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 JUNESEPTEMBER 30, 2019
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)
Delaware74-1621248
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)

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

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

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

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

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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 July 26,October 25, 2019, 11,818,17911,826,104 shares of common stock, $.10 par value, of the registrant were outstanding.


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Alamo Group Inc. and Subsidiaries
 
INDEX
 
                                                                                                                                                                              
PART I.FINANCIAL INFORMATIONPAGE
Item 1.Interim Condensed Consolidated Financial Statements  (Unaudited)
JuneSeptember 30, 2019 and December 31, 2018
Three and SixNine Months Ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018
Three and SixNine Months Ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018
Three and SixNine Months Ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018
SixNine Months Ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018
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)
(in thousands, except share amounts)
June 30, 2019December 31, 2018
(in thousands, except share amounts)
September 30, 2019December 31, 2018
ASSETSASSETSASSETS
Current assets:Current assets:Current assets:
Cash and cash equivalentsCash and cash equivalents$48,190 $34,043 Cash and cash equivalents$60,279  $34,043  
Accounts receivable, netAccounts receivable, net267,064 228,098 Accounts receivable, net243,296  228,098  
Inventories, netInventories, net205,910 176,630 Inventories, net206,516  176,630  
Prepaid expenses and other current assetsPrepaid expenses and other current assets6,690 5,327 Prepaid expenses and other current assets7,771  5,327  
Income tax receivableIncome tax receivable8,250 8,745 Income tax receivable6,615  8,745  
Total current assetsTotal current assets536,104 452,843 Total current assets524,477  452,843  
Rental equipment, netRental equipment, net51,517 43,978 Rental equipment, net56,177  43,978  
Property, plant and equipmentProperty, plant and equipment243,489 219,135 Property, plant and equipment243,777  219,135  
Less: Accumulated depreciationLess: Accumulated depreciation(138,022)(131,905)Less: Accumulated depreciation(136,838) (131,905) 
Total property, plant and equipment, netTotal property, plant and equipment, net105,467 87,230 Total property, plant and equipment, net106,939  87,230  
GoodwillGoodwill93,134 83,243 Goodwill93,468  83,243  
Intangible assets, netIntangible assets, net62,725 48,857 Intangible assets, net59,205  48,857  
Deferred income taxesDeferred income taxes961 1,783 Deferred income taxes1,060  1,783  
Other non-current assetsOther non-current assets16,671 3,699 Other non-current assets15,067  3,699  
Total assetsTotal assets$866,579 $721,633 Total assets$856,393  $721,633  
LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:Current liabilities:Current liabilities:
Trade accounts payableTrade accounts payable$67,391 $54,083 Trade accounts payable$69,009  $54,083  
Income taxes payableIncome taxes payable1,926 2,865 Income taxes payable2,516  2,865  
Accrued liabilitiesAccrued liabilities47,707 43,785 Accrued liabilities48,525  43,785  
Current maturities of long-term debt and finance lease obligationsCurrent maturities of long-term debt and finance lease obligations131 119 Current maturities of long-term debt and finance lease obligations113  119  
Total current liabilitiesTotal current liabilities117,155 100,852 Total current liabilities120,163  100,852  
Long-term debt and finance lease obligations, net of current maturitiesLong-term debt and finance lease obligations, net of current maturities166,232 85,179 Long-term debt and finance lease obligations, net of current maturities150,192  85,179  
Long-term tax liabilityLong-term tax liability6,378 6,120 Long-term tax liability6,710  6,120  
Deferred pension liabilityDeferred pension liability1,719 1,944 Deferred pension liability1,606  1,944  
Other long-term liabilitiesOther long-term liabilities14,340 8,436 Other long-term liabilities14,190  8,436  
Deferred income taxesDeferred income taxes17,923 11,731 Deferred income taxes12,480  11,731  
Stockholders’ equity:Stockholders’ equity:Stockholders’ equity:
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,737,993 and 11,662,688 outstanding at June 30, 2019 and December 31, 2018, respectively1,174 1,166 
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,747,829 and 11,662,688 outstanding at September 30, 2019 and December 31, 2018, respectivelyCommon stock, $0.10 par value, 20,000,000 shares authorized; 11,747,829 and 11,662,688 outstanding at September 30, 2019 and December 31, 2018, respectively1,175  1,166  
Additional paid-in-capitalAdditional paid-in-capital111,476 108,422 Additional paid-in-capital112,629  108,422  
Treasury stock, at cost; 72,600 and 42,600 shares at June 30, 2019 and December 31, 2018, respectively(3,381)(426)
Treasury stock, at cost; 82,600 and 42,600 shares at September 30, 2019 and December 31, 2018, respectivelyTreasury stock, at cost; 82,600 and 42,600 shares at September 30, 2019 and December 31, 2018, respectively(4,566) (426) 
Retained earningsRetained earnings476,152 443,040 Retained earnings492,161  443,040  
Accumulated other comprehensive lossAccumulated other comprehensive loss(42,589)(44,831)Accumulated other comprehensive loss(50,347) (44,831) 
Total stockholders’ equityTotal stockholders’ equity542,832 507,371 Total stockholders’ equity551,052  507,371  
Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity$866,579 $721,633 Total liabilities and stockholders’ equity$856,393  $721,633  

See accompanying notes.
3






































Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)
 
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts)(in thousands, except per share amounts)2019201820192018(in thousands, except per share amounts)2019201820192018
Net sales:Net sales:Net sales:
IndustrialIndustrial$168,000 $150,031 $326,425 $282,198 Industrial$158,499  $156,721  $484,924  $438,919  
AgriculturalAgricultural55,159 59,071 108,332 117,718 Agricultural59,797  61,464  168,129  179,182  
EuropeanEuropean62,027 48,023 112,363 95,296 European53,533  39,387  165,896  134,683  
Total net salesTotal net sales285,186 257,125 547,120 495,212 Total net sales271,829  257,572  818,949  752,784  
Cost of salesCost of sales212,053 190,671 410,679 368,501 Cost of sales203,119  190,800  613,798  559,301  
Gross profitGross profit73,133 66,454 136,441 126,711 Gross profit68,710  66,772  205,151  193,483  
Selling, general and administrative expensesSelling, general and administrative expenses43,784 39,668 84,486 78,564 Selling, general and administrative expenses44,255  38,523  128,741  117,087  
Income from operationsIncome from operations29,349 26,786 51,955 48,147 Income from operations24,455  28,249  76,410  76,396  
Interest expenseInterest expense(1,935)(1,497)(3,385)(2,834)Interest expense(1,837) (1,399) (5,222) (4,233) 
Interest incomeInterest income330 109 503 209 Interest income359  100  862  309  
Other expense, net(295)(92)(684)(226)
Other income (expense), netOther income (expense), net242  (265) (442) (491) 
Income before income taxesIncome before income taxes27,449 25,306 48,389 45,296 Income before income taxes23,219  26,685  71,608  71,981  
Provision for income taxesProvision for income taxes6,782 6,535 12,469 11,942 Provision for income taxes5,801  3,142  18,270  15,084  
Net IncomeNet Income$20,667 $18,771 $35,920 $33,354 Net Income$17,418  $23,543  $53,338  $56,897  
Net income per common share:Net income per common share:Net income per common share:
BasicBasic$1.76 $1.61 $3.07 $2.87 Basic$1.48  $2.01  $4.55  $4.88  
DilutedDiluted$1.75 $1.60 $3.05 $2.84 Diluted$1.47  $2.00  $4.52  $4.84  
Average common shares:Average common shares:Average common shares:
BasicBasic11,726 11,652 11,712 11,629 Basic11,748  11,689  11,724  11,649  
DilutedDiluted11,798 11,759 11,787 11,749 Diluted11,813  11,777  11,796  11,758  
Dividends declaredDividends declared$0.12 $0.11 $0.24 $0.22 Dividends declared$0.12  $0.11  $0.36  $0.33  
 
 See accompanying notes.
 
4






































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

Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)(in thousands)2019201820192018(in thousands)2019201820192018
Net incomeNet income$20,667 $18,771 $35,920 $33,354 Net income$17,418  $23,543  $53,338  $56,897  
Other comprehensive income:
Other comprehensive loss:Other comprehensive loss:
Foreign currency translation adjustmentsForeign currency translation adjustments1,194 (11,850)1,914 (8,733)Foreign currency translation adjustments(9,791) (924) (7,877) (9,657) 
Net gain on pension and other post-retirement benefitsNet gain on pension and other post-retirement benefits215 228 430 423 Net gain on pension and other post-retirement benefits215  211  645  634  
Unrealized loss during the period related to derivatives(12)— (12)— 
Other comprehensive income (loss) before income tax expense1,397 (11,622)2,332 (8,310)
Unrealized gain during the period related to derivativesUnrealized gain during the period related to derivatives1,864  —  1,852  —  
Other comprehensive loss before income tax expenseOther comprehensive loss before income tax expense(7,712) (713) (5,380) (9,023) 
Income tax expense related to items of other comprehensive incomeIncome tax expense related to items of other comprehensive income(45)(20)(90)(89)Income tax expense related to items of other comprehensive income(46) (44) (136) (133) 
Other comprehensive income (loss)1,352 (11,642)2,242 (8,399)
Other comprehensive lossOther comprehensive loss(7,758) (757) (5,516) (9,156) 
Comprehensive incomeComprehensive income$22,019 $7,129 $38,162 $24,955 Comprehensive income$9,660  $22,786  $47,822  $47,741  

See accompanying notes.



