ALAMO GROUP INC 10-K

Item 9A. Controls and Procedures Disclosure Controls and Procedures . An evaluation was carried out, under the supervision and with the participation of the Company's management, including our President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer), and Vice President and Corporate Controller (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 & Chief Executive Officer, Executive Vice President & Chief Financial Officer (Principal Financial Officer), and Vice President & Corporate Controller (Principal Accounting Officer) concluded that the Company’s disclosure controls and procedures were effective at the end of the period covered by this report. Management’s Annual Report on Internal Control over Financial Reporting . Management’s report on the Company’s internal control over financial reporting is included on page 45 of this Annual Report on Form 10-K and incorporated by reference herein. The Company’s independent registered public accounting firm has audited and issued a report on the Company’s internal control over financial reporting which is included on page 48 of this Annual Report on Form 10-K and incorporated by reference herein. 37 The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, and the firm’s report on this matter is included in Item 8 of this annual report on Form 10-K. Changes in Internal Controls over Financial Reporting . There have not been any changes in the Company's internal control over financial reporting (as such term is defined by paragraph (d) of Rule 13a-15 under the Securities Exchange Act) during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information (a) On February 27, 2020, the Board of Directors (the "Board") of the Company adopted forms of restricted stock award agreements, restricted stock unit agreements, and performance share unit agreements under the Company’s 2019 Equity Incentive Plan (the “Plan”), which was approved by stockholders at the Company’s 2019 annual meeting of stockholders. The form of restricted stock award agreement, restricted stock unit agreement and form of performance share unit agreement are attached to this Annual Report on Form 10-K as exhibit 10.23, 10.24 and 10.25, respectively, and the terms thereof are incorporated herein by reference. PART III Item 10. Directors, Executive Officers and Corporate Governance There are incorporated in this Item 10, by reference, those portions of the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders which appear therein under the captions “Proposal 1 - Election of Directors,” “Nominees for Election to the Board of Directors,” “Information Concerning Directors,” “Meetings and Committees of the Board,” “The Audit Committee,” and “The Nominating/Corporate Governance Committee." See also the information under the caption “Information About Our Executive Officers” in Part I of this Report. 38 The Board of Directors has delegated certain responsibilities to three Committees of the Board. The Committees are the Audit Committee, Compensation Committee and Nominating/Corporate Governance Committee. The Board of Directors has also adopted Corporate Governance guidelines and a Code of Business Conduct and Ethics for all employees, including the Chief Executive Officer, Principal Financial Officer, Principal Accounting Officer and those individuals performing similar functions. The Committee Charters, Code of Business Conduct and Ethics, and Corporate Governance Guidelines may be found on the Company’s website (www.alamo-group.com) under the “Our Commitment” tab and are also available in printed form at no charge by sending a request to the Corporate Secretary, Alamo Group Inc., 1627 E. Walnut Street, Seguin, Texas 78155, which is the principal executive office of the Company. The telephone number is (830) 379-1480. The Company will post any amendments to the Code of Conduct and Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on the Company’s website. Item 11. Executive Compensation There are incorporated in this Item 11, by reference, those portions of the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders which appear therein under the captions "Executive Compensation," “The Compensation Committee,” “Compensation Discussion and Analysis,” "Compensation Committee Report” and “Director Compensation during 2020.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters There is incorporated in this Item 12, by reference, that portion of the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders which appears under the caption “Beneficial Ownership of our Common Stock.” Information on Alamo Group Inc.’s Equity Compensation Plans The following table provides information on the shares that are available under the Company’s stock compensation plans and, in the case of plans where stock options may be granted, the number of shares of common stock issuable upon exercise of those stock options. The Company currently does not have an Equity Compensation Plan not approved by the Stockholders. The numbers in the table are as of December 31, 2020, the last day of Alamo Group Inc.’s 2020 fiscal year. A B C Equity Compensation Plan Category Number of Securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of Securities that remain available for future issuance under equity compensation plans (excluding securities reflected in column A) Plans approved by stockholders 2005 Incentive Stock Option Plan 36,170 $41.73 — 2009 Equity Incentive Plan 50,480 $95.55 — 2015 Incentive Stock Option Plan 64,750 $83.59 314,750 2019 Equity Incentive Plan 43,563 $111.94 455,549 Plans not approved by stockholders — — — Total 194,963 770,299 39 Item 13. Certain Relationships, Related Transactions and Director Independence Information regarding certain relationships and related transactions is set forth under the caption “Certain Relationships and Related Transactions” in the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders, and such information is incorporated by reference herein. There were no such reportable relationships or related party transactions in the fiscal year ended December 31, 2020. Information regarding director independence is set forth under the caption “Information Concerning Directors” in the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders, and such information is incorporated by reference herein. Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is set forth under the caption “Proposal 3 – Ratification of Appointment of Independent Auditors” in the Company’s definitive proxy statement for the 2021 Annual Meeting of Stockholders, and such information is incorporated by reference herein. 40 PART IV Item 15. Exhibits and Financial Statement Schedules Financial Statements Page Report of Management on Internal Control over Financial Reporting 45 Reports of Independent Registered Public Accounting Firm (KPMG LLP) 46 Consolidated Balance Sheets 49 Consolidated Statements of Income 50 Consolidated Statements of Comprehensive Income 51 Consolidated Statements of Stockholders’ Equity 52 Consolidated Statements of Cash Flows 53 Notes to Consolidated Financial Statements 54 Financial Statement Schedules All schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are omitted because they are not required or because the required information is included in the consolidated financial statements or notes thereto. Item 16. Summary None. Exhibits Exhibits – The following exhibits are incorporated by reference to the filing indicated or are included following the index to Exhibits. INDEX TO EXHIBITS Incorporated by Reference From the Following Exhibits Exhibit Title Documents 3.1 — Certificate of Incorporation, as amended, of Alamo Group Inc. Filed as Exhibit 3.1 to Form S-1, February 5, 1993 3.2 — Certificate of Amendment of Certificate of Incorporation of Alamo Group Inc. Filed as Exhibit 3.1 to Form 8-K, May 10, 2016 3.3 — By-Laws of Alamo Group Inc. as amended Filed as Exhibit 3.2 to Form 8-K, May 10, 2016 3.4 — By-Laws of Alamo Group Inc. as amended Filed as Exhibit 3. 1 to Form 8-K, Ma rch 30 , 20 20 4.1 — Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 Filed as Exhibit 4.1 to Form 10-K, February 28 , 2020 10.1 — Form of indemnification agreements with Directors of Alamo Group Inc. Filed as Exhibit 10.1 to Form 10-Q, May 15, 1997 10.2 — Form of indemnification agreements with certain executive officers of Alamo Group Inc. Filed as Exhibit 10.2 to Form 10-Q, May 15, 1997 *10.3 — 401(k) Restoration Plan for Highly Compensated Employees, adopted on December 9, 1997 Filed as Exhibit 10.15 to Form 10-K, March 31, 1998 41 *10.4 — First Amended and Restated 1999 Non-Qualified Stock Option Plan, adopted by the Board of Directors on February 13, 2001 Filed as Exhibit B to Schedule 14A, March 30, 2001 *10.5 — 2005 Incentive Stock Option Plan, adopted by the Board of Directors on May 4, 2005 Filed as Appendix E to Schedule 14A, March 29, 2005 *10.6 — 2009 Equity Incentive Plan, adopted by the Board of Directors on May 7, 2009 Filed as Exhibit 10.1 to Form 8-K, May 13, 2009 10.7 — Second Amended and Restated Credit Agreement, dated as of October 24, 2019, by and among Alamo Group Inc., Bank of America, N.A. as administrative agent, Wells Fargo Bank, National Association, and BBVA USA as co-syndication agents, and the other lenders party thereto. Filed as Exhibit 10.1 to Form 8-K, October 29, 2019 10.8 — Securities Purchase Agreement, dated as of September 11, 2019, by and among Alamo Acquisition Corporation, a Delaware corporation, Alamo Group Inc., a Delaware corporation, Stellex Capital Partners, LP, a Delaware limited partnership, and in its capacity as the initial