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

FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____

Commission file number 0-21220

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

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

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

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

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

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

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

At May 1, 2020, 11,860,233 shares of common stock, $.10 par value, of the registrant were outstanding.


1






































Alamo Group Inc. and Subsidiaries
 
INDEX
 
                                                                                                                                                                              
PART I.
FINANCIAL INFORMATION
PAGE
Item 1.
Interim Condensed Consolidated Financial Statements  (Unaudited)
3
March 31, 2020 and December 31, 2019
4
Three Months Ended March 31, 2020 and March 31, 2019
5
Three Months Ended March 31, 2020 and March 31, 2019
6
Three Months Ended March 31, 2020 and March 31, 2019
7
Three Months Ended March 31, 2020 and March 31, 2019
8
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, 2020 December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$ 84,425    $ 42,311   
Accounts receivable, net
248,773    237,837   
Inventories, net
273,648    267,674   
Prepaid expenses and other current assets
10,243    10,099   
Income tax receivable
6,878    12,907   
Total current assets
623,967    570,828   
Rental equipment, net
52,045    56,467   
Property, plant and equipment
297,729    302,113   
Less:  Accumulated depreciation
(141,349)   (141,388)  
Total property, plant and equipment, net
156,380    160,725   
Goodwill
195,561    198,022   
Intangible assets, net
202,344    206,272   
Deferred income taxes
1,026    1,078   
Other non-current assets
18,553    19,371   
Total assets
$ 1,249,876    $ 1,212,763   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable
$ 88,891    $ 81,986   
Income taxes payable
2,079    2,362   
Accrued liabilities
52,923    59,686   
Current maturities of long-term debt and finance lease obligations
18,826    18,840   
Total current liabilities
162,719    162,874   
Long-term debt and finance lease obligations, net of current maturities
471,429    425,141   
Long-term tax liability
6,778    7,432   
Deferred pension liability
1,654    1,844   
Other long-term liabilities
25,307    19,254   
Deferred income taxes
21,580    26,461   
Stockholders’ equity:
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,761,259 and 11,752,509 outstanding at March 31, 2020 and December 31, 2019, respectively
1,176    1,175   
Additional paid-in-capital
114,967    113,666   
Treasury stock, at cost; 82,600 shares at March 31, 2020 and December 31, 2019, respectively
(4,566)   (4,566)  
Retained earnings
514,320    500,320   
Accumulated other comprehensive loss
(65,488)   (40,838)  
Total stockholders’ equity
560,409    569,757   
Total liabilities and stockholders’ equity
$ 1,249,876    $ 1,212,763   

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) 2020 2019
Net sales:
Industrial
$ 229,975    $ 173,530   
Agricultural
84,473    88,404   
Total net sales 314,448    261,934   
Cost of sales 235,508    198,626   
Gross profit 78,940    63,308   
Selling, general and administrative expenses 51,248    39,847   
Amortization expenses 3,836    855   
Income from operations
23,856    22,606   
Interest expense (5,519)   (1,450)  
Interest income 356    173   
Other income (expense), net 2,341    (389)  
Income before income taxes
21,034    20,940   
Provision for income taxes 5,506    5,687   
Net Income
$ 15,528    $ 15,253   
Net income per common share:
Basic
$ 1.32    $ 1.30   
Diluted
$ 1.31    $ 1.30   
Average common shares:
Basic
11,761    11,698   
Diluted
11,827    11,777   
Dividends declared $ 0.13    $ 0.12   
 
 See accompanying notes.
 
4






































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

Three Months Ended
March 31,
(in thousands) 2020 2019
Net income $ 15,528    $ 15,253   
Other comprehensive (loss) income:
Foreign currency translation adjustment
(20,454)   720   
Net gain on pension and other post-retirement benefits
246    215   
Unrealized losses on derivative instruments
(4,390)   —   
Other comprehensive (loss) income before income tax expense
(24,598)   935   
Income tax expense related to items of other comprehensive income (52)   (45)  
Other comprehensive (loss) income
(24,650)   890   
Comprehensive (loss) income $ (9,122)   $ 16,143   

See accompanying notes.