5






































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


For six months ended June 30, 2019
For nine months ended September 30, 2019For nine months ended September 30, 2019
Common Stock
Additional
Paid-in Capital
Treasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
Common Stock
Additional
Paid-in Capital
Treasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)(in thousands)SharesAmountTreasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
Balance at December 31, 2018Balance at December 31, 201811,620 $1,166 $108,422 $(426)$443,040 $(44,831)$507,371 Balance at December 31, 201811,620  $1,166  $108,422  $(426) $443,040  $(44,831) $507,371  
Net incomeNet income— 15,253 — 15,253 Net income—  —  —  —  15,253  —  15,253  
Translation adjustmentTranslation adjustment— 720 Translation adjustment—  —  —  —  —  720  720  
Net actuarial gain arising during period, net of taxesNet actuarial gain arising during period, net of taxes— 170 Net actuarial gain arising during period, net of taxes—  —  —  —  —  170  170  
Stock-based compensationStock-based compensation— 627 — 627 Stock-based compensation—  —  627  —  —  —  627  
Common stock repurchaseCommon stock repurchase(15)— (1,490)— (1,490)Common stock repurchase(15) —  —  (1,490) —  —  (1,490) 
Exercise of stock optionsExercise of stock options11 236 — 237 Exercise of stock options11   236  —  —  —  237  
Dividends paid ($0.12 per share)Dividends paid ($0.12 per share)— (1,404)— (1,404)Dividends paid ($0.12 per share)—  —  —  —  (1,404) —  (1,404) 
Balance at March 31, 2019Balance at March 31, 201911,616 $1,167 $109,285 $(1,916)$456,889 $(43,941)$521,484 Balance at March 31, 201911,616  $1,167  $109,285  $(1,916) $456,889  $(43,941) $521,484  
Net incomeNet income— 20,667 — 20,667 Net income—  —  —  —  20,667  —  20,667  
Translation adjustmentTranslation adjustment— 1,194 Translation adjustment—  —  —  —  —  1,194  1,194  
Unrealized derivative loss, net of taxesUnrealized derivative loss, net of taxes— (12)Unrealized derivative loss, net of taxes—  —  —  —  —  (12) (12) 
Net actuarial gain arising during period, net of taxesNet actuarial gain arising during period, net of taxes— 170 Net actuarial gain arising during period, net of taxes—  —  —  —  —  170  170  
Stock-based compensationStock-based compensation— 948 — 948 Stock-based compensation—  —  948  —  —  —  948  
Common stock repurchaseCommon stock repurchase(15)— (590)(1,465)— (2,055)Common stock repurchase(15) —  (590) (1,465) —  —  (2,055) 
Exercise of stock optionsExercise of stock options64 1,833 — 1,840 Exercise of stock options64   1,833  —  —  —  1,840  
Dividends paid ($0.12 per share)Dividends paid ($0.12 per share)— (1,404)— (1,404)Dividends paid ($0.12 per share)—  —  —  —  (1,404) —  (1,404) 
Balance at June 30, 2019Balance at June 30, 201911,665 $1,174 $111,476 $(3,381)$476,152 $(42,589)$542,832 Balance at June 30, 201911,665  $1,174  $111,476  $(3,381) $476,152  $(42,589) $542,832  
Net incomeNet income—  —  —  —  17,418  —  17,418  
Translation adjustmentTranslation adjustment—  —  —  —  —  (9,791) (9,791) 
Unrealized derivative gain, net of taxesUnrealized derivative gain, net of taxes—  —  —  —  —  1,864  1,864  
Net actuarial gain arising during period, net of taxesNet actuarial gain arising during period, net of taxes—  —  —  —  —  169  169  
Stock-based compensationStock-based compensation—  —  766  —  —  —  766  
Common stock repurchaseCommon stock repurchase(10) —  —  (1,185) —  —  (1,185) 
Exercise of stock optionsExercise of stock options10   387  —  —  —  388  
Dividends paid ($0.12 per share)Dividends paid ($0.12 per share)—  —  —  —  (1,409) —  (1,409) 
Balance at September 30, 2019Balance at September 30, 201911,665  $1,175  $112,629  $(4,566) $492,161  $(50,347) $551,052  










6






































For six months ended June 30, 2018
Common StockAdditional Paid-in CapitalTreasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)SharesAmount
Balance at December 31, 201711,534 $1,158 $103,864 $(426)$374,678 $(30,166)$449,108 
Net income— — — — 14,583 — 14,583 
Translation adjustment— — — — — 3,117 3,117 
Net actuarial gain arising during period, net of taxes— — — — — 126 126 
Stock-based compensation— — 458 — — — 458 
Exercise of stock options— 266 — — — 266 
Dividends paid ($0.11 per share)— — — — (1,276)— (1,276)
Balance at March 31, 201811,543 $1,158 $104,588 $(426)$387,985 $(26,923)$466,382 
Net income— — — — 18,771 — 18,771 
Translation adjustment— — — — — (11,850)(11,850)
Net actuarial gain arising during period, net of taxes— — — — — 208 208 
Stock-based compensation— — 730 — — — 730 
Common stock repurchase— — (437)— — — (437)
Exercise of stock options67 1,913 — — — 1,920 
Dividends paid ($0.11 per share)— — — — (1,277)— (1,277)
Balance at June 30, 201811,610 $1,165 $106,794 $(426)$405,479 $(38,565)$474,447 
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)


For nine months ended September 30, 2018
Common StockAdditional Paid-in CapitalTreasury StockRetained Earnings
Accumulated
Other
Comprehensive Loss
Total Stock-
holders’ Equity
(in thousands)SharesAmount
Balance at December 31, 201711,534  $1,158  $103,864  $(426) $374,678  $(30,166) $449,108  
Net income—  —  —  —  14,583  —  14,583  
Translation adjustment—  —  —  —  —  3,117  3,117  
Net actuarial gain arising during period, net of taxes—  —  —  —  —  126  126  
Stock-based compensation—  —  458  —  —  —  458  
Exercise of stock options —  266  —  —  —  266  
Dividends paid ($0.11 per share)—  —  —  —  (1,276) —  (1,276) 
Balance at March 31, 201811,543  $1,158  $104,588  $(426) $387,985  $(26,923) $466,382  
Net income—  —  —  —  18,771  —  18,771  
Translation adjustment—  —  —  —  —  (11,850) (11,850) 
Net actuarial gain arising during period, net of taxes—  —  —  —  —  208  208  
Stock-based compensation—  —  730  —  —  —  730  
Common stock repurchase—  —  (437) —  —  —  (437) 
Exercise of stock options67   1,913  —  —  —  1,920  
Dividends paid ($0.11 per share)—  —  —  —  (1,277) —  (1,277) 
Balance at June 30, 201811,610  $1,165  $106,794  $(426) $405,479  $(38,565) $474,447  
Net income—  —  —  —  23,543  —  23,543  
Translation adjustment—  —  —  —  —  (924) (924) 
Net actuarial gain arising during period, net of taxes—  —  —  —  —  167  167  
Stock-based compensation—  —  622  —  —  —  622  
Common stock repurchase—  —   —  —  —   
Exercise of stock options  320  —  —  —  321  
Dividends paid ($0.11 per share)—  —  —  —  (1,285) —  (1,285) 
Balance at September 30, 201811,618  $1,166  $107,737  $(426) $427,737  $(39,322) $496,892  


See accompanying notes.