representative of the other Sellers and Morbark Holdings Group, LLC, a Delaware limited liability company. Filed as Exhibit 10.1 to Form 8-K, September 17, 2019 10.9 — First Amendment to Securities Purchase Agreement, dated as of October 22, 2019, by and among Alamo Acquisition Corporation, a Delaware corporation, Alamo Group Inc., a Delaware corporation, Stellex Capital Partners, LP, a Delaware limited partnership, and in its capacity as the initial representative of the other Sellers pursuant to Section 10.6 of the Securities Purchase Agreement. Filed as Exhibit 10.2 to Form 10-Q, October 31, 2019 *10.10 — Form of Restricted Stock Award Agreement under the 2009 Equity Incentive Plan Filed as Exhibit 10.2 to Form 8-K, May 13, 2009 *10.11 — Form of Restricted Stock Unit Award Agreement under the 2009 Equity Incentive Plan Filed as Exhibit 10.3 to Form 8-K, May 13, 2009 *10.12 — Form of Nonqualified Stock Option Agreement under the 2009 Equity Incentive Plan Filed as Exhibit 10.4 to Form 8-K, May 13, 2009 *10.13 — Form of Nonqualified Stock Option Agreement under the First Amended and Restated 1999 Nonqualified Stock Option Plan Filed as Exhibit 10.5 to Form 8-K, May 13, 2009 *10.14 — Form of Stock Option Agreement under the 2005 Stock Option Plan Filed as Exhibit 10.6 to Form 8-K, May 13, 2009 10.15 — Investor Rights Agreement, dated October 22, 2009, between Alamo Group Inc. and Bush Hog, LLC Filed as Exhibit 10.25 to Form 10-K, March 12, 2012 *10.16 — Supplemental Executive Retirement Plan Filed as Exhibit 10.1 to Form 8-K, January 18, 2011 *10.17 — Amended and Restated Executive Incentive Plan Filed as Exhibit 10.26 to Form 10-K, March 1, 2018 *10.18 — 2015 Incentive Stock Option Plan, adopted by the Board of Directors on May 7, 2015 Filed as Appendix A to Schedule 14A, March 19, 2015 *10.19 Alamo Group Inc. 2019 Equity Incentive Plan Filed as Exhibit 10.1 to Form 8-K, May 7, 2019 *10.20 Form of Restricted Stock Award Agreement under the Alamo Group Inc. 2019 Equity Incentive Plan Filed as Exhibit 10.23 to Form 10-K, February 28, 2020 *10.21 Form of Restricted Stock Unit Agreement under the Alamo Group Inc. 2019 Equity Incentive Plan Filed as Exhibit 10.24 to Form 10-K, February 28, 2020 *10.22 Form of Performance Share Unit Agreement under the Alamo Group Inc. 2019 Equity Incentive Plan Filed Herewith 42 10.23 Executive Change in Control Agreement Filed as Exhibit 10.1 to Form 8-K, March 10, 2020 21.1 — Subsidiaries of the Registrant Filed Herewith 23.1 — Consent of KPMG LLP Filed Herewith 31.1 — Certification by Ronald A. Robinson under Section 302 of the Sarbanes-Oxley Act of 2002 Filed Herewith 31.2 — Certification by Dan E. Malone under Section 302 of the Sarbanes-Oxley Act of 2002 Filed Herewith 31.3 — Certification by Richard J. Wehrle under Section 302 of the Sarbanes-Oxley Act of 2002 Filed Herewith 32.1 — Certification by Ronald A. Robinson under Section 906 of the Sarbanes-Oxley Act of 2002 Filed Herewith 32.2 — Certification by Dan E. Malone under Section 906 of the Sarbanes-Oxley Act of 2002 Filed Herewith 32.3 — Certification by Richard J. Wehrle under Section 906 of the Sarbanes-Oxley Act of 2002 Filed Herewith 101.INS — XBRL Instance Document Filed Herewith 101.SCH — XBRL Taxonomy Extension Schema Document Filed Herewith 101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document Filed Herewith 101.LAB — XBRL Taxonomy Extension Label Linkbase Document Filed Herewith 101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document Filed Herewith 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document Filed Herewith 104 — Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) Filed Herewith ________________________________________________________________________________________________________________________ *Compensatory Plan 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ALAMO GROUP INC. Date: February 25, 2021 /s/ Ronald A. Robinson Ronald A. Robinson President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the 25th day of February, 2021. Signature Title /s/ RODERICK R. BATY Roderick R. Baty Chairman of the Board & Director /s/ RONALD A. ROBINSON Ronald A. Robinson President, Chief Executive Officer (Principal 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) /s/ ROBERT P. BAUER Robert P. Bauer Director /s/ ERIC P. ETCHART Eric P. Etchart Director /s/ TRACY C. JOKINEN Tracy C. Jokinen Director /s/ RICHARD W. PAROD Richard W. Parod Director /s/ LORIE L. TEKORIUS Lorie L. Tekorius Director 44 Report of Management on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 using the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the Company’s management concludes that, as of December 31, 2020, the Company’s internal controls over financial reporting were effective based on these criteria. KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the effectiveness of internal control over financial reporting, which is included herein. Date: February 25, 2021 /s/ Ronald A. Robinson Ronald A. Robinson President, Chief Executive Officer & Director (Principal 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) 45 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Alamo Group Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Alamo Group Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Sufficiency of evidence over the existence of inventory As discussed in Note 6 to the consolidated financial statements, the value of inventory was $230 million as of December 31, 2020. To facilitate the global delivery of goods to customers, the Company operates across North America, South America, Europe and Australia. Within these locations, the Company has 27 principal manufacturing plants located in seven countries. We identified the assessment of the sufficiency of evidence over the existence of inventory as a critical audit matter. The geographical dispersion of inventory required especially subjective auditor judgment in determining the sufficiency of audit evidence obtained over the existence of inventory. 46 The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the existence of inventory including determining where we would perform procedures. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s inventory process at certain manufacturing plants. This included controls related to the physical inspection of inventories at certain plants. We performed independent test counts for a sample of items and compared them to the Company’s records to evaluate the inventory at those specific plants. We selected a sample of inventory transactions that were made by the Company near the Company’s fiscal year-end and evaluated the accounting period in which they were recorded. We evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed. /s/KPMG LLP We have served as the Company’s auditor since 2009. San Antonio, Texas February 25, 2021 47 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Alamo Group Inc.: Opinion on Internal Control Over Financial Reporting We have audited Alamo Group Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/KPMG LLP San Antonio, Texas February 25, 2021 48 Alamo Group Inc. and Subsidiaries Consolidated Balance Sheets Year Ended December 31, (in thousands, except per share amounts) 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 50,195 $ 42,311 Accounts receivable, net 209,276 237,837 Inventories, net 229,971 267,674 Prepaid expenses and other current assets 7,382 10,099 Income tax receivable 6,186 12,907 Total current assets 503,010 570,828 Rental equipment, net 42,266 56,467 Property, plant and equipment 312,362 302,113 Less: Accumulated depreciation ( 156,928 ) ( 141,388 ) Total property, plant and equipment, net 155,434 160,725 Goodwill 195,132 198,022 Intangible assets, net 193,172 206,272 Deferred income taxes 1,203 1,078 Other non-current assets 19,112 19,371 Total assets $ 1,109,329 $ 1,212,763 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade accounts payable $ 75,317 $ 81,986 Income taxes payable 2,278 2,362 Accrued liabilities 64,634 59,686 Current maturities of long-term debt and finance lease obligations 15,066 18,840 Total current liabilities 157,295 162,874 Long-term debt and finance lease obligations, net of current maturities 270,320 425,141 Long-term tax liability 3,954 7,432 Deferred pension liability 1,731 1,844 Other long-term liabilities 30,744 19,254 Deferred income taxes 19,642 26,461 Stockholders’ equity: Common stock, $ .10 par value, 20,000,000 shares authorized; 11,809,926 and 11,752,509 outstanding at December 31, 2020 and December 31, 2019, respectively 1,181 1,175 Additional paid-in capital 118,528 113,666 Treasury stock, at cost; 82,600 shares at December 31, 2020 and December 31, 2019 ( 4,566 ) ( 4,566 ) Retained earnings 550,826 500,320 Accumulated other comprehensive loss ( 40,326 ) ( 40,838 ) Total stockholders’ equity 625,643 569,757 Total liabilities and stockholders’ equity $ 1,109,329 $ 1,212,763 See accompanying notes. 49 Alamo Group Inc. and Subsidiaries Consolidated Statements of Income Year Ended December 31, (in thousands, except per share amounts) 2020 2019 2018 Net sales: Industrial $ 811,161 $ 768,454 $ 638,198 Agricultural 352,305 350,684 370,624 Total net sales 1,163,466 1,119,138 1,008,822 Cost of sales 871,356 845,911 752,707 Gross profit 292,110 273,227 256,115 Selling, general and administrative expenses 184,199 172,921 151,522 Amortization expense 14,746 5,658 3,505 Income from operations 93,165 94,648 101,088 Interest expense ( 15,837 ) ( 10,747 ) ( 5,493 ) Interest income 1,366 1,229 410 Other income ( 557 ) ( 795 ) ( 1,474 ) Income before income taxes 78,137 84,335 94,531 Provision for income taxes 21,507 21,429 21,045 Net income $ 56,630 $ 62,906 $ 73,486 Net income per common share: Basic $ 4.81 $ 5.36 $ 6.30 Diluted $ 4.78 $ 5.33 $ 6.25 Average common shares: Basic 11,782 11,729 11,660 Diluted 11,845 11,800 11,761 See accompanying notes. 