 7.9% to $211.9 million for the first quarter of 2021 compared to $230.0 million during the same period in 2020. The COVID-19 pandemic has negatively affected the Division's net sales since the end of the first quarter of 2020 and, in the first quarter of 2021, supply chain and logistics disruptions have had a more pronounced negative impact.
 
Net Agricultural sales were $99.3 million in the first quarter of 2021 compared to $84.5 million for the same period in 2020, an increase of $14.8 million or 17.5%. The increase was mainly due to the overall strengthening of the agricultural market that began in the second half of 2020. This Division also experienced supply chain disruptions in the first quarter of 2021 including delays in receiving component parts from supply chain partners and logistics issues.

Gross profit for the first quarter of 2021 was $76.4 million (24.6% of net sales) compared to $78.9 million (25.1% of net sales) during the same period in 2020, a decrease of $2.5 million.  The decrease in gross profit and margin percentage during the first quarter of 2021 compared to the first quarter of 2020 was primarily due to inflationary pressures, mainly from steel, along with higher costs relating to delivery of component parts, such as airfreighting charges to meet customer deliveries. Negatively affecting the gross margin and gross margin percentage during the first quarter of 2020 was $2.0 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 $47.3 million (15.2% of net sales) during the first quarter of 2021 compared to $51.2 million (16.3% of net sales) during the same period of 2020, a decrease of $3.9 million. The decrease in the first quarter of 2021 compared to the first quarter of 2020 was related to expense
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savings related to cost reductions made in connection with the COVID-19 pandemic. Amortization expense in the first quarter of 2021 was $3.7 million compared to $3.8 million in the same period in 2020, a decrease of $0.1 million.

Interest expense was $2.6 million for the first quarter of 2021 compared to $5.5 million during the same period in 2020, a decrease of $2.9 million.  The decrease during the first quarter of 2021 versus the first quarter of 2020 was attributable to the Company's reduction of debt during 2020.
 
Other income (expense), net was $0.6 million of expense for the first quarter of 2021 compared to $2.3 million of income during the same period in 2020.  The expense in 2021 was primarily the result of changes in currency exchange rates. The income in 2020 was primarily the result of changes in currency exchange rates and a gain of $0.7 million from the sale of the Super Products building.
                                         
Provision for income taxes was $5.0 million (22.3% of income before income tax) in the first quarter of 2021 compared to $5.5 million (26.2% of income before income tax) during the same period in 2020. The decrease in the tax rate for 2021 was a result of a discrete benefit for state tax rate changes, discrete tax benefits associated with stock based compensation, and a discrete tax benefit associated with the reduction in US taxation of certain foreign earnings.
    
The Company’s net income after tax was $17.5 million or $1.47 per share on a diluted basis for the first quarter of 2021 compared to $15.5 million or $1.31 per share on a diluted basis for the first quarter of 2020.  The increase of $2.0 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 March 31, 2021, the Company had working capital of $439.4 million which represents an increase of $93.7 million from working capital of $345.7 million at December 31, 2020. The increase in working capital was primarily from an increase in cash as well as volume-driven increases in accounts receivable and inventory levels.

Capital expenditures were $3.5 million for the first three months of 2021, compared to $7.4 million during the first three months of 2020. In response to the COVID-19 pandemic, we limited new capital expenditures in projects in 2020, however, for the full year of 2021 we expect to return to a more normalized capital expenditure level. The Company will fund any future expenditures from operating cash flows or through our revolving credit facility, described below.

Net cash used for investing activities was $2.8 million during the first three months of 2021 compared to $5.0 million during the first three months of 2020.

Net cash provided in financing activities was $67.4 million and $45.1 million during the three month periods ended March 31, 2021 and March 31, 2020, respectively. Higher Net cash provided by financing activities for the first three months of 2021 relates to increase borrowings on the revolving credit facility for increased working capital in support of elevated backlog levels.

The Company had $99.6 million in cash and cash equivalents held by its foreign subsidiaries as of March 31, 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 value of the U.S. dollar. Repatriated funds will initially be used to reduce funded debt levels under the Company's current credit facility and subsequently used to fund working capital, capital investments and acquisitions company-wide.
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On October 24, 2019, the Company, as Borrower, and each of its domestic subsidiaries as guarantors, entered into a Second Amended and Restated Credit Agreement (the Credit Agreement) with Bank of America, N.A., as Administrative Agent. The Credit Agreement provides the Company with the ability to request loans and other financial obligations in an aggregate amount of up to $650.0 million and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional $200.0 million. Pursuant to the Credit Agreement, the Company borrowed $300.0 million pursuant to a Term Facility repayable at a percentage of the initial principal amount of the Term Facility equal to 5.0% per year along with interest payable quarterly. The remaining principal amount is due in 2024. Up to $350.0 million is available under the Credit Agreement pursuant to a Revolver Facility. The Agreement requires the Company to maintain two financial covenants, a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The Agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on sale of properties and limitations on liens and capital expenditures. The Agreement also contains other customary covenants, representations and events of defaults. The expiration date of the Term Facility and the Revolver Facility is October 24, 2024. As of March 31, 2021, $354.5 million was outstanding under the Credit Agreement, $277.5 million on the Term Facility and $77.0 million on the Revolver Facility. On March 31, 2021, $2.2 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 $98.2 million in available borrowings. The Company is in compliance with the covenants under the Agreement as of March 31, 2021.

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

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions, particularly given the uncertainty created by the COVID-19 pandemic.
 