7






































Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
Nine Months Ended
September 30,
(in thousands)(in thousands)20192018(in thousands)20192018
Operating ActivitiesOperating ActivitiesOperating Activities
Net incomeNet income$35,920 $33,354 Net income$53,338  $56,897  
Adjustment to reconcile net income to net cash provided by (used in) operating activities:
Adjustment to reconcile net income to net cash provided by operating activities:Adjustment to reconcile net income to net cash provided by operating activities:
Provision for doubtful accountsProvision for doubtful accounts157 (158)Provision for doubtful accounts280  (132) 
Depreciation - Property, plant and equipmentDepreciation - Property, plant and equipment6,868 6,242 Depreciation - Property, plant and equipment10,583  9,388  
Depreciation - Rental equipmentDepreciation - Rental equipment4,323 2,983 Depreciation - Rental equipment6,770  4,790  
Amortization of intangiblesAmortization of intangibles1,969 1,756 Amortization of intangibles3,081  2,630  
Amortization of debt issuance costsAmortization of debt issuance costs110 110 Amortization of debt issuance costs166  166  
Stock-based compensation expenseStock-based compensation expense1,575 1,188 Stock-based compensation expense2,341  1,810  
Provision for deferred income tax expense2,306 967 
Provision for deferred income tax (benefit) expenseProvision for deferred income tax (benefit) expense(2,549) 1,160  
Gain on sale of property, plant and equipmentGain on sale of property, plant and equipment(284)(149)Gain on sale of property, plant and equipment(732) (298) 
Changes in operating assets and liabilities, net of acquisitions:Changes in operating assets and liabilities, net of acquisitions:Changes in operating assets and liabilities, net of acquisitions:
Accounts receivableAccounts receivable(32,377)(35,260)Accounts receivable(11,263) (24,916) 
InventoriesInventories(11,023)(22,116)Inventories(8,413) (31,521) 
Rental equipmentRental equipment(11,862)(11,547)Rental equipment(18,970) (16,758) 
Prepaid expenses and other assetsPrepaid expenses and other assets(3,393)(1,452)Prepaid expenses and other assets(5,377) (1,887) 
Trade accounts payable and accrued liabilitiesTrade accounts payable and accrued liabilities5,555 5,959 Trade accounts payable and accrued liabilities9,481  15,797  
Income taxes payableIncome taxes payable(477)(9,806)Income taxes payable1,738  (8,887) 
Long-term tax payableLong-term tax payable258 — Long-term tax payable590  (4,969) 
Other assets and long-term liabilitiesOther assets and long-term liabilities1,274 215 Other assets and long-term liabilities3,146  317  
Net cash provided by (used in) operating activities899 (27,714)
Net cash provided by operating activitiesNet cash provided by operating activities44,210  3,587  
Investing ActivitiesInvesting ActivitiesInvesting Activities
Acquisitions, net of cash acquiredAcquisitions, net of cash acquired(52,499)— Acquisitions, net of cash acquired(58,531) —  
Purchase of property, plant and equipmentPurchase of property, plant and equipment(12,423)(10,829)Purchase of property, plant and equipment(19,488) (18,781) 
Proceeds from sale of property, plant and equipmentProceeds from sale of property, plant and equipment661 628 Proceeds from sale of property, plant and equipment1,987  1,037  
Net cash used in investing activitiesNet cash used in investing activities(64,261)(10,201)Net cash used in investing activities(76,032) (17,744) 
Financing ActivitiesFinancing ActivitiesFinancing Activities
Borrowings on bank revolving credit facilityBorrowings on bank revolving credit facility122,000 104,000 Borrowings on bank revolving credit facility141,000  126,000  
Repayments on bank revolving credit facilityRepayments on bank revolving credit facility(41,000)(45,000)Repayments on bank revolving credit facility(76,000) (85,000) 
Principal payments on finance leasesPrincipal payments on finance leases(76)(66)Principal payments on finance leases(97) (82) 
Proceeds from issuance of long-term debt and finance leasesProceeds from issuance of long-term debt and finance leases38 — Proceeds from issuance of long-term debt and finance leases —  
Dividends paidDividends paid(2,808)(2,553)Dividends paid(4,217) (3,838) 
Proceeds from exercise of stock optionsProceeds from exercise of stock options2,077 2,186 Proceeds from exercise of stock options2,465  2,507  
Treasury stock(2,955)— 
Purchase of common stock for treasuryPurchase of common stock for treasury(4,140) —  
Cost of common stock repurchasedCost of common stock repurchased(590)(437)Cost of common stock repurchased(590) (436) 
Net cash provided by financing activitiesNet cash provided by financing activities76,686 58,130 Net cash provided by financing activities58,423  39,151  
Effect of exchange rate changes on cash and cash equivalentsEffect of exchange rate changes on cash and cash equivalents823 (1,986)Effect of exchange rate changes on cash and cash equivalents(365) (1,487) 
Net change in cash and cash equivalentsNet change in cash and cash equivalents14,147 18,229 Net change in cash and cash equivalents26,236  23,507  
Cash and cash equivalents at beginning of the yearCash and cash equivalents at beginning of the year34,043 25,373 Cash and cash equivalents at beginning of the year34,043  25,373  
Cash and cash equivalents at end of the periodCash and cash equivalents at end of the period$48,190 $43,602 Cash and cash equivalents at end of the period$60,279  $48,880  
Cash paid during the period for:Cash paid during the period for:Cash paid during the period for:
InterestInterest$3,285 $2,526 Interest$5,327  $3,889  
Income taxesIncome taxes10,035 19,637 Income taxes18,431  26,568  
See accompanying notes.
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Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
JuneSeptember 30, 2019
 
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, 2019.  The balance sheet at December 31, 2018 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, 2018 (the "2018 10-K").

Accounting Pronouncements Adopted on January 1, 2019

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)"." This update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. The guidance became effective for us on January 1, 2019. As a lessee, this standard primarily impacted our accounting for long-term real estate and equipment leases, for which we recognized right-of-use assets of $7,747,000 and a corresponding lease liability of $7,868,000 on our consolidated balance sheet.

We adopted these provisions on January 1, 2019 using the optional transition method that permits us to apply the new disclosure requirements in 2019 and continue to present comparative period information as required under FASB ASC Topic 840, "Leases.""Leases". We did not have a cumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to not account for lease and non-lease components separately for most of our asset classes and to exclude leases with an initial term of 12 months or less from the right-of-use assets and liabilities. Adoption of the standards had no impact on results of operations or liquidity.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,”Income", to allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). Upon adoption of the ASU, entities will be required to disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income. The standard is required to be adopted for periods beginning after December 15, 2018, with early adoption available for any set of financial statements that have yet to be issued or made available for issuance including retrospectively for any period in which the effect of the change is the U.S. corporate income tax rate in the TCJA is recognized. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

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Accounting Pronouncements Not Yet Adopted

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 add disclosures for changes in unrealized gains and losses on Level 3 fair value measurements and requires additional disclosures on unobservable inputs associated with Level 3 assets. The guidance will become effective for us on January 1, 2020. The impacts that adoption of the ASU is expected to have on our financial disclosures is being evaluated.

In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-14, “Compensation, Defined Benefit Plans,”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 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. The ASU is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted beginning in fiscal years beginning after December 15, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

2. Accounting Policies

Leases

The following policy resulted from our adoption of the provisions of ASC Topic 842, “Leases,”“Leases", effective January 1, 2019, as described above in “Accounting Pronouncements Adopted on January 1, 2019.”2019".

If we determine that an arrangement is or contains a lease, we recognize a right-of-use (ROU) asset and lease liability at the commencement date of the lease. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

We have elected to not account for the lease and non-lease components separately for most of our asset classes with the exception of real-estate. We have also elected to exclude all lease agreements with an initial term of 12 months or less from the lease recognition requirements.

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3.  Business Combinations

On March 4, 2019, the Company acquired 100 percent 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 million and has been finalized.million.

The Company has included the operating results of Dutch Power in its consolidated financial statements since the acquisition. The total purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed, including deferred taxes, based on their fair values astaxes. During the third quarter of the completion of the acquisitions.2019, additional information was obtained and an adjustment was made to goodwill for approximately $2.0 million. Certain estimated values are not yet finalized and are subject to change. The Company will finalize the amounts once the necessary information is obtained and the analysis is complete.

In the period between the date of acquisition and September 30, 2019, Dutch Power generated approximately $27.7 million of net sales and $0.8 million of net income. The Company has included the operating results of Dutch Power in its consolidated financial statements since the date of acquisition.

The following aretable reflects the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

Cash$87 
Accounts receivable6,278 
Inventory17,49817,731  
Prepaid and other assets3,5641,901  
Property, plant and equipment12,82813,439  
Intangible assets15,78714,095  
Other liabilities assumed(13,132)(12,606)
Net assets assumed$42,91040,925  
Goodwill9,70111,686  
Acquisition Price$52,611 

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

At JuneSeptember 30, 2019 the Company had $19,220,000$16,807,000 in reserves for sales discounts compared to $18,123,000 at December 31, 2018 related to products shipped to our customers under various promotional programs. The increasedecrease was primarily due to additionalreduced discounts reserved related to increasedlower sales of the Company's agricultural products sold during the first sixnine months of 2019.
 