50 Alamo Group Inc. and Subsidiaries Consolidated Statements of Comprehensive Income Year Ended December 31, (in thousands, except per share amounts) 2020 2019 2018 Net income $ 56,630 $ 62,906 $ 73,486 Other comprehensive income (loss): Foreign currency translation adjustment 8,862 3,363 ( 13,347 ) Unrealized (loss) gains on derivative instruments ( 9,326 ) 610 — Net loss on pension and other post-retirement benefits ( 1,096 ) ( 683 ) ( 1,667 ) Other comprehensive (loss) income before income tax (expense) benefit ( 1,560 ) 3,290 ( 15,014 ) Income tax benefit related to items of other comprehensive income (loss) 2,072 703 349 Other comprehensive income (loss) $ 512 $ 3,993 $ ( 14,665 ) Comprehensive income $ 57,142 $ 66,899 $ 58,821 See accompanying notes. 51 Alamo Group Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Stock- holders’ Equity (in thousands) Shares Amount Balance at December 31, 2017 11,534 $ 1,158 $ 103,864 $ ( 426 ) $ 374,678 $ ( 30,166 ) $ 449,108 Other comprehensive income — — — — 73,486 ( 14,665 ) 58,821 Stock-based compensation expense — — 2,450 — — — 2,450 Stock-based compensation transactions 86 8 2,108 — — — 2,116 Dividends paid ($ 0.44 per share) — — — — ( 5,124 ) — ( 5,124 ) Balance at December 31, 2018 11,620 $ 1,166 $ 108,422 $ ( 426 ) $ 443,040 $ ( 44,831 ) $ 507,371 Other comprehensive income — — — — 62,906 3,993 66,899 Stock-based compensation expense — — 3,269 — — — 3,269 Stock-based compensation transactions 90 9 1,975 — — — 1,984 Repurchased shares ( 40 ) — — ( 4,140 ) — — ( 4,140 ) Dividends paid ($ 0.48 per share) — — — — ( 5,626 ) — ( 5,626 ) Balance at December 31, 2019 11,670 $ 1,175 $ 113,666 $ ( 4,566 ) $ 500,320 $ ( 40,838 ) $ 569,757 Other comprehensive income — — — — 56,630 512 57,142 Stock-based compensation expense — — 4,119 — — — 4,119 Stock-based compensation transactions 57 6 743 — — — 749 Dividends paid ($ 0.52 per share) — — — — ( 6,124 ) — ( 6,124 ) Balance at December 31, 2020 11,727 $ 1,181 $ 118,528 $ ( 4,566 ) $ 550,826 $ ( 40,326 ) $ 625,643 See accompanying notes. 52 Alamo Group Inc. and Subsidiaries Consolidated Statements of Cash Flows Year Ended December 31, (in thousands) 2020 2019 2018 Operating Activities Net income $ 56,630 $ 62,906 $ 73,486 Adjustments to reconcile net income to cash provided by operating activities: Provision for doubtful accounts 860 575 71 Depreciation - PP&E 19,264 14,934 12,884 Depreciation - Rental 9,830 9,373 6,725 Amortization of intangibles 14,746 5,658 3,505 Amortization of debt issuance 634 295 221 Stock-based compensation expense 4,119 3,269 2,450 Provision for deferred income tax (benefit) expense ( 1,301 ) 3,316 2,052 Gain on sale of property, plant and equipment ( 1,094 ) ( 912 ) ( 361 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 28,064 11,447 ( 27,029 ) Inventories 39,895 657 ( 25,991 ) Rental equipment 4,542 ( 20,729 ) ( 22,424 ) Prepaid expenses and other 6,373 ( 4,633 ) ( 583 ) Trade accounts payable and accrued liabilities ( 3,783 ) 6,397 4,130 Income taxes payable 6,601 ( 4,861 ) ( 10,332 ) Long term tax payable ( 3,478 ) ( 1,082 ) ( 6,196 ) Other assets and liabilities, net 2,431 2,203 302 Net cash provided by operating activities 184,333 88,813 12,910 Investing Activities Acquisitions, net of cash acquired — ( 400,784 ) — Purchase of property, plant and equipment ( 17,874 ) ( 31,337 ) ( 26,587 ) Proceeds from sale of property, plant and equipment 3,703 2,277 1,341 Purchase of patents — ( 96 ) ( 112 ) Net cash used in investing activities ( 14,171 ) ( 429,940 ) ( 25,358 ) Financing Activities Borrowings on bank revolving credit facility 115,000 217,000 159,000 Repayment on bank revolving credit facility ( 255,000 ) ( 157,000 ) ( 134,000 ) Principal payments on long-term debt and capital leases ( 18,867 ) ( 122 ) 216 Proceeds from issuance of long-term debt — 300,002 — Debt issuance cost — ( 2,875 ) — Dividends paid ( 6,124 ) ( 5,626 ) ( 5,124 ) Proceeds from exercise of stock options 1,459 2,573 2,552 Treasury stock repurchased — ( 4,140 ) — Common stock repurchased ( 710 ) ( 589 ) ( 436 ) Net cash (used in) provided by financing activities ( 164,242 ) 349,223 22,208 Effect of exchange rate changes on cash 1,964 172 ( 1,090 ) Net change in cash and cash equivalents 7,884 8,268 8,670 Cash and cash equivalents at beginning of the year 42,311 34,043 25,373 Cash and cash equivalents at end of the year $ 50,195 $ 42,311 $ 34,043 Cash paid during the year for: Interest $ 17,049 $ 9,455 $ 5,199 Income taxes $ 17,140 $ 23,099 $ 30,295 See accompanying notes. 53 Alamo Group Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. SIGNIFICANT ACCOUNTING POLICIES Description of the Business and Segments The Company manufactures, distributes and services high quality tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, excavators, vacuum trucks, forestry and tree maintenance equipment, snow removal equipment, leaf collection equipment, pothole patchers, zero turn radius mowers, agricultural implements and related aftermarket parts and services. The Company manages its business through two principal reporting segments: Industrial and Agricultural which are discussed in Note 18 . Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of Alamo Group Inc. and its subsidiaries (the “Company” or “Alamo Group”), all of which are wholly owned. All intercompany accounts and transactions have been eliminated in consolidation. Reclassifications At the beginning of the fourth quarter of 2019, the Company began reporting operating results on the basis of two segments, the Industrial Division and the Agricultural Division. Prior to the fourth quarter of 2019, the Company had been reporting its operating results on the basis of three segments which included the Company's European Division. The Company's European Division was a mixture of industrial and agricultural products similar to those within the other two segments. The prior period segment information has been retrospectively adjusted to reflect the current segment presentation in Note 18 to the Consolidated Financial Statements. Use of Estimates The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amount of assets, liabilities, revenues, and expenses reported in the financial statements and accompanying notes. Judgments related to asset impairment and certain reserves are particularly subject to change. Actual results could differ from those estimates. Such estimates include, but are not limited to, allowance for doubtful accounts, reserve for sales discounts, estimated realizable value on obsolete and slow-moving inventory, warranty reserve, estimates related to pension accounting, estimates related to fair value for purposes of assessing goodwill, long-lived assets and intangible assets for impairment, estimates related to income taxes, and estimates related to contingencies. Foreign Currency The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the end of the year. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in Accumulated other comprehensive income (loss). Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. As of December 31, 2020 and December 31, 2019, there was no restricted cash. 54 Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The credit risk is limited because of the large numbers and types of customers and their geographic dispersion. Inventories Inventories of U.S. operating subsidiaries are stated at the lower of cost (last-in, first-out method) (“LIFO”) or market, and the Company’s international subsidiaries’ inventories are stated at the lower of cost (first-in, first-out) (“FIFO”) or market. Inventory costs include those costs directly attributable to products, including raw materials, labor and overhead. Property, Plant and Equipment Property, plant, and equipment are stated on the basis of cost. Major renewals and betterments are charged to the property accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed to the current period. Depreciation is provided at amounts calculated to amortize the cost of the assets over their estimated useful economic lives using the straight-line method. Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, rental equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares non-discounted cash flows expected to be generated by that asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on a non-discounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Goodwill Goodwill represents the excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is instead tested for impairment at least annually, or whenever events or circumstances change between the annual impairment tests that make it likely that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. The Company performs its annual test for goodwill impairment related to its reporting units on October 1 of each fiscal year. Impairment testing for goodwill is done at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available, and segment management regularly reviews the operating results of that component. We perform a qualitative assessment for all of our reporting units to determine whether it is more likely than not that an impairment exists. Factors considered include macroeconomic, industry and competitive conditions, legal and regulatory environment, historical financial performance and significant changes in the reporting unit. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. Alternatively, we may also bypass the qualitative assessment and go ahead and perform step 1 to determine if the carrying amount exceeds the reporting unit’s fair value. If the fair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds the fair value. However, the loss recognized cannot exceed the carrying amount of goodwill. We typically use discounted cash flow models to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those we believe a hypothetical marketplace participant would use. See Note 8 to the Consolidated Financial Statements for more information regarding goodwill. 55 Intangible Assets The Company has intangible assets with both definite and indefinite useful lives. The definite-lived assets are trade names and trademarks, customer and dealer relationships, and patents and drawings that are subject to amortization with useful lives ranging from 3 years to 25 years. Impairment of definite-lived assets is discussed as part of the Impairment of Long-Lived Assets paragraph above. The indefinite-lived assets not subject to amortization consist of trade names. The Company tests its indefinite-lived intangible assets for impairment on an annual basis at year-end, or more frequently if an event occurs or circumstances change that indicate that the fair value of an indefinite-lived intangible asset could be below its carrying amount. The impairment test consists of comparing the fair value of the indefinite-lived intangible asset, determined using the relief from royalty method, with its carrying amount. An impairment loss would be recognized for the carrying amount in excess of its fair value. See Note 9 to the Consolidated Financial Statements for more information regarding intangible assets. Leases We determine if an arrangement is a lease at inception. Operating leases are included in other non-current assets, accrued liabilities, and other long-term liabilities on our consolidated balance sheets. Finance leases are included in property, plant and equipment, accrued liabilities, and other long-term liabilities on our consolidated balance sheets. 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 as allowed by ASC. See Note 10 to the Consolidated Financial Statements for more information regarding leases. Pensions The Company records annual amounts relating to its pension and post-retirement plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in Accumulated other comprehensive income (loss) and amortized to net periodic cost over future periods using the corridor method. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefits. Revenue Recognition The majority of the Company's revenue is recognized from product sales under contracts with customers. The Company presents two reportable operating segments within its financial statements: Industrial and Agricultural. Contract terms and performance obligations within each contractual agreement are generally consistent for both divisions, with small differences that do not have a significant impact on the revenue recognition considerations under Topic 606. Revenues are recognized when we satisfy our performance obligation to transfer product to our customers, which typically occurs at a point in time upon shipment or delivery of the product, and for an amount that reflects the transaction price that is allocated to the performance obligation. Our contracts with customers state the 56 final terms of sale, including the description, quantity and price for goods sold. In the normal course of business, we generally do not accept product returns. The transaction price is the consideration that we expect to be entitled to in exchange for our products. Some of our contracts contain variable consideration in the form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, we estimate the factors that determine the variable consideration in order to establish the transaction price. We have elected that any taxes collected from customers and remitted to government authorities (i.e., sales tax, use tax, etc.) are excluded from the measurement of the transaction price and therefore are excluded from net sales in the consolidated statements of operations. There are instances where we provide shipping services in relation to the goods sold to our customers. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of goods sold. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service. Rental Equipment The Company enters into operating lease agreements with customers related to the rental of certain equipment. In accounting for these leases, the cost of the equipment purchased or manufactured by the Company is recorded as an asset, and is depreciated over its estimated useful life. Accumulated depreciation relating to the rental equipment was $ 18.0 million and $ 14.6 million on December 31, 2020 and December 31, 2019, respectively. Shipping and Handling Costs The Company’s policy is to include shipping and handling costs in costs of goods sold. Advertising We charge advertising costs to expense as incurred. Advertising and marketing expense related to operations for fiscal years 2020, 2019, and 2018 was approximately $ 10.1 million, $ 12.2 million and $ 11.8 million, respectively. Advertising and marketing expenses are included in Selling, General and Administrative expenses (“SG&A”). Research and Development Product development and engineering costs charged to SG&A amounted to $ 12.4 million, $ 12.0 million, and $ 10.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company's policy is to accrue for legal costs expected to be incurred in connection with loss contingencies. Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial reporting basis and tax basis of assets and liabilities, and are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, available tax carry backs and tax planning strategies in making this assessment other than those which we have reserved. We have elected to treat the global intangible low-taxed income (GILTI) tax as a period expense. 57 Stock-Based Compensation The Company has granted options to purchase its common stock, restricted stock awards,restricted stock units, and performance stock units to certain employees and directors of the Company and its affiliates under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding ten years and are forfeited in the event that the employee or director terminates his or her employment or relationship with the Company or one of its affiliates other than by retirement or death. These options generally vest over five years . All option plans contain anti-dilutive provisions that permit an adjustment of the number of shares of the Company’s common stock represented by each option for any change in capitalization. Excess tax benefits or awards that are recognized in equity related to stock option exercises are reflected as cash flows from financing activities in the statement of cash flows. The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the following assumptions noted: 1. The risk-free rate is based on the U.S. Treasury rate over the expected life of the option at the time of the grant. 2. The dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of the grant. 3. The expected volatility factors are based on the historical movement of the Company’s common stock price over the expected life of the option. 4. The expected life is the average length of time in which officers, other employees, and non-employee directors are expected to exercise their options, and which are primarily based on historical experience. The Company calculated the fair value for options with the following weighted-average assumptions for 2020, 2019, and 2018: Fair Value Calculation Assumptions for Stock Compensation December 31, 2020 2019 2018 Risk-free interest rate 1.22 % 2.43 % 2.94 % Dividend yield 0.5 % 0.5 % 0.5 % Volatility factors 30.0 % 31.2 % 34.5 % Weighted-average expected life 8.0 years 8.0 years 8.0 years Earnings per Common Share (“EPS”) Basic EPS is computed using the weighted-average number of common shares outstanding during the year. The treasury stock method is used to compute diluted EPS which gives effect to the potential dilution of earnings that could have occurred if additional shares were issued for awards granted under the Company’s incentive stock option plans. The treasury stock method assumes proceeds obtained upon exercise of awards granted under the incentive stock option plans are used to purchase outstanding common stock at the average market price during the period. 2. ACCOUNTING PRONOUNCEMENTS Accounting Pronouncements Adopted on January 1, 2020 In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirements on fair value measurements. Among other things, the amendments added disclosures for changes in unrealized gains and losses on Level 3 fair value measurements and required additional disclosures on unobservable inputs associated with Level 3 assets. The guidance became effective for us on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. 58 In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” to improve information on credit losses for financial instruments. The ASU replaces the previous incurred loss impairment methodology with a methodology that reflects expected credit losses. This guidance became effective for us on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements. Accounting Pronouncements Not Yet Adopted In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-14, “Compensation, Defined Benefit Plans", which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The update removes certain disclosures that are no longer considered cost beneficial and adds disclosure requirements identified as relevant. We have elected to adopt this accounting guidance as of January 1, 2021. In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” to simplify the accounting for income taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We have elected to adopt this accounting guidance as of January 1, 2021. 