5







































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


For three months ended March 31, 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   
Exercise of stock options
    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   




For three months ended March 31, 2019
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   
Other comprehensive income
—    —    —    —    15,253    890    16,143   
Stock-based compensation expense
—    —    627    —    —    —    627   
Repurchased shares (15)   —    —    (1,490)   —    —    (1,490)  
Exercise of stock options
11      236    —    —    —    237   
  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   


See accompanying notes.

6






































Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
(in thousands) 2020 2019
Operating Activities
Net income $ 15,528    $ 15,253   
Adjustment to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts
197    (24)  
Depreciation - Property, plant and equipment
4,624    3,338   
Depreciation - Rental equipment
2,516    2,088   
Amortization of intangibles
3,836    855   
Amortization of debt issuance costs
167    55   
Stock-based compensation expense
933    627   
Provision for deferred income tax (benefit) expense (4,095)   1,865   
Gain on sale of property, plant and equipment
(745)   (180)  
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
(16,306)   (34,936)  
Inventories
(11,675)   (17,098)  
Rental equipment
1,906    (7,453)  
Prepaid expenses and other assets
(1,139)   (1,472)  
Trade accounts payable and accrued liabilities
2,833    1,563   
Income taxes payable
5,829    2,925   
Long-term tax payable (654)   258   
Other assets and long-term liabilities, net
1,819    (25)  
Net cash provided by (used in) operating activities
5,574    (32,361)  
Investing Activities
Acquisitions, net of cash acquired —    (50,477)  
Purchase of property, plant and equipment (7,378)   (5,284)  
Proceeds from sale of property, plant and equipment 2,385    472   
Net cash used in investing activities (4,993)   (55,289)  
Financing Activities
Borrowings on bank revolving credit facility 74,000    103,000   
Repayments on bank revolving credit facility (24,000)   (8,000)  
Principal payments on long-term debt and finance leases (3,791)   (37)  
Dividends paid (1,528)   (1,404)  
Proceeds from exercise of stock options 369    237   
Treasury stock repurchased —    (1,490)  
Net cash provided by financing activities 45,050    92,306   
Effect of exchange rate changes on cash and cash equivalents (3,517)   324   
Net change in cash and cash equivalents 42,114    4,980   
Cash and cash equivalents at beginning of the year 42,311    34,043   
Cash and cash equivalents at end of the period $ 84,425    $ 39,023   
Cash paid during the period for:
Interest
$ 5,513    $ 1,061   
Income taxes
2,690    2,814   
See accompanying notes.
7






































Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
March 31, 2020
 
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.  The balance sheet at December 31, 2019 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, 2019 (the "2019 10-K").

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 disclosures 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 current 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 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. 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.


8






































2.  Business Combinations

Morbark, LLC.

On October 24, 2019, the Company completed the acquisition of 100% of the outstanding capital shares of Morbark, LLC. ("Morbark") a former portfolio company of Stellex Capital Management. Morbark manufacturers equipment and aftermarket parts for forestry, tree maintenance, biomass, land management and recycling markets. These products are marketed under the Morbark, Rayco, Denis Cimaf and Boxer Equipment brand names. The total consideration for the purchase was approximately $354.0 million on a debt free basis and subject to certain post-closing adjustments.

The primary reason for the acquisition was to expand 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.

The valuation of Morbark resulted in goodwill of $103.3 million, all of which has been assigned to the Company's Industrial reporting segment, $74.5 million of goodwill is tax deductible, the remaining balance is not.

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. Certain estimated values are not yet finalized and are subject to change. The Company will finalize goodwill and deferred tax amounts once the analysis is complete.

During the first quarter of 2020, Morbark generated approximately $53.3 million of net sales and $2.3 million of net income. The Company has included the operating results of Morbark in its consolidated financial statements since the date of acquisition.