5.  Inventories
Inventories valued at LIFO cost represented 54% and 60% of total inventory at June 30, 2019 and December 31, 2018, respectively. The excess of current cost over LIFO valued inventories was approximately $10,646,000 at June 30, 2019 and December 31, 2018. 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)June 30, 2019December 31, 2018
Finished goods$172,577 $149,298 
Work in process18,192 12,732 
Raw materials15,141 14,600 
Inventories, net$205,910 $176,630 
Inventory obsolescence reserves were $7,014,000 at June 30, 2019 and $7,194,000 at December 31, 2018.

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5.  Inventories
Inventories valued at LIFO cost represented 56% and 60% of total inventory at September 30, 2019 and December 31, 2018, respectively. The excess of current cost over LIFO valued inventories was approximately $10,646,000 at September 30, 2019 and December 31, 2018. 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)September 30, 2019December 31, 2018
Finished goods$173,994  $149,298  
Work in process18,415  12,732  
Raw materials14,107  14,600  
Inventories, net$206,516  $176,630  
Inventory obsolescence reserves were $6,991,000 at September 30, 2019 and $7,194,000 at December 31, 2018.

6. Rental Equipment

Rental equipment is shown net of accumulated depreciation of $12,417,000$13,359,000 and $11,145,000 at JuneSeptember 30, 2019 and December 31, 2018, respectively. The Company recognized depreciation expense of $2,234,000$2,447,000 and $1,577,000$1,808,000 for the three months ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018, respectively and $4,323,000$6,770,000 and $2,983,000$4,790,000 for the sixnine months ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018, respectivelyrespectively.

7.  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 JuneSeptember 30, 2019 and December 31, 2018, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.

8. Goodwill and Definite and Indefinite-lived Intangible Assets

The following is the summary of changes to the Company's Goodwill for the sixnine months ended JuneSeptember 30, 2019:
IndustrialAgriculturalEuropeanConsolidatedIndustrialAgriculturalEuropeanConsolidated
(in thousands)(in thousands)(in thousands)
Balance at December 31, 2018Balance at December 31, 2018$61,107 $6,230 $15,906 $83,243 Balance at December 31, 2018$61,107  $6,230  $15,906  $83,243  
Translation adjustmentTranslation adjustment326 46 (182)190 Translation adjustment234  (397) (1,298) (1,461) 
Goodwill acquiredGoodwill acquired— — 9,701 9,701 Goodwill acquired—  —  11,686  11,686  
Balance at June 30, 2019$61,433 $6,276 $25,425 $93,134 
Balance at September 30, 2019Balance at September 30, 2019$61,341  $5,833  $26,294  $93,468  

The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
(in thousands)Estimated Useful LivesJune 30, 2019December 31, 2018
Definite:
Trade names and trademarks25 years$33,083 $23,938 
Customer and dealer relationships10-14 years34,466 32,260 
Patents and drawings3-12 years6,621 2,061 
Total at cost74,170 58,259 
Less accumulated amortization(16,945)(14,902)
Total net57,225 43,357 
Indefinite:
Trade names and trademarks5,500 5,500 
Total Intangible Assets$62,725 $48,857 

The Company recognized amortization expense of $1,114,000 and $875,000 for the three months ending June 30, 2019 and 2018, respectively, and $1,969,000 and $1,756,000 for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, the Company had $62,725,000 of intangible assets, which represents 7% of total assets. 

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The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
(in thousands)Estimated Useful LivesSeptember 30, 2019December 31, 2018
Definite:
Trade names and trademarks25 years$31,866  $23,938  
Customer and dealer relationships10-14 years34,150  32,260  
Patents and drawings3-12 years5,689  2,061  
Total at cost71,705  58,259  
Less accumulated amortization(18,000) (14,902) 
Total net53,705  43,357  
Indefinite:
Trade names and trademarks5,500  5,500  
Total Intangible Assets$59,205  $48,857  

The Company recognized amortization expense of $1,112,000 and $874,000 for the three months ending September 30, 2019 and 2018, respectively, and $3,081,000 and $2,630,000 for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, the Company had $59,205,000 of intangible assets, which represents 7% of total assets. 

9. Debt

The components of long-term debt are as follows:

(in thousands)

(in thousands)
June 30, 2019December 31, 2018
(in thousands)
September 30, 2019December 31, 2018
Current Maturities:Current Maturities:Current Maturities:
Finance lease obligations Finance lease obligations$131 $119  Finance lease obligations$113  $119  
Long-term debt:Long-term debt:Long-term debt:
Bank revolving credit facilityBank revolving credit facility166,000 85,000 Bank revolving credit facility150,000  85,000  
Finance lease obligations Finance lease obligations232 179  Finance lease obligations192  179  
Total Long-term debt Total Long-term debt166,232 85,179  Total Long-term debt150,192  85,179  
Total debtTotal debt$166,363 $85,298 Total debt$150,305  $85,298  

As of JuneSeptember 30, 2019, $3,152,000 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 $80,848,000$96,848,000 in available borrowings.

10.  Common Stock and Dividends
 
Dividends declared and paid on a per share basis were as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
20192018201920182019201820192018
Dividends declaredDividends declared$0.12 $0.11 $0.24 $0.22 Dividends declared$0.12  $0.11  $0.36  $0.33  
Dividends paidDividends paid$0.12 $0.11 $0.24 $0.22 Dividends paid$0.12  $0.11  $0.36  $0.33  

On July 2,October 1, 2019, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.12 per share, which was paid on July 29,October 28, 2019, to shareholders of record at the close of business on July 16,October 15, 2019.
 
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
June 30,
Six Months Ended
June 30,
(In thousands, except per share)2019201820192018
Net Income$20,667 $18,771 $35,920 $33,354 
Average Common Shares:
Basic (weighted-average outstanding shares)11,726 11,652 11,712 11,629 
Dilutive potential common shares from stock options72 107 75 120 
Diluted (weighted-average outstanding shares)11,798 11,759 11,787 11,749 
Basic earnings per share$1.76 $1.61 $3.07 $2.87 
Diluted earnings per share$1.75 $1.60 $3.05 $2.84 

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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
September 30,
Nine Months Ended
September 30,
(In thousands, except per share)2019201820192018
Net Income$17,418  $23,543  $53,338  $56,897  
Average Common Shares:
Basic (weighted-average outstanding shares)11,748  11,689  11,724  11,649  
Dilutive potential common shares from stock options65  88  72  109  
Diluted (weighted-average outstanding shares)11,813  11,777  11,796  11,758  
Basic earnings per share$1.48  $2.01  $4.55  $4.88  
Diluted earnings per share$1.47  $2.00  $4.52  $4.84  

12. Income Taxes

Tax Reform

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act ("TCJA") that instituted fundamental changes to the U.S. Internal Revenue Code of 1986, as amended ("the Code").

During the three months ended September 30, 2018, we revised our initial provisional amount recorded at December 31, 2017 for the transitional tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries and the impact of the federal tax rate change on the value of our deferred tax assets and liabilities. The transition tax liability on the deemed repatriation decreased $4.2 million, primarily as a result of additional analysis performed over our historical foreign earnings and foreign source income which provided increased ability to credit foreign taxes associated with the deemed repatriation. In addition, the impact of the rate change on deferred increased by $1.2 million due to adjustments resulting from the filing of our 2017 federal income tax return. The net benefit to income taxes reduced the Company's effective income tax rate for the third quarter of 2018 to 11.8%, as well as reducing the effective income tax rate for the first nine months of 2018 to 21.0%.

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 TypeRevenue by Product TypeRevenue by Product Type
Three Months Ended
June 30,
Six Months Ended June 30,Three Months Ended
September 30,
Nine Months Ended September 30,
(in thousands)(in thousands)2019201820192018(in thousands)2019201820192018
Net SalesNet SalesNet Sales
WholegoodsWholegoods$229,069 $209,359 $437,103 $399,724 Wholegoods$207,461  $200,160  $644,042  $594,114  
PartsParts49,617 43,247 97,871 87,242 Parts58,093  52,093  155,965  145,105  
OtherOther6,500 4,519 12,146 8,246 Other6,275  5,319  18,942  13,565  
ConsolidatedConsolidated$285,186 $257,125 $547,120 $495,212 Consolidated$271,829  $257,572  $818,949  $752,784  
Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.