3. BUSINESS COMBINATIONS Morbark, LLC. On October 24, 2019, the Company completed the acquisition of 100 % of the outstanding capital shares of Morbark, LLC. (" Morbark ") a former portfolio company of Stellex Capital Management. Morbark manufacturers equipment and aftermarket parts for forestry, tree maintenance, biomass, land management and recycling markets. These products are marketed under the Morbark, Rayco, Denis Cimaf and Boxer Equipment brand names. The total consideration for the purchase was approximately $ 354.0 million on a debt free basis and subject to certain post-closing adjustments. The primary reason for the acquisition is to expand and complement our range of vegetation maintenance equipment in an adjacent market along with accelerating Morbark's international growth using the Company's existing presence in Europe, Brazil and Australia. The acquisition was accounted for in accordance with ASC Topic 805 Business Combinations ("ASC Topic 805"). The total purchase price has been allocated to assets acquired and liabilities assumed, including deferred taxes, as of October 24, 2019. The Company completed its review of the valuation of the purchase price allocation for Morbark during the fourth quarter of 2020. The Company found that no additional changes were necessary and that the values disclosed in the Company's 2020 third quarter 10-Q were final. The valuation of Morbark resulted in goodwill of $ 98.6 million, all of which has been assigned to the Company's Industrial reporting segment, $ 93.0 million of goodwill is tax deductible, the remaining balance is not. In the period between the date of acquisition and December 31, 2019, Morbark generated approximately $ 35.1 million of net sales and $ 1.5 million of net loss. The Company has included the operating results of Morbark in its consolidated financial statements since the date of acquisition. 59 The following table reflects the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date (in thousands): Accounts receivable $ 13,966 Inventory 72,972 Prepaid and other assets 5,180 Rental Equipment 1,133 Property, plant and equipment 42,969 Intangible assets 149,790 Deferred tax liability ( 4,982 ) Other liabilities assumed ( 30,056 ) Net assets assumed $ 250,972 Goodwill 98,604 Total Acquisition Price net cash 349,576 Plus: Cash 4,735 Total Consideration $ 354,311 Dutch Power Company B.V. On March 4, 2019, the Company acquired 100 % of the issued and outstanding equity interests of Dutch Power Company B.V. (" Dutch Power "). Dutch Power designs, manufactures and sells a variety of landscape and vegetation management machines primarily in Europe. The primary reason for the Dutch Power acquisition was to enhance the Company's platform for growth by increasing both the Company's product portfolio and capabilities in the European market. The acquisition price was approximately $ 53.0 million. The Company completed its review of the valuation of the purchase price allocation for Dutch Power during the first quarter of 2020. The Company found that no additional changes were necessary and that the values disclosed in the 2019 10-K were final. 4. 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 does not differ. (in thousands, except per share amounts) 2020 2019 2018 Net income $ 56,630 $ 62,906 $ 73,486 Average common shares: Basic (weighted-average outstanding shares) 11,782 11,729 11,660 Dilutive potential common shares from stock options 63 71 101 Diluted (weighted-average outstanding shares) 11,845 11,800 11,761 Basic earnings per share $ 4.81 $ 5.36 $ 6.30 Diluted earnings per share $ 4.78 $ 5.33 $ 6.25 Stock options totaling 9,864 shares in 2020, 4,244 shares in 2019, and 4,850 shares in 2018 were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive. 60 5. VALUATION AND QUALIFYING ACCOUNTS Valuation and qualifying accounts included the following: (in thousands) Balance Beginning of Year Net Charged to Costs and Expenses Translations, Reclassifications and Acquisitions Net Write-Offs or Discounts Taken Balance End of Year 2020 Reserve for sales discounts $ 16,883 $ 93,398 $ 15 $ ( 96,747 ) $ 13,549 Reserve for inventory obsolescence 8,233 4,609 1,471 ( 2,286 ) 12,027 Reserve for warranty 10,249 8,466 247 ( 9,866 ) 9,096 2019 Reserve for sales discounts $ 18,123 $ 91,962 $ 39 $ ( 93,241 ) $ 16,883 Reserve for inventory obsolescence 7,194 5,711 6,467 ( 11,139 ) 8,233 Reserve for warranty 4,992 8,273 4,343 ( 7,359 ) 10,249 2018 Reserve for sales discounts $ 15,652 $ 91,082 $ ( 48 ) $ ( 88,563 ) $ 18,123 Reserve for inventory obsolescence 6,932 3,773 ( 116 ) ( 3,395 ) 7,194 Reserve for warranty 5,335 5,815 ( 144 ) ( 6,014 ) 4,992 Sales Discounts On December 31, 2020, the Company had $ 13.5 million in reserves for sales discounts compared to $ 16.9 million on December 31, 2019 on product shipped to our customers under various promotional programs. The most common programs provide a discount when the customer pays within a specified period of time. The Company reviews the reserve quarterly based on analysis made on each program outstanding at the time. The cost of these discounts is estimated based on historical experience and known changes in promotional programs and is reported as a reduction to sales when the product sale is recognized. The reserve is adjusted if discounts paid differ from those estimated. Historically, those adjustments have not been material. Inventories – Obsolete and Slow Moving The Company had a reserve of $ 12.0 million on December 31, 2020 and $ 8.2 million on December 31, 2019 to cover obsolete and slow moving inventory. The increase in the reserve was primarily attributable to the Company's Industrial Division. The obsolete and slow moving inventory reserve is calculated as follows: 1) no inventory usage over a three-year period is deemed obsolete and reserved at 100 %; and 2) slow moving inventory with little usage requires a 100 % reserve on items that have a quantity greater than a three-year supply. There are exceptions to the obsolete and slow moving classifications if approved by an officer of the Company, based on specific identification of an item or items that are deemed to be either included or excluded from this classification. In cases where there is no historical data, management makes a judgment based on a specific review of the inventory in question to determine what reserves, if any, are appropriate. New products or parts are generally excluded from the reserve until a three-year history has been established. Warranty The Company’s warranty policy is generally to provide its customers warranty for up to one year on all wholegood units and 90 days on parts, though some components can have warranty for longer terms. Warranty reserve, as a percentage of sales, is generally calculated by looking at the current twelve months ’ expenses and prorating that amount based on twelve months ’ sales with a 90 day to six-month lag period. The Company’s historical experience is that an end-user takes approximately 90 days to six months from the receipt of the unit to file a warranty claim. A warranty reserve is established for each different marketing group. The current liability warranty reserve balance was $ 9.1 million on December 31, 2020 and $ 10.2 million on December 31, 2019 and is included in Note 11 . 61 6. INVENTORIES Inventories valued at LIFO represented 41 % and 42 % of total inventory for the years ended December 31, 2020 and 2019, respectively. The excess of current costs (market value) over LIFO-valued inventories was $ 12.5 million and $ 10.9 million on December 31, 2020 and December 31, 2019, respectively. Inventories consisted of the following on a cost basis, net of reserves for obsolescence and LIFO: December 31, (in thousands) 2020 2019 Finished goods and parts $ 196,126 $ 227,823 Work in process 21,225 21,918 Raw materials 12,620 17,933 Inventory, net $ 229,971 $ 267,674 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: December 31, (in thousands) 2020 2019 Useful Lives Land $ 14,908 $ 13,876 Buildings and improvements 149,048 135,474 5 - 20 yrs. Machinery and equipment 116,825 121,870 3 - 10 yrs. Office furniture and equipment 11,743 10,749 3 - 7 yrs. Computer software 12,276 12,665 3 - 7 yrs. Transportation equipment 7,562 7,479 3 yrs. Property, plant and equipment, at cost 312,362 302,113 Accumulated depreciation ( 156,928 ) ( 141,388 ) Property, plant and equipment, net $ 155,434 $ 160,725 8. GOODWILL The changes in the carrying amount of goodwill for the year ended December 31, 2018, 2019, and 2020 are as follows: Industrial Agricultural Consolidated (in thousands) Balance at December 31, 2017 $ 69,504 $ 15,257 $ 84,761 Translation adjustment ( 916 ) ( 1,460 ) ( 2,376 ) Goodwill adjustment 84 774 858 Balance at December 31, 2018 $ 68,672 $ 14,571 $ 83,243 Translation adjustment ( 124 ) 144 20 Goodwill acquired 114,759 — 114,759 Balance at December 31, 2019 $ 183,307 $ 14,715 $ 198,022 Translation adjustment 2,089 ( 921 ) 1,168 Goodwill adjustment ( 4,058 ) — ( 4,058 ) Balance at December 31, 2020 $ 181,338 $ 13,794 $ 195,132 62 9. DEFINITE- AND INDEFINITE-LIVED INTANGIBLE ASSETS The following is a summary of both the Company's definite and indefinite-lived intangible assets net of the accumulated amortization: (in thousands) Estimated Useful Lives December 31, 2020 December 31, 2019 Definite: Trade names and trademarks 15 - 25 years $ 67,770 $ 67,222 Customer and dealer relationships 8 - 15 years 122,470 121,508 Patents and developed technologies 3 - 12 years 28,764 28,485 Favorable leasehold interests 7 years 4,200 4,200 Total at cost 223,204 221,415 Less accumulated amortization ( 35,532 ) ( 20,643 ) Total net 187,672 200,772 Indefinite: Trade names and trademarks 5,500 5,500 Total Intangible Assets $ 193,172 $ 206,272 The Company's net carrying value at December 31, 2020 of intangible assets with definite useful lives consists of trade names and trademarks at $ 59.4 million, customer and dealer relationships at $ 100.5 million, patents and drawings at $ 24.3 million, and favorable leasehold interests at $ 3.5 million. As of December 31, 2020, the related accumulated amortization balance for the definite-lived assets were $ 8.4 million for trade names and trademarks, $ 21.9 million for customer and dealer relationships, $ 4.5 million for patents and drawings, and $ 0.7 million for favorable leasehold interests. The Company estimates amortization expense to be $ 14.5 million for each of the next five years. Indefinite-lived trade names and trademarks consisted of the Gradall trade name with a carrying value of $ 3.6 million and the Bush Hog trade name with a carrying value of $ 1.9 million. 