The following table reflects the estimated fair value of the assets acquired and liabilities assumed 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 42,972   
Intangible assets 149,790   
Deferred tax liability (7,503)  
Other liabilities assumed (32,275)  
Net assets assumed $ 246,235   
Goodwill 103,341   
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 acquisition 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.
9







































The Company completed its review of the valuation of the purchase price allocation for Morbark 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.

3.  Accounts Receivable
 
Accounts receivable is shown net of sales discounts and the allowance for doubtful accounts.

At March 31, 2020 the Company had $19.4 million in reserves for sales discounts compared to $16.9 million at December 31, 2019 related to products shipped to our customers under various promotional programs. The
change was primarily due to additional discounts reserved related to sales of the Company's agricultural products sold during the first three months of 2020.
 
4.  Inventories
 
Inventories valued at LIFO cost represented 45% and 42% of total inventory at March 31, 2020 and December 31, 2019, respectively. The excess of current cost over LIFO valued inventories was approximately $10.9 million at March 31, 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)
March 31, 2020 December 31, 2019
Finished goods
$ 236,964    $ 227,823   
Work in process
21,972    21,918   
Raw materials
14,712    17,933   
Inventories, net $ 273,648    $ 267,674   
 
Inventory obsolescence reserves were $9.3 million at March 31, 2020 and $8.2 million at December 31, 2019.

5. Rental Equipment

Rental equipment is shown net of accumulated depreciation of $15.7 million and $14.6 million at March 31, 2020 and December 31, 2019, respectively. The Company recognized depreciation expense of $2.5 million and $2.1 million for the three months ended March 31, 2020 and March 31, 2019.

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 March 31, 2020 and December 31, 2019, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.

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7. Goodwill and Intangible Assets

The following is the summary of changes to the Company's Goodwill for the three months ended March 31, 2020:
Industrial Agricultural Consolidated
(in thousands)
Balance at December 31, 2019 $ 183,307    $ 14,715    $ 198,022   
Translation adjustment (1,247)   (1,893)   (3,140)  
Goodwill adjustment 679    —    679   
Balance at March 31, 2020 $ 182,739    $ 12,822    $ 195,561   

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, 2020 December 31, 2019
Definite:
Trade names and trademarks
15-25 years
$ 66,734    $ 67,222   
Customer and dealer relationships
8-15 years
121,888    121,508   
Patents and drawings
3-12 years
28,255    28,485   
Favorable leasehold interests
7 years
4,200    4,200   
Total at cost 221,077    221,415   
Less accumulated amortization (24,233)   (20,643)  
Total net 196,844    200,772   
Indefinite:
Trade names and trademarks 5,500    5,500   
Total Intangible Assets $ 202,344    $ 206,272   

The Company recognized amortization expense of $3.8 million and $0.9 million for the three months ending March 31, 2020 and 2019, respectively. The increase in amortization is related to the intangible assets created in the Morbark acquisition.

As of March 31, 2020, the Company had $202.3 million of intangible assets, which represents 16% 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 components of lease cost were as follows:
Components of Lease Cost
Three Months Ended
March 31,
(in thousands) 2020 2019
Finance lease cost:
     Amortization of right-of-use assets $ 24    $ 31   
     Interest on lease liabilities    
Operating lease cost 1,225    1,024   
Short-term lease cost 235    52   
Variable lease cost 118    105   
Total lease cost $ 1,604    $ 1,214   

Rent expense for the three months ending March 31, 2020 and 2019 was immaterial.
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Maturities of lease liabilities were as follows:
Future Minimum Lease Payments
March 31, 2020 December 31, 2019
(in thousands) Operating Leases Finance Leases Operating Leases Finance Leases
2020 $ 3,143    (a) $ 69    (a) $ 4,305    $ 97   
2021 2,813    79    2,718    83   
2022 2,094    41    2,051    45   
2023 1,536    17    1,459    22   
2024 993    17    941    19   
Thereafter 2,603    12    2,587    14   
Total minimum lease payments $ 13,182    $ 235    $ 14,061    $ 280   
Less imputed interest (1,079)   (14)   (1,100)   (16)  
Total lease liabilities $ 12,103    $ 221    $ 12,961    $ 264   
(a) Amounts represent remaining three months of payments due for 2019.
Future Lease Commencements

As of March 31, 2020, we have no additional operating leases that have not yet commenced.

