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OFFON

ALAMO GROUP INC.

(ALG)
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ALAMO GROUP INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/03/2021 | 04:05pm EST
The following tables set forth, for the periods indicated, certain financial
data:

                               Three Months Ended                  Nine Months Ended
                                 September 30,                       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                 Nine Months Ended
                                              September 30,                     September 30,

Cost Trends and Profit Margin, as

      Percentages of Net Sales              2021              2020         
   2021             2020

 Gross profit                                    25.5  %     27.0  %               25.2  %     25.8  %
 Income from operations                           8.9  %     10.6  %                8.9  %      8.9  %
 Income before income taxes                       8.2  %      9.4  %                8.5  %      7.6  %
 Net income                                       5.2  %      6.9  %                6.1  %      5.5  %



Overview

This report contains forward-looking statements that are based on Alamo Group's
current expectations.  Actual results in future periods may differ materially
from those expressed or implied because of a number of risks and uncertainties
which are discussed below and in the Forward-Looking Information section. Unless
the context otherwise requires, the terms the "Company", "we", "our" and "us"
means Alamo Group Inc.

We experienced continued strong demand for our products during the third quarter
of 2021. COVID-19 variant cases have generally fallen since the summer peak
levels and we have experienced less disruption in our business as a direct
result of COVID-19 illness. However, we continue to struggle with the indirect
consequences of the pandemic and we expect that these issues will persist, at
least in the near-term. Our top line performance was constrained by supply chain
disruptions and labor shortages. While we have elevated engagement with our key
suppliers and taken other actions to mitigate supply chain disruptions, we
expect these challenges to continue for at least the remainder of 2021. We also
experienced a shortage of skilled labor along with higher material and
transportation costs, all of which negatively impacted our operations and
financial results during the quarter.

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

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

The Company's Agricultural Division sales increased in the first nine months of
2021 by 26% compared to the first nine months of 2020. Agricultural sales
continue to rebound due to improved commodity prices, government subsidies, and
increased customer demand for our products aided by lower dealer inventory.
Negatively impacting this Division were higher input costs and supply chain
disruptions which affected manufacturing efficiencies. Notwithstanding these
challenges, the Division's income from operations recorded a 43% improvement
compared to the first nine months of 2020.
                                       17
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Consolidated income from operations was $89.1 million in the first nine months
of 2021 compared to $77.4 million in the first nine months of 2020. The results
of the first nine months of 2021 included a $1.1 million expense related to an
acceleration of stock expense. The 2020 first nine months results included a
$3.5 million non-cash inventory step-up expense related to the Morbark
acquisition which was completed in October of 2019. The Company's backlog
increased 154% to $645.1 million at the end of the third quarter of 2021 versus
a backlog of $254.5 million at the end of the third quarter of 2020. The
increase in the Company's backlog was primarily attributable to improved market
conditions and an increase in customer demand for our products in both Divisions
as outlined above.

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

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

Results of Operations

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


Net sales for the third quarter of 2021 were $338.3 million, an increase of
$46.5 million or 16% compared to $291.8 million for the third quarter of 2020.
Net sales during the third quarter of 2021 improved due to increased customer
demand for our products versus the third quarter of 2020 which was negatively
affected by the COVID-19 pandemic.

Net Industrial sales increased by $22.8 million or 12% to $219.0 million for the
third quarter of 2021 compared to $196.2 million during the same period in 2020.
The increase was due to strong customer demand for the Company's Industrial
products and to a lesser extent pricing actions. Governmental sales were strong
during the third quarter of 2021 as both state and municipal governmental
budgets recovered at a faster pace than was expected, but have not yet recovered
to pre-pandemic levels. Non-governmental sales were also up as forestry and tree
care markets were stronger as compared to the third quarter of 2020 where those
markets were materially impacted by the COVID-19 pandemic. Supply chain and
logistics disruptions, which affected our manufacturing efficiencies, had an
overall negative impact during the third quarter of 2021.

Net Agricultural sales were $119.3 million in the third quarter of 2021 compared
to $95.5 million for the same period in 2020, an increase of $23.8 million or
25%. The increase was mainly due to the continued strengthening of the
agricultural market that began in the second half of 2020 and recent price
increases.
                                       18
--------------------------------------------------------------------------------

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

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

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

Interest expense was $2.7 million for the third quarter of 2021 compared to $3.5
million during the same period in 2020, a decrease of $0.8 million. The decrease
in interest expense during the third quarter of 2021 versus the third quarter of
2020 was attributable to the Company's continued reduction of debt levels.

Other income (expense), net was $36.0 thousand of income for the third quarter of 2021 compared to $0.3 million of expense during the same period in 2020.

The

income in 2021 was primarily the result of changes in currency exchange rates
and the expense in 2020 was primarily the result of changes in currency exchange
rates.

Provision for income taxes was $10.2 million (37% of income before income tax)
in the third quarter of 2021 compared to $7.4 million (27% of income before
income tax) during the same period in 2020. The increase in the tax rate for
2021 was due to a provision made for stock-based compensation in anticipation of
a 28% full year effective tax rate and a non-deductible acceleration of
restricted stock awards related to the retirement of our former CEO.

The Company's net income after tax was $17.5 million or $1.47 per share on a
diluted basis for the third quarter of 2021 compared to $20.0 million or $1.69
per share on a diluted basis for the third quarter of 2020.  The decrease of
$2.5 million resulted from the factors described above.

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


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

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

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

                                       19
--------------------------------------------------------------------------------

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

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

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

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

Provision for income taxes was $23.5 million (28% of income before income taxes)
in the first nine months of 2021 compared to $17.7 million (27% of income before
income taxes) during the same period in 2020.

The Company's net income after tax was $61.0 million or $5.13 per share on a
diluted basis for the first nine months of 2021 compared to $48.6 million or
$4.10 per share on a diluted basis for the first nine months of 2020. The
increase of $12.4 million resulted from the factors described above.

Liquidity and Capital Resources


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

As of September 30, 2021, the Company had working capital of $440.1 million
which represents an increase of $81.9 million from working capital of $358.2
million at December 31, 2020. The increase in working capital was primarily a
result of volume-driven and inflation increases in accounts receivable and
inventory levels.

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

The Company had $85.0 million in cash and cash equivalents held by its foreign
subsidiaries as of September 30, 2021. The majority of these funds are at our
European and Canadian facilities. The Company will continue to repatriate
European and Canadian cash and cash equivalents in excess of amounts needed to
fund
                                       20
--------------------------------------------------------------------------------

operating and investing activities, but will need to monitor exchange rates to
determine the appropriate timing of such repatriation given the current relative
value of the U.S. dollar. Repatriated funds will initially be used to reduce
funded debt levels under the Company's current credit facility and subsequently
used to fund working capital, capital investments and acquisitions company-wide.

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

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

Critical Accounting Estimates


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

Critical Accounting Policies


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

Off-Balance Sheet Arrangements

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

                                       21
--------------------------------------------------------------------------------

Forward-Looking Information


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

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

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

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

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

                                       22

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