63 10. LEASES Leases The Company leases office space and equipment under various operating and capital leases, which generally are expected to be renewed or replaced by other leases. As of December 31, 2020, the components of lease cost were as follows: Components of Lease Cost Twelve Months Ended December 31, (in thousands) 2020 2019 Finance lease cost: Amortization of right-of-use assets $ 89 $ 125 Interest on lease liabilities 7 10 Operating lease cost 4,824 4,457 Short-term lease cost 818 594 Variable lease cost 487 464 Total lease cost $ 6,225 $ 5,650 As of December 31, 2020, future minimum lease payments under these non-cancelable leases are: Future Minimum Lease Payments December 31, 2020 (in thousands) Operating Leases Finance Leases 2021 $ 4,072 $ 69 2022 3,063 40 2023 2,089 17 2024 1,465 17 2025 1,244 16 Thereafter 3,622 — Total minimum lease payments $ 15,555 $ 159 Less imputed interest ( 1,310 ) ( 6 ) Total lease liabilities $ 14,245 $ 153 As of December 31, 2019, future minimum lease payments under these non-cancelable leases are: December 31, 2019 (in thousands) Operating Leases Finance Leases 2020 $ 4,305 $ 97 2021 2,718 83 2022 2,051 45 2023 1,459 22 2024 941 19 Thereafter 2,587 14 Total minimum lease payments $ 14,061 $ 280 Less imputed interest ( 1,100 ) ( 16 ) Total lease liabilities $ 12,961 $ 264 64 Rental expense for operating leases was $ 6.1 million for 2020, $ 5.5 million for 2019, and $ 5.1 million for 2018. Future Lease Commencements As of December 31, 2020, we have additional operating leases, that have not yet commenced in the amount of $ 0.9 million. These operating leases will commence in fiscal year 2021. Supplemental balance sheet information related to leases was as follows: Operating Leases December 31, (in thousands) 2020 2019 Other non-current assets $ 14,144 $ 12,858 Accrued liabilities 3,680 3,972 Other long-term liabilities 10,565 8,989 Total operating lease liabilities $ 14,245 $ 12,961 Finance Leases December 31, (in thousands) 2020 2019 Property, plant and equipment, gross $ 331 $ 524 Accumulated Depreciation ( 211 ) ( 265 ) Property, plant and equipment, net $ 120 $ 259 Current maturities of long-term debt and finance lease obligations $ 66 $ 90 Long-term debt and finance lease obligations, net of current maturities 87 174 Total finance lease liabilities $ 153 $ 264 Weighted Average Remaining Lease Term Operating leases 5.83 years 5.10 years Finance leases 2.62 years 3.47 years Weighted Average Discount Rate Operating leases 3.04 % 3.29 % Finance leases 3.38 % 3.39 % Supplemental Cash Flow information related to leases was as follows: Twelve Months Ended December 31, (in thousands) 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 6 $ 10 Operating cash flows from operating leases 4,487 4,507 Financing cash flows from finance leases 88 122 65 11. ACCRUED LIABILITIES Accrued liabilities consist of the following balances: December 31, (in thousands) 2020 2019 Salaries, wages and bonuses $ 31,658 $ 28,296 Taxes 5,907 5,130 Warranty 9,096 10,249 Retirement Provision 3,252 2,795 Customer Deposits 1,385 2,430 Other 13,336 10,786 Accrued Liabilities $ 64,634 $ 59,686 12. FAIR VALUE OF FINANCIAL INSTRUMENTS U.S. GAAP requires or permits certain assets or liabilities to be measured at fair value on a recurring or non- recurring basis in our balance sheets. U.S. GAAP also requires the disclosure of the fair values of financial instruments when on option to elect fair value accounting has been provided but such election has not been made. A debt obligation is an example of such a financial instrument. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In fair value, measurements are classified under the following hierarchy: Level 1 – Quoted prices for identical assets or liabilities in active markets. Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Level 3 – Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. When measuring fair value, the Company maximizes use of observable inputs and minimizes the use of unobservable inputs. Fair value measurements are classified to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. The carrying values of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate fair value because of the short-term nature of these items. The carrying value of our debt approximates the fair value as of December 31, 2020 and 2019, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs. Fair values determined by Level 2 utilize inputs that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Other than the investments held by the retirement benefit plans, as described in Note 17 to the Consolidated Financial Statements, the Company does not have any other significant financial assets or liabilities measured at fair value on a recurring basis. The Company has no recurring nor nonrecurring valuations that fall under Level 3 of the fair value hierarchy as of December 31, 2020 and 2019. 66 13. LONG-TERM DEBT The components of long-term debt are as follows: December 31, (in thousands) 2020 2019 Bank revolving credit facility $ 5,000 $ 145,000 Term debt 280,233 298,717 Capital lease obligations 153 264 Total debt 285,386 443,981 Less current maturities 15,066 18,840 Total long-term debt $ 270,320 $ 425,141 On October 24, 2019, the Company, as Borrower, and each of its domestic subsidiaries as guarantors, entered into a Second Amended and Restated Credit Agreement (the Credit Agreement ) with Bank of America, N.A., as Administrative Agent. The Credit Agreement provides the Company with the ability to request loans and other financial obligations in an aggregate amount of up to $ 650.0 million and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional $ 200.0 million. Pursuant to the Credit Agreement, the Company has borrowed $ 300.0 million pursuant to a Term Facility repayable with interest quarterly at a percentage of the initial principal amount of the Term Facility of 5.0 % per year with the remaining principal due in 5 years. Up to $ 350.0 million is available under the Credit Agreement pursuant to a Revolver Facility which terminates in 5 years. The Agreement requires the Company to maintain two financial covenants, a maximum 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. The expiration date of the Term Facility and the Revolver Facility is October 24, 2024. As of December 31, 2020, $ 285.2 million was outstanding under the Credit Agreement. Of the total outstanding, $ 280.2 million was on the Term Facility at a rate of 1.90 % and $ 5.0 million was on the Revolver Facility at a rate of 4.00 %. On December 31, 2020, $ 2.2 million of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts resulting in $ 176.7 million in available borrowings. The Company is in compliance with the covenants under the Credit Agreement. The aggregate maturities of long-term debt, as of December 31, 2020, are as follows: $ 15.1 million in 2021; $ 15.0 million in 2022; $ 15.0 million in 2023; $ 240.2 million in 2024; and $ 0.02 million in 2025; and zero thereafter. 