Supplemental balance sheet information related to leases was as follows:

Operating Leases
(in thousands) March 31, 2020 December 31, 2019
Other non-current assets
$ 12,018    $ 12,858   
Accrued liabilities 3,634    3,972   
Other long-term liabilities 8,469    8,989   
    Total operating lease liabilities $ 12,103    $ 12,961   
Finance Leases
(in thousands) March 31, 2020 December 31, 2019
Property, plant and equipment, gross $ 471    $ 524   
Accumulated Depreciation (242)   (265)  
    Property, plant and equipment, net $ 229    $ 259   
Current maturities of long-term debt and finance lease obligations $ 76    $ 90   
Long-term debt and finance lease obligations, net of current maturities 145    174   
    Total finance lease liabilities $ 221    $ 264   
Weighted Average Remaining Lease Term
    Operating leases 5.05 5.10
    Finance leases 3.42 3.47
Weighted Average Discount Rate
    Operating leases 3.31  % 3.29  %
    Finance leases 3.43  % 3.39  %

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Supplemental Cash Flow information related to leases was as follows:
Three Months Ended
March 31,
(in thousands) 2020 2019
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows from finance leases $   $ 10   
     Operating cash flows from operating leases 1,122    4,507   
     Financing cash flows from finance leases 23    122   

9. Debt

The components of long-term debt are as follows:
 
(in thousands)
March 31, 2020 December 31, 2019
Current Maturities:
    Finance lease obligations $ 76    $ 90   
    Term debt 18,750    18,750   
18,826    18,840   
Long-term debt:
     Finance lease obligations
145    174   
Term debt, net 276,284    279,967   
     Bank revolving credit facility 195,000    145,000   
         Total Long-term debt 471,429    425,141   
Total debt $ 490,255    $ 443,981   

As of March 31, 2020, $3.0 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 $119.2 million in available borrowings.

10.  Common Stock and Dividends
 
Dividends declared and paid on a per share basis were as follows:
Three Months Ended
March 31,
2020 2019
Dividends declared
$ 0.13    $ 0.12   
Dividends paid
$ 0.13    $ 0.12   

On April 1, 2020, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.13 per share, which was paid on April 29, 2020, to shareholders of record at the close of business on April 15, 2020.
 
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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
March 31,
(In thousands, except per share)
2020 2019
Net Income
$ 15,528    $ 15,253   
Average Common Shares:
Basic (weighted-average outstanding shares)
11,761    11,698   
Dilutive potential common shares from stock options
66    79   
Diluted (weighted-average outstanding shares)
11,827    11,777   
Basic earnings per share
$ 1.32    $ 1.30   
Diluted earnings per share
$ 1.31    $ 1.30   

12. Income Taxes

Tax Rate Methodology

The Company has historically calculated 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 are not currently able to estimate our annual effective income tax rate for 2020. If a reliable estimate of the estimated effective tax rate cannot be made, the actual effective tax rate for the year to date may be the best estimate of the annual effective tax rate.

The Company has calculated the actual effective tax rate for the quarter ending March 31, 2020.

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
Three Months Ended
March 31,
(in thousands) 2020 2019
Net Sales
Wholegoods
$ 243,531    $ 207,771   
Parts
59,610    48,255   
Other
11,307    5,908   
Consolidated $ 314,448    $ 261,934   
Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.