Revenue by Geographical Location
Three Months Ended
June 30,
Six Months Ended June 30,
(in thousands)2019201820192018
Net Sales
United States$188,652 $183,291 $373,965 $348,468 
France27,619 24,346 53,554 49,273 
Canada17,361 15,418 31,305 29,652 
United Kingdom14,082 12,419 27,880 25,862 
Brazil5,702 4,858 9,975 10,318 
Netherlands10,132 1,877 12,806 3,166 
China6,999 129 8,211 383 
Germany2,452 493 3,341 896 
Australia1,827 3,145 4,323 5,527 
Other10,360 11,149 21,760 21,667 
Consolidated$285,186 $257,125 $547,120 $495,212 

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

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Revenue by Geographical Location
Three Months Ended
September 30,
Nine Months Ended September 30,
(in thousands)2019201820192018
Net Sales
United States$187,320  $188,037  $561,285  $536,505  
France22,719  17,048  76,273  66,321  
Canada17,700  15,167  49,005  44,819  
United Kingdom14,327  15,141  42,207  41,003  
Brazil3,924  3,050  13,899  13,368  
Netherlands6,704  640  19,510  3,806  
China3,773  6,586  11,984  8,905  
Germany2,262  379  5,603  1,275  
Australia1,549  2,023  5,872  7,550  
Other11,551  9,501  33,311  29,232  
Consolidated$271,829  $257,572  $818,949  $752,784  

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 JuneSeptember 30, 2019:  
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)(in thousands)2019201820192018(in thousands)2019201820192018
Net SalesNet SalesNet Sales
IndustrialIndustrial$168,000 $150,031 $326,425 $282,198 Industrial$158,499  $156,721  $484,924  $438,919  
AgriculturalAgricultural55,159 59,071 108,332 117,718 Agricultural59,797  61,464  168,129  179,182  
EuropeanEuropean62,027 48,023 112,363 95,296 European53,533  39,387  165,896  134,683  
ConsolidatedConsolidated$285,186 $257,125 $547,120 $495,212 Consolidated$271,829  $257,572  $818,949  $752,784  
Income from OperationsIncome from OperationsIncome from Operations
IndustrialIndustrial$20,172 $16,165 $36,644 $27,965 Industrial$14,350  $18,351  $50,994  $46,316  
AgriculturalAgricultural4,234 6,186 6,406 11,439 Agricultural6,140  6,608  12,546  18,047  
EuropeanEuropean4,943 4,435 8,905 8,743 European3,965  3,290  12,870  12,033  
ConsolidatedConsolidated$29,349 $26,786 $51,955 $48,147 Consolidated$24,455  $28,249  $76,410  $76,396  

(in thousands)(in thousands)June 30, 2019December 31, 2018(in thousands)September 30, 2019December 31, 2018
GoodwillGoodwillGoodwill
IndustrialIndustrial$61,433 $61,107 Industrial$61,341  $61,107  
AgriculturalAgricultural6,276 6,230 Agricultural5,833  6,230  
EuropeanEuropean25,425 15,906 European26,294  15,906  
ConsolidatedConsolidated$93,134 $83,243 Consolidated$93,468  $83,243  
Total Identifiable AssetsTotal Identifiable AssetsTotal Identifiable Assets
Industrial Industrial$465,860 $421,539  Industrial$470,927  $421,539  
Agricultural Agricultural177,673 162,548  Agricultural169,818  162,548  
European European223,046 137,546  European215,648  137,546  
ConsolidatedConsolidated$866,579 $721,633 Consolidated$856,393  $721,633  

13.
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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.

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14.15.  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 CostComponents of Lease CostComponents of Lease Cost
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)(in thousands)20192019(in thousands)20192019
Finance lease cost:Finance lease cost:Finance lease cost:
Amortization of right-of-use assets Amortization of right-of-use assets$34 $65  Amortization of right-of-use assets$33  $98  
Interest on lease liabilities Interest on lease liabilities Interest on lease liabilities  
Operating lease costOperating lease cost1,088 2,112 Operating lease cost1,095  3,207  
Short-term lease costShort-term lease cost180 232 Short-term lease cost79  311  
Variable lease costVariable lease cost122 227 Variable lease cost120  347  
Total lease costTotal lease cost$1,427 $2,641 Total lease cost$1,330  $3,971  

Rent expense for the three and sixnine months ending JuneSeptember 30, 2018 was immaterial.

Maturities of lease liabilities were as follows:
Future Minimum Lease Payments
June 30, 2019December 31, 2018
(in thousands)Operating LeasesFinance LeasesOperating LeasesCapital Leases
2019$1,965 (a)$77 (a)$3,310 $125 
20203,009 124 2,453 97 
20211,743 88 1,308 62 
20221,117 49 743 24 
2023655 26 419 
Thereafter1,205 24 79 — 
Total minimum lease payments$9,694 $388 $8,312 $309 
Less imputed interest(690)(25)— (11)
Total lease liabilities$9,004 $363 $8,312 $298 
(a) Amounts represent remaining six months of payments due for 2019.
Future Lease Commencements

As of June 30, 2019, we have additional operating leases, that have not yet commenced in the amount of $88,000. These operating leases will commence in fiscal year 2019.
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Maturities of lease liabilities were as follows:
Future Minimum Lease Payments
September 30, 2019December 31, 2018
(in thousands)Operating LeasesFinance LeasesOperating LeasesCapital Leases
2019$1,008  (a)$37  (a)$3,310  $125  
20203,215  115  2,453  97  
20211,900  79  1,308  62  
20221,244  41  743  24  
2023713  17  419   
Thereafter1,225  35  79  —  
Total minimum lease payments$9,305  $324  $8,312  $309  
Less imputed interest(658) (19) —  (11) 
Total lease liabilities$8,647  $305  $8,312  $298  
(a) Amounts represent remaining three months of payments due for 2019.
Future Lease Commencements

As of September 30, 2019, we have additional operating leases, that have not yet commenced in the amount of $321,000. These operating leases will commence in fiscal year 2019.

Supplemental balance sheet information related to leases was as follows:

Operating Leases
(in thousands)JuneSeptember 30, 2019
Other non-current assets$8,9508,569  
Accrued liabilities3,3823,314  
Other long-term liabilities5,6225,333  
    Total operating lease liabilities$9,0048,647  
Finance Leases
(in thousands)JuneSeptember 30, 2019
Property, plant and equipment, gross$629 
Accumulated Depreciation(297)(324)
    Property, plant and equipment, net$332305  
Current maturities of long-term debt and finance lease obligations$131113  
Long-term debt and finance lease obligations, net of current maturities232192  
    Total finance lease liabilities$363305  
Weighted Average Remaining Lease Term
    Operating leases3.584.07 years
    Finance leases4.103.40 years
Weighted Average Discount Rate
    Operating leases3.333.40 %
    Finance leases3.363.34 %

Supplemental Cash Flow information related to leases was as follows:
Six Months Ended
June 30,
(in thousands)2019
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows from finance leases$
     Operating cash flows from operating leases2,108 
     Financing cash flows from finance leases76 

15.  Retirement Benefit Plans

Defined Benefit Plan
The Company amortizes annual pension income or expense evenly over four quarters. Pension expense was $23,000 and pension income was $86,000 for the three months ended June 30, 2019 and June 30, 2018, respectively. Pension expense for the six months ended June 30, 2019 was $46,000 and pension income for the six months ended June 30, 2018 was $176,000. The Company is not required to contribute to the pension plans for the 2019 plan year but may do so.

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Supplemental Cash Flow information related to leases was as follows:
Nine Months Ended
September 30,
(in thousands)2019
Cash paid for amounts included in the measurement of lease liabilities:
     Operating cash flows from finance leases$11 
     Operating cash flows from operating leases3,146 
     Financing cash flows from finance leases97 

16.  Retirement Benefit Plans

Defined Benefit Plan
The Company amortizes annual pension income or expense evenly over four quarters. Pension expense was $23,000 and pension income was $87,000 for the three months ended September 30, 2019 and September 30, 2018, respectively. Pension expense for the nine months ended September 30, 2019 was $68,000 and pension income for the nine months ended September 30, 2018 was $260,000. The Company is not required to contribute to the pension plans for the 2019 plan year, but may do so.

Supplemental Retirement Plan
 
In May of 2015, the Board amended the SERP to allow the Board to modify the retirement benefit percentage either higher or lower than 20%. In May of 2016, the Board added additional key management to the plan. As of JuneSeptember 30, 2019, the current retirement benefit (as defined in the plan) for the participants ranges from 10% to 20%.

The net period expense for the three months ended JuneSeptember 30, 2019 and 2018 was $214,000 and $287,000$250,000 respectively and $428,000$642,000 and $499,000$749,000 for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
 
17.  Subsequent Events

On October 24, 2019, the Company reported that it had completed the previously announced acquisition of 100% of the outstanding capital shares of Morbark, LLC (Morbark), a former portfolio company of Stellex Capital Management, for a total consideration of approximately $352 million, on a debt free basis and subject to certain post-closing adjustments.