14. INCOME TAXES Income Statement Components The jurisdictional components of income before taxes consist of the following: December 31, (in thousands) 2020 2019 2018 Income before income taxes: Domestic $ 49,357 $ 54,566 $ 66,858 Foreign 28,780 29,769 27,673 $ 78,137 $ 84,335 $ 94,531 67 The components of income tax expense (benefit) consist of the following: December 31, (in thousands) 2020 2019 2018 Current: Domestic $ 10,823 $ 6,403 $ 6,771 Foreign 8,759 8,419 7,391 State 3,226 3,291 4,831 22,808 18,113 18,993 Deferred: Domestic 674 3,800 2,542 Foreign ( 1,199 ) ( 280 ) ( 390 ) State ( 776 ) ( 204 ) ( 100 ) ( 1,301 ) 3,316 2,052 Total income taxes $ 21,507 $ 21,429 $ 21,045 The difference between income tax expense (benefit) for financial statement purposes and the amount of income tax expense computed by applying the domestic statutory income tax rate of 21% to income before income taxes consists of the following: December 31, (in thousands) 2020 2019 2018 Income tax expense at statutory rates $ 16,409 $ 17,710 $ 19,851 Increase (reduction) from: Jurisdictional rate differences 1,034 988 719 Valuation allowance ( 63 ) 460 ( 267 ) Stock based compensation ( 366 ) ( 358 ) ( 205 ) U.S. state taxes 2,450 3,125 3,917 Foreign tax expense 704 — — R&D credit ( 415 ) ( 699 ) ( 531 ) GILTI 50 872 673 Previously unrecognized tax (benefit)/expense 2,219 ( 1,504 ) — Other, net ( 515 ) 835 219 Provision for income taxes before tax reform $ 21,507 $ 21,429 $ 24,376 Effective tax rate before effects of tax reform 28 % 25 % 26 % Tax Reform: Rate change of deferreds — — 1,200 Transition tax on deemed repatriation — — ( 4,531 ) Impact of tax reform $ — $ — $ ( 3,331 ) Provision for income tax $ 21,507 $ 21,429 $ 21,045 Effective tax rate 28 % 25 % 22 % 68 Deferred Income Tax Assets and Liabilities Deferred income taxes arise from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The components of the Company’s deferred income tax assets and liabilities consist of the following: December 31, (in thousands) 2020 2019 Deferred income tax assets: Inventory basis difference $ 3,150 $ 4,351 Accounts receivable reserve 255 384 Rental equipment and Property, plant and equipment 144 73 Stock based compensation 606 391 Pension liability 3,655 2,874 Employee benefit accrual 1,585 1,669 Product liability and warranty reserves 2,242 2,526 Foreign net operating loss 3,566 4,485 Lease liability 3,376 3,046 State net operating loss 148 148 Other 2,430 190 Total deferred income tax assets $ 21,157 $ 20,137 Less: Valuation allowance ( 3,641 ) ( 4,156 ) Net deferred income tax assets $ 17,516 $ 15,981 Deferred income tax liabilities: Inventory basis differences $ ( 287 ) $ ( 122 ) Rental equipment and Property, plant and equipment ( 14,818 ) ( 17,327 ) Lease asset ( 3,351 ) ( 3,022 ) Intangible assets ( 16,496 ) ( 18,897 ) Expenses not currently deductible for book purposes ( 1,003 ) ( 1,996 ) Total deferred income tax liabilities $ ( 35,955 ) $ ( 41,364 ) Net deferred income taxes $ ( 18,439 ) $ ( 25,383 ) As of December 31, 2020, the Company had foreign deferred tax assets consisting of foreign net operating losses and other tax benefits available to reduce future taxable income in a foreign jurisdiction. These foreign jurisdictions’ net operating loss carry-forwards are approximately $ 11.1 million with an unlimited carry-forward period, and $ 0.9 million with a carry-forward expiring in 2035. The Company also has U.S. state net operating loss carry-forwards in the amount of $ 3.6 million which will expire between 2021 and 2030. We have recorded a valuation allowance as of December 31, 2020 and 2019 due to uncertainties related to our ability to utilize some of the deferred income tax assets, primarily consisting of international operating losses and foreign tax credits generated by the transition tax, before they expire. The valuation allowance is based on estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. Related to the utilization of net operating loss carry forwards utilized to offset current year earnings, there is not a sufficient history of earnings to fully release the valuation allowances at this time. 69 Unrecognized Tax Benefits Unrecognized tax benefits in the amount of $ 0.3 million and $ 0.3 million for 2020 and 2019, respectively, are included in other non-current liabilities on the balance sheet. The unrecognized tax benefits, if recognized, would favorably impact our effective tax rate in a future period. We do not expect our unrecognized tax benefits disclosed above to change significantly over the next 12 months. Unrecognized Tax Benefits December 31, (in thousands) 2020 2019 Balance as of beginning of year $ 262 $ 236 Increases for tax positions related to the current year 88 88 Increases in tax positions taken related to liabilities assumed in acquisitions — 2,219 Decreases in tax positions taken related to liabilities assumed in acquisitions — ( 1,504 ) Decreases as a result of settlements with taxing authorities related to liabilities assumed in acquisitions — ( 715 ) Decreases due to lapse of statute of limitations ( 88 ) ( 62 ) Balance as of end of year $ 262 $ 262 The Company adopted the policy to include interest and penalty expense related to income taxes as interest and other expense, respectively. As of December 31, 2020, no interest or penalties has been accrued. The Company’s open tax years for its federal and state income tax returns are for the tax years ended 2015 through 2020. The Company’s open tax years for its foreign income tax returns are for the tax years ended 2013 through 2020. The Company is currently under audit with the state of Michigan. As a result of the fundamental changes to the taxation of multinational corporations created by TCJA, we no longer intend to permanently reinvest all of the historical undistributed earnings of our foreign affiliates. We will distribute earnings from our European subsidiaries, while maintaining our permanent reinvestment for our other foreign subsidiaries. There will generally be no U.S. corporate taxes imposed on such future distributions of the earnings or withholding and other local taxes. For the amounts we continue to assert permanent reinvestment, if the amounts were distributed, the company would be subject to approximately $ 4.2 million in withholding taxes. 15. COMMON STOCK On January 4, 2021, the Board of Directors of the Company declared a quarterly dividend of $ 0.14 per share which was paid on January 29, 2021 to holders of record as of January 19, 2021. The Company also has a share repurchase program under which the Company is authorized to repurchase, in the aggregate, up to $ 30.0 million of its outstanding common stock. During 2020, the Company purchased zero shares. 16. STOCK OPTIONS Incentive Stock Option Plan On May 7, 2015, the stockholders of the Company approved the 2015 Incentive Stock Option Plan (“2015 ISO Plan”) and the Company reserved 400,000 shares of common stock for options to be issued under the 2015 ISO Plan. Each option becomes vested and exercisable for up to 20 % of the total optioned shares one year following the grant of the option and for an additional 20 % of the total optioned shares after each succeeding year until the option is fully exercisable at the end of the fifth year. We also maintain other incentive option plans that have expired, under which previously granted awards remain outstanding. No additional grants may be awarded under these plans. 70 Following is a summary of activity in the Incentive Stock Option Plans for the periods indicated: 2020 2019 2018 Shares Exercise Price* Shares Exercise Price* Shares Exercise Price* Options outstanding at beginning of year 119,720 $ 57.65 140,170 $ 49.78 172,875 $ 43.91 Granted 13,950 114.53 12,150 105.56 9,500 92.50 Exercised ( 31,300 ) 45.94 ( 28,100 ) 38.93 ( 41,205 ) 34.89 Canceled ( 1,450 ) 96.97 ( 4,500 ) 58.57 ( 1,000 ) 54.49 Options outstanding at end of year 100,920 68.58 119,720 57.65 140,170 49.78 Options exercisable at end of year 67,700 $ 52.60 85,070 $ 47.10 96,320 $ 41.56 Options available for grant at end of year 314,750 327,250 336,450 *Weighted Averages Options outstanding and exercisable at December 31, 2020 were as follows: Qualified Stock Options Options Outstanding Options Exercisable Shares Remaining Contractual Life (yrs)* Exercise Price* Shares Exercise Price* Range of Exercise Price $ 26.45 - $ 42.70 20,870 1.38 $ 34.07 20,870 $ 34.07 $ 49.44 - $ 74.16 40,500 3.64 $ 53.47 37,700 $ 53.36 $ 83.99 - $ 125.99 39,550 8.03 $ 102.28 9,130 $ 91.84 Total 100,920 67,700 *Weighted Averages The weighted-average grant-date fair values of options granted during 2020, 2019, and 2018 were $ 38.33 , $ 39.85 and $ 38.77 , respectively. Stock option expense was $ 0.5 million, $ 0.5 million and $ 0.5 million for years ending 2020, 2019, and 2018, respectively. As of December 31, 2020, there was $ 0.8 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a period of five years . Equity Incentive Plan On May 2, 2019, the stockholders of the Company approved the 2019 Equity Incentive Plan and the Company reserved 500,000 shares of common stock for issuance of equity awards including the issuance of non-qualified options for the purchase of shares of our common stock which may be granted to Company officers and non-employee directors. Options become vested and exercisable for up to 20 % of the total optioned shares one year following the grant of the option and for an additional 20 % of the total optioned shares after each succeeding year until the option is fully exercisable at the end of the fifth year. 2020 (1) 2019 (1) 2018 (2) Options available for grant at end of year 455,549 499,640 146,075 (1) In 2020 and 2019, options available are from the 2019 Equity Incentive Plan. (2) In 2018, options available are from the 2009 Equity Incentive Plan. We also maintain other incentive option plans that have expired, under which previously granted awards remain outstanding. No additional grants may be awarded under these plans. 