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Revenue by Geographical Location
Three Months Ended
March 31,
(in thousands) 2020 2019
Net Sales
United States
$ 234,159    $ 185,313   
France
22,083    25,935   
Canada
13,612    13,944   
United Kingdom
13,229    13,798   
Brazil
4,546    4,273   
Netherlands 7,647    2,674   
China 77    1,212   
Germany 2,344    889   
Australia
2,353    2,496   
Other
14,398    11,400   
Consolidated $ 314,448    $ 261,934   

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 March 31, 2020:  
Three Months Ended
March 31,
(in thousands)
2020 2019
Net Sales
Industrial
$ 229,975    $ 173,530   
Agricultural
84,473    88,404   
Consolidated $ 314,448    $ 261,934   
Income from Operations
Industrial
$ 18,123    $ 16,947   
Agricultural
5,733    5,659   
Consolidated $ 23,856    $ 22,606   

(in thousands)
March 31, 2020 December 31, 2019
Goodwill
Industrial
$ 182,739    $ 183,307   
Agricultural
12,822    14,715   
Consolidated $ 195,561    $ 198,022   
Total Identifiable Assets
       Industrial
$ 985,099    $ 922,738   
       Agricultural
264,777    290,025   
Consolidated $ 1,249,876    $ 1,212,763   

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14.  Contingent Matters
  
The Company is subject to various legal actions which have arisen in the ordinary course of its business. The most prevalent of such actions relate to product liability, which is 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 ultimate 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 to a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways, 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.

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
2020 2019
Industrial 73.1  % 66.2  %
Agricultural 26.9  % 33.8  %
Total sales, net
100.0  % 100.0  %
  
Three Months Ended
March 31,
Cost Trends and Profit Margin, as
Percentages of Net Sales
2020 2019
Gross profit 25.1  % 24.2  %
Income from operations 7.6  % 8.6  %
Income before income taxes 6.7  % 8.0  %
Net income 4.9  % 5.8  %
 
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, the World Health Organization categorized the current coronavirus disease (“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. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter-in-place” and “stay-at-home” orders, travel restrictions, business curtailments, school closures and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The Company has begun to see the impacts of COVID-19 on its
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markets and operations including operational disruptions and softening demand. The full extent to which COVID-19 will 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.

For the first three months of 2020, the Company's net sales and net income increased by approximately 20% and 1.8% respectively when compared to the same period in 2019. The increase in net sales and net income was due to the acquisitions of Morbark and Dutch Power. However, the COVID-19 pandemic began to materially affect our operations in March, which negatively impacted the Company's overall financial performance during the first quarter of 2020.

The Company's Industrial Division experienced a 32.5% increase in sales for the first three months of 2020 compared to the first three months of 2019 all due to the acquisitions of Morbark and Dutch Power. Without factoring in contributions from Morbark and Dutch Power, sales across all legacy Industrial product groups (with the exception of vegetation control, which was slightly up) were down during the first three months of 2020 compared to the same period in 2019, primarily as a result of adverse impacts from the COVID-19 pandemic which included temporary plant closures in France and Canada, and other operational disruptions across the Division.
The Company's Agricultural Division sales were down in the first three months of 2020 by 4.4% compared to the first three months of 2019. Agricultural sales during the first two months of the quarter showed improvement from the ongoing soft market agricultural market conditions of the last several years, but the effects of the COVID-19 pandemic began to hurt Agricultural sales as well as operations in March, as the Division's operations in the UK and France were temporarily closed while the Division's North American units suffered less drastic operational disruptions.

Despite the negative effects of the coronavirus, consolidated income from operations was $23.8 million in the first quarter of 2020 which included almost $2.0 million of non-cash inventory step-up expense related to the Morbark acquisition. This was a 5.5% improvement when compared to the first three months of 2019, but the Company's backlog decreased 9.8% to $232.6 million at the end of the first quarter of 2020 versus the backlog of $257.8 million at the end of the first quarter of 2019. The decrease in the Company's backlog was primarily attributable to negative effects from the COVID-19 pandemic.