Critical Accounting Policies

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.  Management believes that of the Company's significant accounting policies, which are set forth in Note 1 of the Notes to Consolidated Financial Statements in the 2020 Form 10-K, the policies relating to the business combinations involve a higher degree of judgment and complexity. There have been no material changes to the nature of estimates, assumptions and levels of subjectivity and judgment related to critical accounting estimates disclosed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Form 10-K.

Off-Balance Sheet Arrangements

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

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Forward-Looking Information

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

Statements that are not historical are forward-looking.  When used by or on behalf of the Company, the words “estimate,” "anticipate," "expect," “believe,” “intend”, "will", "would", "should", "could" and similar expressions generally identify forward-looking statements made by or on behalf of the Company.

Forward-looking statements involve risks and uncertainties.  These uncertainties include factors that affect all businesses operating in a global market, as well as matters specific to the Company and the markets it serves.  Particular risks and uncertainties facing the Company include changes in market conditions; the ongoing impact of the COVID-19 pandemic; changes in tariff regulations and the imposition of new tariffs; a strong U.S. dollar; increased competition; trade wars or other negative economic impacts resulting from geopolitical events; decreases in the prices of agricultural commodities, which could affect our customers' income levels; increase in input costs; weakness in our Industrial Division due to changes in customer behavior; our inability to increase profit margins through continuing production efficiencies and cost reductions; repercussions from the exit by the U.K. from the European Union (EU); acquisition integration issues; budget constraints or income shortfalls which could affect the purchases of our type of equipment by governmental customers; credit availability for both the Company and its customers, adverse weather conditions such as droughts, floods, snowstorms, etc. which can affect buying patterns of the Company’s customers and related contractors; the price and availability of raw materials and product components, particularly steel and steel products; energy cost; increased cost of governmental regulations which effect corporations including related fines and penalties (such as the European General Data Protection Regulation and the California Consumer Privacy Act); the potential effects on the buying habits of our customers due to animal disease outbreaks and other epidemics; the Company’s ability to develop and manufacture new and existing products profitably; market acceptance of new and existing products; the Company’s ability to maintain good relations with its employees; the Company's ability to successfully complete acquisitions and operate acquired businesses or assets; the ability to hire and retain quality skilled employees; cyber security risks affecting information technology or data security breaches; and the possible effects of events beyond our control, such as political unrest, acts of terror, natural disasters and pandemics, on the Company or its customers, suppliers and the economy in general. The Company continues to experience the impacts of COVID-19 on its markets and operations including, most notably, operational and supply chain disruptions. The full extent to which COVID-19 will continue to adversely impact the Company’s business depends on future developments, which are highly uncertain and unpredictable.

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

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

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

Foreign Currency Risk        

International Sales

A portion of the Company’s operations consists of manufacturing and sales activities in international jurisdictions. The Company primarily manufactures its products in the U.S., U.K., France, Canada, Brazil, Australia and the Netherlands.  The Company sells its products primarily in the functional currency within the markets where the products are produced, but certain sales from the Company's U.K. and Canadian operations are denominated in other foreign currencies.  As a result, the Company’s financials, specifically the value of its foreign assets, could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the other markets in which the subsidiaries of the Company distribute their products. Foreign exchange rates and economic conditions in these foreign markets may be further impacted by the effects of the COVID-19 pandemic.

Exposure to Exchange Rates

The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive income within the statement of stockholders’ equity. The total foreign currency translation adjustment for the current quarter decreased stockholders’ equity by $4.0 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 $2.2 million for the three month period ending March 31, 2021.  This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.  In addition to the direct effects of changes in exchange rates, which include a changed dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive.  The Company’s sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. 

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

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Interest Rate Risk

The Company’s long-term debt bears interest at variable rates.  Accordingly, the Company’s net income is affected by changes in interest rates.  Assuming the current level of borrowings at variable rates and a two percentage point change for the first quarter 2021 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1.8 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 March 31, 2021, the Company had $354.5 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 13 Contingent Matters to our interim condensed consolidated financial statements.

Item 1A. - Risk Factors

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

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

The following table provides a summary of the Company's repurchase activity for its common stock during the three months ended March 31, 2021:

Issuer Purchases of Equity Securities
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal 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)
January 1-31, 2021— — — $25,861,222
February 1-28, 2021— — — $25,861,222
March 1-31, 2021— — — $25,861,222
(a) On December 13, 2018, the Board authorized a stock repurchase program of up to $30.0 million of the Company's common stock. The program shall have a term of five (5) years, terminating on December 12, 2023.


Item 3. - Defaults Upon Senior Securities

None.

Item 4. - Mine Safety Disclosures

Not Applicable

Item 5. - Other Information

(a) Reports on Form 8-K

None.
 
(b) Other Information
 
None.

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Item 6. - Exhibits

(a)   Exhibits
ExhibitsExhibit Title
Incorporated by Reference From the Following Documents
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 documentFiled Herewith
101.SCH—XBRL Taxonomy Extension Schema DocumentFiled Herewith
101.CAL—XBRL Taxonomy Extension Calculation Linkbase DocumentFiled Herewith
101.DEF—XBRL Taxonomy Extension Definition Linkbase DocumentFiled Herewith
101.LAB—XBRL Taxonomy Extension Label Linkbase DocumentFiled Herewith
101.PRE—XBRL Taxonomy Extension Presentation Linkbase DocumentFiled Herewith
104—Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)Filed Herewith

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Alamo Group Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 5, 2021
Alamo Group Inc.
(Registrant)
 
 
/s/ Ronald A. Robinson
Ronald A. Robinson
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
Vice President, Controller & Treasurer
(Principal Accounting Officer)
 
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