Morbark is a leading manufacturer of equipment and aftermarket parts for the forestry tree maintenance, biomass, land management and recycling markets. Their products include a broad range of tree chippers, grinders, flails, debarkers, stump grinders, mulchers and brush cutters, plus related aftermarket spare and wear parts. This includes the products sold under the Morbark, Rayco, Denis Cimaf and Boxer brand names. Morbark products are sold through a network of independent dealers with about 300 sales locations. Their products complement our core business and they've grown steadily in a sector which has performed well. We intend to maintain the Morbark brands in the market place. Morbark, with approximately 720 employees, is based in Winn, Michigan, with subsidiary operations in Wooster, Ohio and Roxton Falls, Quebec.

In connection with this acquisition, the Company expanded its credit facility from $250 million to $650 million to accommodate this event and the ongoing needs of the combined entities. The new credit facility has a five-year duration and consists of a $300 million term loan (used to finance the acquisition) and a $350 million revolving line of credit.
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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
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
As a
Percent of Net Sales
As a
Percent of Net Sales
2019201820192018
As a
Percent of Net Sales
2019201820192018
IndustrialIndustrial58.9 %58.3 %59.7 %57.0 %Industrial58.3 %60.8 %59.2 %58.3 %
AgriculturalAgricultural19.3 %23.0 %19.8 %23.8 %Agricultural22.0 %23.9 %20.5 %23.8 %
EuropeanEuropean21.8 %18.7 %20.5 %19.2 %European19.7 %15.3 %20.3 %17.9 %
Total sales, netTotal sales, net100.0 %100.0 %100.0 %100.0 %Total sales, net100.0 %100.0 %100.0 %100.0 %
  
Three Months Ended
June 30,
Six Months Ended
June 30,
Three Months Ended
September 30,
Nine Months Ended
September 30,
Cost Trends and Profit Margin, as
Percentages of Net Sales
Cost Trends and Profit Margin, as
Percentages of Net Sales
2019201820192018
Cost Trends and Profit Margin, as
Percentages of Net Sales
2019201820192018
Gross profitGross profit25.6 %25.8 %24.9 %25.6 %Gross profit25.3 %25.9 %25.1 %25.7 %
Income from operationsIncome from operations10.3 %10.4 %9.5 %9.7 %Income from operations9.0 %11.0 %9.3 %10.1 %
Income before income taxesIncome before income taxes9.6 %9.8 %8.8 %9.1 %Income before income taxes8.5 %10.4 %8.7 %9.6 %
Net incomeNet income7.2 %7.3 %6.6 %6.7 %Net income6.4 %9.1 %6.5 %7.6 %
 
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.
 
For the first sixnine months of 2019, the Company's net income increaseddecreased by approximately 7.7%6.3% when compared to the same period in 2018. This increasedecrease was primarily the result of improved sales growth in the Company's Industrial Division and,a favorable one-time adjustment to a lesser extent, the acquisition of Dutch Power Company B.V. ("Dutch Power") completed in early March of 2019.our prior year tax provision related to new tax legislation. Negatively affecting the Company's performance during the first sixnine months of 2019 was the continued soft market conditions in the agricultural market, which impacted our North American agricultural sales. Also, while higher material costs hurt profitability during the first quarter of 2019, steel costs easedhave dropped during the second quarter asand third quarters, although this positive effect on our margins improved, although not yet to the level we saw during the first half of 2018.has been more than offset by unfavorable sales mix and lower production in our Agricultural Division.

The Company's Industrial Division experienced a 15.7%10.5% increase in sales for the first sixnine months of 2019 compared to the first sixnine months of 2018. Sales across all Industrial product groups, with the exception of mowing equipment which was flat,down, outperformed during the first sixnine months of 2019 compared to the same period in 2018. Agricultural sales were down in the first sixnine months of 2019 by 8.0%6.2% compared to the first sixnine months of 2018 as a result of continued weak demand for our products due to soft agricultural market conditions and declining farm incomes. Also negatively impacting results was a shutdown during the first quarter of 2019 of the Division's largest manufacturing facility for several days to install an upgrade to its paint system and heavy rains and flooding throughout the mid-west part of the U.S. that occurred during the second quarter. European sales for the first sixnine months of 2019
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were up in U.S. dollars by 17.9%23.2% compared to the same period in 2018, mainly due to the acquisition of Dutch Power. Excluding Dutch Power, sales in local currency were up during the second quarterfirst nine months of 2019 compared to the same time in 2018 but weredue to improved performance at our Rivard vacuum truck facility, despite being negatively affected by changes due to currency translation. Consolidated income from operations was $52.0$76.4 million in the first sixnine months of 2019 which was relatively flat compared to $48.1 million for the first sixnine months of 2018. The2018, but the Company's backlog increased 3.9%decreased 14.3% to $228.8$215.3 million at the end of the secondthird quarter of 2019 versus the backlog of $220.2$251.2 million at the end of the secondthird quarter of 2018. The increasedecrease in the Company's backlog was attributable to greater demandsofter new order bookings for our products specifically in the Company'sAgricultural and Industrial Division and fromDivisions. Excluding the acquisition of Dutch Power, partially offset by lower newincreased orders in the Company's Agricultural and European Divisions.

The Company is cautiously optimistic about its outlook for the remainder of 2019, but we continue to face several ongoing challenges. Beginning in 2018, the Company saw increases in raw material, freight, tariff surcharges and other input costs including labor, at above rates seen in recent years though some of these inflationary pressures have begun to ease. We continue to experience longer lead times for certain key components of our products. The Company also continues to be impacted by a tight labor market and difficulties in hiring and retaining skilled workers. Additional tariffs, future changes in tariff regulations and ongoing trade disputes could further impact the business by increasing the cost of items used in the manufacturing of our products and by softening sales of our products to certain of our customers who may be impacted directly or indirectly by increasing tariffs and other negative effects resulting from trade disputes. The Company may also be negatively affected by several other unanticipated factors such as a weakness in the overall economy; significant changes in currency exchange rates; negative economic impacts resulting from geopolitical events such as the unresolved Brexit situation, 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 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K").


Results of Operations
Three Months Ended June 30, 2019 vs. Three Months Ended June 30, 2018
Net sales for the second quarter of 2019 were $285,186,000, an increase of $28,061,000 or 10.9% compared to $257,125,000 for the second quarter of 2018.  The increase in sales was attributable to strong demand for our products in the Company's Industrial Division as well as $14,034,000 of net sales from the acquisition of Dutch Power.
Net Industrial sales increased by $17,969,000 or 12.0% to $168,000,000 for the second quarter of 2019 compared to $150,031,000 during the same period in 2018. The increase was attributable to increased sales across all product groups in the Division with the exception of mowing equipment which was down due to soft market conditions and adverse weather conditions.
Net Agricultural sales were $55,159,000 in the second quarter of 2019 compared to $59,071,000 for the same period in 2018, a decrease of $3,912,000 or 6.6%. The decrease was primarily the result of weak market conditions which limited sales growth in both equipment and replacement parts as farm incomes continued to be challenged. Also, negatively affecting sales were heavy rains and flooding throughout the mid-west part of the U.S.
Net European sales for the second quarter of 2019 were $62,027,000, an increase of $14,004,000 or 29.2% compared to $48,023,000 during the second quarter of 2018.  The increase was driven by the acquisition of Dutch Power which added $14,034,000 of net sales during the quarter. Excluding Dutch Power, sales in the European Division were flat in U.S. dollars. Excluding Dutch Power, sales in local currency were up during the second quarter of 2019 compared to the same time in 2018, but werepartially offset by unfavorable currency translation.
Gross profitthese lower new orders for the second quarter of 2019 was $73,133,000 (25.6% of net sales) compared to $66,454,000 (25.8% of net sales) during the same period in 2018, an increase of $6,679,000.  The increase in gross profit during the second quarter of 2019 was primarily due to improved sales in the Company's Industrial Division and to a lesser extent the acquisition of Dutch Power, which more than offset the profit decline in the Agricultural and Europeanquarter.

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Divisions. Gross profitThe Company incurred several challenges during the quarter and gross margin percentageexpect those to likely continue for at least the balance of the year although customer inquiry levels across the Company remain reasonable. Softer economic conditions in North America are beginning to have an affect in the manufacturing sector and consequently have dampened our sales. Also, the Company continues to be impacted by a tight labor market and difficulties in hiring and retaining skilled workers. Additional tariff costs, future changes in tariff regulations and ongoing trade disputes could further impact the business by increasing the cost of items used in the manufacturing of our products and by softening sales of our products to our customers who may be impacted directly or indirectly by increasing tariffs and other negative effects resulting from trade disputes. The Company may also be negatively affected by several other factors such as additional weakness in the overall economy; significant changes in currency exchange rates; negative economic impacts resulting from geopolitical events such as the unresolved Brexit situation, 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 of the Company's Annual Report on Form 10-K for the quarter saw some improvement sinceyear ended December 31, 2018 (the "2018 Form 10-K").