We believe the COVID-19 pandemic will continue to adversely impact our business in the second quarter 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, continuing governmental actions taken in response, including the extent to which economies will remain under stay-at-home or similar orders, and the immediate and longer term economic consequences felt by our dealers and government customers as a result of the pandemic, which could result in budgetary tightening and weaker demand for our products. We have experienced delays in customer deliveries, and we expect to see continued uncertainty when it comes to customer behavior which could result in order delays or a reduction in overall market demand.

In response to the pandemic, the Company has taken a number of actions to maintain our financial stability including adjusting staff levels based on the continuous changes in customer demand, freezing and/or rolling back pay increases for salaried employees in the U.S. and most of our international operations, 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.
While the direct and indirect consequences of the COVID-19 pandemic will certainly pose the greatest risk for the Company during 2020, the Company may also be negatively affected by several other factors such as an increase in tariff rates, ongoing trade disputes, 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K").
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Results of Operations
 
Three Months Ended March 31, 2020 vs. Three Months Ended March 31, 2019
 
Net sales for the first quarter of 2020 were $314.4 million, an increase of $52.5 million or 20.0% compared to $261.9 million for the first quarter of 2019.  The increase in sales was due to the acquisition of Morbark which contributed $53.2 million in net sales and from the acquisition of Dutch Power which added an increase of $9.6 million of net sales quarter over quarter. Negatively affecting net sales during the first quarter of 2020 was the outbreak of the COVID-19 virus which began to affect the business during the month of March.
 
Net Industrial sales increased by $56.4 million or 32.5% to $230.0 million for the first quarter of 2020 compared to $173.5 million during the same period in 2019. The increase was attributable to the acquisitions of Morbark and Dutch Power. The combined increase from the acquisitions was $66.5 million during the first quarter of 2020 compared to a $3.6 million contribution by Dutch Power in the first quarter of 2019. The impact from the COVID-19 issues began to materially affect the Division during the month of March. This included temporary plant closures in France and Canada along with other operational disruptions throughout North America from health concerns and governmental directives and customer delivery restrictions.
 
Net Agricultural sales were $84.5 million in the first quarter of 2020 compared to $88.4 million for the same period in 2019, a decrease of $3.9 million or 4.4%. The decrease was primarily the result of the COVID-19 pandemic as sales during the first part of 2020 began to show signs of improvement from the soft agricultural market conditions that have hurt this 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 coronavirus affected both sales and operations in March and specifically hurt both the U.K. and French Agricultural business as they experienced temporary plant closures.

Gross profit for the first quarter of 2020 was $78.9 million (25.1% of net sales) compared to $63.3 million (24.2% of net sales) during the same period in 2019, an increase of $15.6 million.  The increase in gross profit during the first quarter of 2020 was primarily due to the acquisition of Morbark and Dutch Power. Negatively affecting the gross margin and gross margin percentage during the first quarter of 2020 were almost $2.0 million of inventory step-up charge related to the Morbark acquisition.

Selling, general and administrative expenses (“SG&A”) were $51.2 million (16.3% of net sales) during the first quarter of 2020 compared to $39.8 million (15.2% of net sales) during the same period of 2019, an increase of $11.4 million. The increase came from the acquisitions of Morbark and Dutch Power which accounted for $9.3 million of the net increase quarter over quarter. Amortization expense in the first quarter of 2020 was $3.8 million compared to $0.9 million in the same period in 2019, an increase of $2.9 million. The increased amortization expense was primarily from the acquisitions of Dutch Power and Morbark.
 
Interest expense was $5.5 million for the first quarter of 2020 compared to $1.5 million during the same period in 2019, an increase of $4.0 million.  The increase during the first quarter of 2020 came from increased borrowings due to the Morbark acquisition in October of 2019.
 
Other income (expense), net was $2.3 million of income for the first quarter of 2020 compared to $0.4 million of expense during the same period in 2019.  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 $5.5 million (26.2% of income before income tax) in the first quarter of 2020 compared to $5.7 million (27.2% of income before income tax) during the same period in 2019.
    
The Company’s net income after tax was $15.5 million or $1.31 per share on a diluted basis for the first quarter of 2020 compared to $15.3 million or $1.30 per share on a diluted basis for the first quarter of 2019.  The increase of $0.2 million resulted from the factors described above.

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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, 2020, the Company had working capital of $461.2 million which represents an increase of $53.2 million from working capital of $408.0 million at December 31, 2019. The increase in working capital was primarily due to higher cash balances held in our foreign subsidiaries. The Company limited repatriation of cash due to a strong U.S. dollar which negatively affected currency exchange rates. Also increasing working capital, to a lesser extent, was seasonality.

Capital expenditures were $7.4 million for the first three months of 2020, compared to $5.3 million during the first three 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, but we began to limit such expenditures in March of 2020 in response to the COVID-19 pandemic. 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 $5.0 million during the first three months of 2020 compared to $55.3 million during the first three months of 2019. The 2019 increase in the use of funds was to acquire Dutch Power which was approximately $52.6 million.
Net cash provided by financing activities was $45.1 million and $92.3 million during the three month periods ended March 31, 2020 and March 31, 2019, respectively. The majority of the increase in net cash provided by financing activities in 2019 as compared to 2020, was due to borrowings to finance the acquisition of Dutch Power.

The Company had $79.5 million in cash and cash equivalents held by its foreign subsidiaries as of March 31, 2020. The majority of these funds are at our European and Canadian facilities. While the Company intends to use some of these funds for working capital and capital expenditures outside the U.S., changes in the U.S. tax laws have substantially mitigated the cost of repatriation and the Company intends to repatriate excess cash from our European affiliates. The Company will continue to repatriate European 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 strength 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 of 5.0% per year with the remaining principal due in 5 years. Up to $350.0 million is available under the Credit Agreement pursuant to a Revolver Facility which terminates in 5 years. 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, 2020, $491.3 million was outstanding under the Credit Agreement, $296.3 million on the Term Facility and $195.0 million on the Revolver Facility. On March 31, 2020, $3.0 million of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course
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of business as required by vendors' contracts resulting in $119.2 million in available borrowings. The Company is in compliance with the covenants under the Agreement as of March 31, 2020.

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 2019 Form 10-K, the policies relating to the business combinations, sales discounts, and goodwill and other intangible assets involved 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 2019 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 impact of the current COVID-19 outbreak; ongoing weakness in the agricultural sector; 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; 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,
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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, particularly steel and steel products; energy cost; increased cost of new governmental regulations which effect corporations including related fines and penalties (such as the new European General Data Protection Regulation); 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 has begun to see the impacts of COVID-19 on its markets and operations including operational disruption and softening demand. The full extent to which COVID-19 will 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.

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 six months.  As of March 31, 2020, the Company had $0.5 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
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$0.1 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 decreased stockholders’ equity by $20.5 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, 2020.  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 first quarter 2020 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $2.5 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 it's total lenders that hedge future cash flows related to it's outstanding debt obligations. As of March 31, 2020, the Company had $491.3 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.

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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 Matters to our interim condensed consolidated financial statements.
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, there have not been any material changes from the risk factors previously disclosed in the 2019 Form 10-K for the year ended December 31, 2019.

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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, 2020:

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)
January 1-31, 2020 —    —    —    $25,861,222
February 1-29, 2020 —    —    —    $25,861,222
March 1-31, 2020 —    —    —    $25,861,222
(a) On December 13, 2018, the Board authorized a stock repurchase program of up to $30.0 million of the Company's common stock. The program shall have a term of five (5) years, terminating on December 12, 2023.


Item 3. - Defaults Upon Senior Securities

None.
 
Item 4. - Mine Safety Disclosures

Not Applicable
 


Item 5. - Other Information

(a) Reports on Form 8-K

None.
 
(b) Other Information
 
None.
 
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Item 6. - Exhibits
 
(a)   Exhibits
Exhibits Exhibit Title
Incorporated by Reference From the Following Documents
10.1 Filed as Exhibit 10.1 to Form 8-K, March 10, 2020
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

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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 6, 2020
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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