On October 24, 2019, the firstCompany completed the previously announced acquisition of 100% of the outstanding capital shares of Morbark, LLC (Morbark), a former portfolio company of Stellex Capital Management, for a total consideration of approximately $352 million, on a debt free basis and subject to certain post-closing adjustments.


Results of Operations
Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018
Net sales for the third quarter of 2019 were $271,829,000, an increase of $14,257,000 or 5.5% compared to $257,572,000 for the third quarter of 2018.  The increase in sales was mainly attributable to $10,031,000 of net sales from the acquisition of Dutch Power and to a lesser extent, increased demand for our products in the Company's European and Industrial Division.
Net Industrial sales increased by $1,778,000 or 1.1% to $158,499,000 for the third quarter of 2019 compared to $156,721,000 during the same period in 2018. The increase was attributable to higher sales in most product groups specifically sweeper, vacuum truck and snow product lines which were helped by stable municipal demand offset by lower sales of mowing equipment and excavators reflecting softer demand from some of our industrial and state-level governmental customers.
Net Agricultural sales were $59,797,000 in the third quarter of 2019 compared to $61,464,000 for the same period in 2018, a decrease of $1,667,000 or 2.7%. The decrease was primarily the result of weak market conditions which limited sales growth in wholegoods as commodity costs, specifically raw materials suchfarm incomes remained challenged. Also, an unfavorable product mix of less high margin mowers sales negatively affected both sales and profitability in this division.
Net European sales for the third quarter of 2019 were $53,533,000, an increase of $14,146,000 or 35.9% compared to $39,387,000 during the third quarter of 2018.  The increase was mostly due to the acquisition of Dutch Power which added $10,031,000 of net sales during the quarter. Excluding Dutch Power, sales in the European Division were up mainly due to increased sales levels from Rivard which more than offset unfavorable currency translation.
Gross profit for the third quarter of 2019 was $68,710,000 (25.3% of net sales) compared to $66,772,000 (25.9% of net sales) during the same period in 2018, an increase of $1,938,000.  The increase in gross profit during the third quarter of 2019 was primarily due to the acquisition of Dutch Power. Excluding Dutch Power, gross profit was essentially flat, but lower as steel eased.a percent of sales due to lower production and unfavorable sales mix which more than offset lower material costs.

Selling, general and administrative expenses (“SG&A”) were $43,784,000 (15.4%$44,255,000 (16.3% of net sales) during the secondthird quarter of 2019 compared to $39,668,000 (15.4%$38,523,000 (15.0% of net sales) during the same period of 2018, an increase of $4,116,000.$5,732,000. The increase primarily came from the acquisition of Dutch Power in the amount of $2,338,000.$2,472,000. Also, higher selling
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attributing to the increase was $843,000 in acquisition expenses due toalong with increased salesbonus accrual and increased spending on research and development projects added to SG&A expenses during the secondthird quarter of 2019.
 
Interest expense was $1,935,000$1,837,000 for the secondthird quarter of 2019 compared to $1,497,000$1,399,000 during the same period in 2018, an increase of $438,000.  The increase during the secondthird quarter of 2019 came from increased borrowings due to the Dutch Power acquisition.
 
Other expenseincome (expense), net was $295,000$242,000 of income for the secondthird quarter of 2019 compared to $92,000$265,000 of expense during the same period in 2018.  The expensesincome in 2019 was primarily due to the the sale of property for $350,000 and the expense in 2018 werewas primarily the result of changes in currency exchange rates.
                                         
Provision for income taxes was $6,782,000 (24.7%$5,801,000 (25.0% of income before income tax) in the secondthird quarter of 2019 compared to $6,535,000 (25.8%$3,142,000 (11.8% of income before income tax) during the same period in 2018. The increase was due to higher pre-tax income duringDuring the secondthird quarter of 2019.2018, the Company recorded a net benefit to income taxes of $2,995,000 relating to the adjustment in the provisional amounts recorded in the fourth quarter of 2017 upon enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), as more fully described in Note 12 of the Interim Condensed Consolidated Financial Statements. The net benefit to income taxes reduced the Company's effective income tax rate for the third quarter of 2018 to 11.8%.
    
The Company’s net income after tax was $20,667,000$17,418,000 or $1.75$1.47 per share on a diluted basis for the secondthird quarter of 2019 compared to $18,771,000$23,543,000 or $1.60$2.00 per share on a diluted basis for the secondthird quarter of 2018.  The increasedecrease of $1,896,000$6,125,000 resulted from the factors described above.

SixNine Months Ended JuneSeptember 30, 2019 vs. SixNine Months Ended JuneSeptember 30, 2018

Net sales for the first sixnine months of 2019 were $547,120,000,$818,949,000, an increase of $51,908,000$66,165,000 or 10.5%8.8% compared to $495,212,000$752,784,000 for the first sixnine months of 2018. The increase was primarily attributable to increased demand for our products in the Company's Industrial Division. Our recent acquisition of Dutch Power addedalso contributed to the increase in net sales in the amount of $17,648,000.$27,679,000. Negatively affecting sales during the first sixnine months of 2019, were weak agricultural market conditions as well as unfavorable currency translation effects primarily in our European Division.
Net Industrial sales increased during the first sixnine months by $44,227,000$46,005,000 or 15.7%10.5% to $326,425,000$484,924,000 for 2019 compared to $282,198,000$438,919,000 during the same period in 2018. The increase came from higher sales of all product lines, with the exception of mowing equipment which was flatdown compared to the same time in 2018.2018 due to soft market conditions and adverse weather conditions experienced during the second quarter of 2019.

Net Agricultural sales were $108,332,000$168,129,000 during the first sixnine months of 2019 compared to $117,718,000$179,182,000 for the same period in 2018, a decrease of $9,386,000$11,053,000 or 8.0%6.2%. The decrease in sales for the first sixnine months of 2019 compared to the first sixnine months of 2018 was a result of weak market conditions and lower farm incomes which have been impacted by lower commodity prices as well as tariffs.trade disputes. A first quarter 2019 shutdown in the Division's largest manufacturing facility to install an upgrade to its paint system in addition to heavy rains and flooding throughout the mid-west part of the U.S. during the second quarter of 2019 also negatively hampered sales.

Net European sales for the first sixnine months of 2019 were $112,363,000,$165,896,000, an increase of $17,067,000$31,213,000 or 17.9%23.2% compared to $95,296,000$134,683,000 during the same period of 2018. The increase in 2019 was mainly due to the acquisition of Dutch Power.Power in the amount of $27,679,000 and to a lesser extent increased sales of Rivard equipment. Excluding Dutch Power, sales in local currency were up during the first sixnine months of 2019 compared to the same time in 2018 but weredue to improved Rivard vacuum truck sales, despite being partially offset by unfavorable currency translation.

Gross profit for the first sixnine months of 2019 was $136,441,000 (24.9%$205,151,000 (25.1% of net sales) compared to $126,711,000 (25.6%$193,483,000 (25.7% of net sales) during the same period in 2018, an increase of $9,730,000.$11,668,000. The increase in gross profit for the first sixnine months of 2019 came from the acquisition of Dutch Power and higher equipment sales in the Company's Industrial Division and, to a lesser extent, the acquisition of Dutch Power.Division. Negatively affecting both gross margin and margin percentage for the first sixnine months of 2019 were higher steel, freightthe effects of lower production and other inputunfavorable product mix, partially offset by lower material costs some of which began to ease duringand improvements in the second quarter. Productivity improvements, pricing actions, and purchasing initiatives helped offset these negative affects.Rivard vacuum truck business.

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SG&A expenses were $84,486,000 (15.4%$128,741,000 (15.7% of net sales) during the first sixnine months of 2019 compared to $78,564,000 (15.9%$117,087,000 (15.6% of net sales) during the same period of 2018, an increase of $5,922,000.$11,654,000. The increase primarily came from increased spending on research and development projects, higher selling expenses due to increased sales, along with increased spending on research and development projects. To a lesser extent, ouras well as acquisition expenses in the amount of $1,240,000. Our recent acquisition of Dutch Power added $2,949,000$5,421,000 in SG&A expenses.

Interest expense was $3,385,000$5,222,000 for the first sixnine months of 2019 compared to $2,834,000$4,233,000 during the same period in 2018, an increase of $551,000.$989,000. The increase during the first sixnine months of 2019 came from increased borrowings due to the Dutch Power acquisition.
Other income (expense), net was $684,000$442,000 of expense during the first sixnine months of 2019 compared to $226,000$491,000 of expense in the first sixnine months of 2018. The expenses in 2019 and 2018 were primarily the result of changes in exchange rates.

Provision for income taxes was $12,469,000 (25.8%$18,270,000 (25.5% of income before income taxes) in the first sixnine months of 2019 compared to $11,942,000 (26.4%$15,084,000 (21.0% of income before income taxes) during the same period in 2018. During the third quarter of 2018, the Company recorded a net benefit to income taxes of $2,995,000 relating to the adjustment in the provisional amounts recorded in the fourth quarter of 2017 upon enactment of TCJA, as more fully described in Note 12 of the Interim Condensed Consolidated Financial Statements. The increase was duenet benefit to higher pre-tax income duringtaxes reduced the Company's effective income tax rate for the first sixnine months of 2019.2018 to 21.0%.
    
The Company's net income after tax was $35,920,000$53,338,000 or $3.05$4.52 per share on a diluted basis for the first sixnine months of 2019 compared to $33,354,000$56,897,000 or $2.84$4.84 per share on a diluted basis for the first sixnine months of 2018. The increasedecrease of $2,566,000$3,559,000 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 JuneSeptember 30, 2019, the Company had working capital of $418,949,000$404,314,000 which represents an increase of $66,958,000$52,323,000 from working capital of $351,991,000 at December 31, 2018. The increase in working capital was primarily due to seasonality and increased demand for our products reflected in the Company's higher sales and backlog and to a lesser extent the acquisition of Dutch Power.

Capital expenditures were $12,423,000$19,488,000 for the first sixnine months of 2019, compared to $10,829,000$18,781,000 during the first sixnine months of 2018. The Company expects higher capital expenditures in 2019 in order to increaseconsolidate production capacity, support improvements in operational efficiencies, invest in technology and for the previously announced construction of a new manufacturing facility for its Super Products vacuum truck operation in Wisconsin, as well as the expansion of our Tenco facility in Canada. The Company will fund future expenditures from operating cash flows or through our revolving credit facility, described below.

Net cash used for acquisitions was $58,531,000 during the first nine months of 2019. The amount used to acquire Dutch Power was approximately $52,611,000 with the remaining balance used for the Dixie Chopper acquisition.
Net cash provided by financing activities was $76,686,000$58,423,000 and $58,130,000$39,151,000 during the sixnine month periods ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018, respectively. The majority of the increase in net cash provided by financing activities in 2019 as compared to the prior year, was mainly due to borrowings to finance the acquisition of Dutch Power, partially offset by the repurchase activity related to the Company's common stock.

The Company had $44,605,000$51,888,000 in cash and cash equivalents held by its foreign subsidiaries as of JuneSeptember 30, 2019. The majority of these funds are at our European and Canadian facilities. As a result of the
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fundamental changes to the taxation of multinational corporations created by Tax Cuts and Jobs Act, we no longer intend to permanently reinvest all of the undistributed earnings of our European foreign affiliates. While the Company intends to use some of these funds for working capital and capital expenditures outside the U.S., recent changes in the U.S. tax laws have substantially mitigated the cost of repatriation. During the second quarter of 2018, the Company repatriated excess cash from its European operations of approximately $24,000,000. The Company will continue to repatriate foreign cash and cash equivalents in excess of amounts needed to fund foreign operating and investing
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activities. 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.

TheOn October 24, 2019, the Company, maintains an unsecured revolving credit facility with certain lenders underas Borrower, and each of its domestic subsidiaries as guarantors, entered into a Second Amended and Restated Revolving Credit Agreement ("(the Credit Agreement) with Bank of America, N.A., as Administrative Agent. The Credit Agreement provides the Agreement"). TheCompany with the ability to request loans and other financial obligations in an aggregate commitments from lenders underamount of up to $650,000,000. Pursuant to the Credit Agreement, is $250,000,000 and, subject to certain conditions and bank approval, the Company has borrowed $300,000,000 pursuant to a Term Facility repayable with interest quarterly at a percentage of the optioninitial principal amount of the Term Facility of 5.0% per year with the remaining principal due in 5 years. Up to request an increase$350,000,000 is available under the Credit Agreement pursuant to a Revolver Facility which terminates in aggregate commitments of up to an additional $50,000,000.5 years. The Agreement requires the Company to maintain varioustwo financial covenants, including a minimum earnings before interest and tax to interest expense ratio, a maximum leverage ratio and a minimum asset 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. Effective December 20, 2016, the Company amended its revolving credit facility to extend the termination date, reduce LIBOR interest margin and to modify certain financial and other covenants in order to meet the ongoing needs of the Company's business and to allow for greater flexibility in relation to future acquisitions. The expiration date of the revolving credit facilityTerm Facility and the Revolver Facility is December 20, 2021.October 24, 2024. As of JuneOctober 30, 2019, $166,000,000$510,000,000 was outstanding under the Agreement. On JuneOctober 30, 2019, $3,152,000$4,152,000 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 $80,848,000$133,964,000 in available borrowings. As of June 30, 2019, theThe Company wasis in compliance with the covenants under the Agreement.

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.
 
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 2018 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 2018 Form 10-K.
Off-Balance Sheet Arrangements

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

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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; 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, 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; and cyber security risks affecting information technology or data security breaches.

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

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

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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.

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 JuneSeptember 30, 2019, the Company had $1,578,000$903,000 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 $237,000.$135,000.  However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts should be offset by changes in the underlying value of the transaction being hedged.

Exposure to Exchange Rates
 
The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive income within the statement of stockholders’ equity. The total foreign currency translation adjustment for the current quarter increaseddecreased stockholders’ equity by $1,194,000.$9,791,000.

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 $4,375,000$6,558,000 for the sixnine month period ending JuneSeptember 30, 2019.  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 second quarter 2019 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $830,000.  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.

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Interest Rate Risk

The Company’s long-term debt bears interest at variable rates.  Accordingly, the Company’s net income is affected by changes in interest rates.  Assuming the current level of borrowings at variable rates and a two percentage point change for the third quarter 2019 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $750,000.  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.

Item 4. Controls and Procedures
 
Disclosure Controls and Procedures

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

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  
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PART II.  OTHER INFORMATION
 
Item 1. - Legal Proceedings

For a description of legal proceedings, see Note 1314 Contingent Matters to our interim condensed consolidated financial statements.
Item 1A. - Risk Factors

ThereWe may not be able to realize the potential or strategic benefits of the acquisitions we complete, or we may not successfully address problems encountered in connection with acquisitions.

Acquisitions are an important part of our growth strategy and we have completed a number of acquisitions over the past several years. To date in 2019, we completed three acquisitions, namely, Dutch Power, Dixie Chopper, and Morbark, with Morbark being the most recently completed and most significant. Acquisitions can be difficult, time-consuming, and pose a number of risks, including:

Potential negative impact on our earnings per share;
Failure of acquired products to achieve projected sales;
Problems in integrating the acquired products with our existing and/or new products;
Potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs and other expenses associated with adding and supporting new products;
Difficulties in retaining and integrating key employees;
Failure to realize expected synergies including anticipated revenue benefits and/or cost savings ;
Disruption of ongoing business operations, including diversion of management’s attention and uncertainty for employees and customers, particularly during the post-acquisition integration process; and
Potential negative impact on our relationships with customers, distributors and vendors.

If we do not manage these risks, the acquisitions that we complete may have an adverse effect on our business, our results of operations or financial condition.

Other than as set forth under this Item 1A, there have not been any material changes from the risk factors previously disclosed in the 2018 Form 10-K for the year ended December 31, 2018.

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 JuneSeptember 30, 2019:

Issuer Purchases of Equity SecuritiesIssuer Purchases of Equity SecuritiesIssuer Purchases of Equity Securities
PeriodPeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly announced Plans or Programs
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a)
PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly announced Plans or Programs
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a)
April 2019— 
May 2019— 
June 201915,000 $97.66 15,000 $27,045,987 
July 2019July 2019—  —  —  —  
August 2019August 2019—  —  —  —  
September 2019September 201910,000  $118.5110,000  $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.(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.(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


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Item 4. - Mine Safety Disclosures

Not Applicable


Item 5. - Other Information

(a) Reports on Form 8-K

None.
 
(b) Other Information
 
None.
 
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Item 6. - Exhibits
 
(a)   Exhibits
ExhibitsExhibit TitleIncorporated by Reference From the Following Documents
10.1Incorporated by Reference
10.2Filed Herewith
10.3Incorporated by Reference
31.1Filed Herewith
31.2Filed Herewith
31.3Filed Herewith
32.1Filed Herewith
32.2Filed Herewith
32.3Filed Herewith
32.4Filed HerewithIncorporated by Reference
101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL documentFiled Herewith
101.SCHXBRL Taxonomy Extension Schema DocumentFiled Herewith
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentFiled Herewith
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentFiled Herewith
101.LABXBRL Taxonomy Extension Label Linkbase DocumentFiled Herewith
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentFiled Herewith
104Cover 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.
 
July 31,October 30, 2019Alamo 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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