71 Non-Qualified Options Following is a summary of activity in the Non-Qualified Stock Option Plans for the periods indicated: 2020 2019 2018 Shares Exercise Price* Shares Exercise Price* Shares Exercise Price* Options outstanding at beginning of year 5,300 $ 46.87 40,200 $ 42.99 67,000 $ 42.43 Granted — — — — — — Exercised ( 2,300 ) 38.22 ( 34,900 ) 42.40 ( 26,800 ) 41.61 Canceled — — — — — — Options outstanding at end of year 3,000 53.51 5,300 46.87 40,200 42.99 Options exercisable at end of year 3,000 $ 53.51 5,300 $ 46.87 34,400 $ 41.21 *Weighted Averages Options outstanding and exercisable as of December 31, 2020 were as follows: Non-Qualified Stock Options Options Outstanding Options Exercisable Shares Remaining Contractual Life (yrs)* Exercise Price* Shares Exercise Price* Range of Exercise Price $ 49.44 - $ 74.16 3,000 3.36 $ 53.51 3,000 $ 53.51 Total 3,000 3,000 *Weighted Averages There were no options granted in 2018 , 2019 or 2020. Stock option expense was zero , $ 0.01 million and $ 0.02 million for years ending 2020, 2019, and 2018, respectively. As of December 31, 2020, there was zero unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. During 2020, 2019, and 2018, 2,300 , 34,900 , and 26,800 non-qualified options were exercised, respectively, $ 0.1 million, $ 1.5 million, and $ 1.1 million of cash receipts were received, respectively. Restricted Stock Awards/Units Following is a summary of activity in the Restricted Stock Awards for the periods indicated: 2020 2019 2018 Shares Grant-Date Fair Value* Shares Grant-Date Fair Value* Shares Grant-Date Fair Value* Awards outstanding at beginning of year 78,705 $ 94.34 75,636 $ 81.39 63,052 $ 70.08 Granted 44,307 111.95 36,060 105.69 35,300 92.50 Exercised ( 31,594 ) 88.90 ( 32,466 ) 69.94 ( 22,266 ) 66.91 Canceled ( 375 ) 100.34 ( 525 ) 99.96 ( 450 ) 83.99 Awards outstanding at end of year 91,043 104.77 78,705 94.34 75,636 81.39 *Weighted Averages Restricted stock awards granted in 2018 and 2019 vest 25 % after one year following the award date and for an additional 25 % of total awarded shares each succeeding year until fully vested. Restricted stock awards granted in 2020 vest over a three year period. The weighted-average remaining contractual life in years for 2020, 2019, and 2018 was 1.95 , 2.48 and 2.53 , respectively. Compensation expense was $ 3.7 million, $ 2.8 million and $ 1.9 million for years ending 2020, 2019, and 2018, respectively. As of December 31, 2020, there was $ 6.2 million of total 72 unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. The cost for awards granted prior to 2020 is expected to be recognized over a period of four years . In 2020, the Board of Directors modified the vesting period for new RSA's granted to three years to be inline with grants of future performance stock units. Performance Stock Units In 2020, the Company's Board of Directors approved a change to our long-term incentive compensation plan to implement a new performance-based equity grants in the form of a Performance Stock Unit ("PSU") award. PSU award vesting and payout amounts are tied to the Company's achievement of certain targeted financial metrics relating to a three-year performance period with the goal of more closely aligning executive compensation with long-term Company performance. The 2020 target long-term incentive compensation mix established for the Company's Section 16 filers consists of RSA's and PSU's each representing fifty percent ( 50 %) of the total long-term incentive compensation target value. PSU awards represent a right to receive a certain number of shares of the Company’s common stock at the end of the three-year performance period if certain financial or other performance targets/metrics have been met. 17. RETIREMENT BENEFIT PLANS Defined Benefit Plans In connection with the February 3, 2006 purchase of all the net assets of the Gradall excavator business, the Company assumed sponsorship of two Gradall non-contributory defined benefit pension plans, both of which are frozen with respect to both future benefit accruals and future new entrants. The Gradall Company Employees’ Retirement Plan covers approximately 247 former employees and 55 current employees who (i) were formerly employed by JLG Industries, Inc., (ii) were not covered by a collective bargaining agreement and (iii) first participated in the plan before December 31, 2004. An amendment ceasing future benefit accruals for certain participants was effective December 31, 2004. A second amendment discontinued all future benefit accruals for all participants effective April 24, 2006. The Gradall Company Hourly Employees’ Pension Plan covered former employees and current employees who (i) were formerly employed by JLG Industries, Inc., (ii) were covered by a collective bargaining agreement and (iii) first participated in the plan before April 6, 1997. An amendment ceasing all future benefit accruals was effective April 6, 1997. The following table sets forth the change in plan assets, change in projected benefit obligation, rate assumptions and components of net periodic benefit cost as of December 31 with respect to the plan. The measurement dates of the assets and liabilities of the plan were December 31 of the respective years presented. 73 Reconciliation of Funded Status Year Ended December 31, (in thousands) 2020 2019 Change in projected benefit obligation Benefit obligation at beginning of year $ 22,449 $ 20,050 Service cost 4 3 Interest cost 689 819 Liability actuarial (gain) loss 2,025 2,604 Benefits paid ( 1,067 ) ( 1,027 ) Benefit obligation at end of year $ 24,100 $ 22,449 Change in fair value of plan assets Fair value of plan assets at beginning of year $ 20,605 $ 18,106 Return on plan assets 2,832 3,526 Employer contributions — — Benefits paid ( 1,067 ) ( 1,027 ) Fair value of plan assets at end of year 22,370 20,605 Funded status $ ( 1,730 ) $ ( 1,844 ) The Company recognizes the overfunded or underfunded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of defined benefit postretirement plans as an asset or liability in its consolidated balance sheet and recognizes changes in the funded status in the year in which the changes occur. The Company measures the funded status of a plan as of the date of the year-end consolidated balance sheet. The underfunded status of the plan of $ 1.7 million and $ 1.8 million as of December 31, 2020 and 2019, respectively, is recognized in the accompanying consolidated balance sheets as long-term accrued pension liability because plan assets are less than the value of benefit obligations expected to be paid. The accumulated benefit obligation for our pension plan represents the actuarial present value of benefits based on employee service and compensation as of a certain date and does not include an assumption about future compensation levels. In determining the projected benefit obligation and the net pension cost, we used the following significant weighted-average assumptions: Rates to Determine Benefit Obligation Year Ended December 31, 2020 2019 Discount rate 2.35 % 3.15 % Composite rate of compensation increase N/A N/A Rates to Determine Net Periodic Benefit Cost Year Ended December 31, 2020 2019 Discount rate 3.15 % 4.20 % Long-term rate of return on plan assets 7.25 % 7.25 % Composite rate of compensation increase N/A N/A The Company employs a building block approach in determining the expected long-term rate of return on plan assets. Historical markets are studied and long-term historical relationships between equities and fixed income are 74 preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness. The following table presents the components of net periodic benefit cost (gains are denoted with parentheses and losses are not): Components of Net Periodic Benefit Cost Year Ended December 31, (in thousands) 2020 2019 Service cost $ 4 $ 3 Interest cost 689 819 Expected return on plan assets ( 1,452 ) ( 1,273 ) Amortization of net loss 508 542 Net periodic benefit cost $ ( 251 ) $ 91 The Company estimates that $ 0.5 million of unrecognized actuarial expense will be amortized from Accumulated other comprehensive income (loss) into net periodic benefit costs during 2021. The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and small and large capitalization. Other assets such as real estate, private equity, and hedge funds are used judiciously to enhance long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements, and periodic asset/liability studies. Our current asset allocations are consistent with our targeted allocations. The pension plans' weighted-average asset allocation as a percentage of plan assets at December 31 is as follows: Asset Allocation as a Percentage of the Plan Year Ended December 31, 2020 2019 Equity securities 56 % 56 % Debt securities 38 % 37 % Short-term investments 2 % 2 % Other 4 % 5 % Total 100 % 100 % 75 The following table presents the hierarchy levels for our postretirement benefit plan investments as of December 31 as described in Note 1 to the Consolidated Financial Statements: (in thousands) December 31, 2020 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Mutual Funds: Mid Cap $ 1,450 $ 1,450 $ — $ — Large Cap 3,233 3,233 — — International 2,660 2,660 — — Common/Collective Trusts: Wells Fargo Liability Driven Solution 3,106 — 3,106 — Wells Fargo BlackRock International Equity 959 — 959 — Wells Fargo Core Bond 1,552 — 1,552 — Wells Fargo/Causeway International Value 923 — 923 — Wells Fargo BlackRock Large Cap Growth Index Fund 1,268 — 1,268 — Wells Fargo BlackRock Large Cap Value Index Fund 1,240 — 1,240 — Wells Fargo Multi-Manager Small Cap 1,544 — 1,544 — Wells Fargo BlackRock Russell 2000 Index Fund 702 — 702 — Wells Fargo BlackRock S&P Mid Cap Index Fund 781 — 781 — Wells Fargo/MFS Value CIT F 627 — 627 — Wells Fargo/T. Rowe Price Large-Cap Growth Managed CIT 639 — 639 — Wells Fargo/T. Rowe Price Equity Income Managed CIT 643 — 643 — Wells Fargo Voya Large Cap Growth CIT F 639 — 639 — Cash & Short-term Investments 404 404 — — Total $ 22,370 $ 7,747 $ 14,623 $ — 76 (in thousands) December 31, 2019 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Mutual Funds: Mid Cap $ 2,239 $ 2,239 $ — $ — Large Cap 2,574 2,574 — — International 1,879 1,879 — — Common/Collective Trusts: Wells Fargo Liability Driven Solution 2,866 — 2,866 — Wells Fargo BlackRock International Equity 861 — 861 — Wells Fargo Core Bond 1,413 — 1,413 — Wells Fargo/Causeway International Value 864 — 864 — Wells Fargo BlackRock Large Cap Growth Index Fund 1,153 — 1,153 — Wells Fargo BlackRock Large Cap Value Index Fund 1,159 — 1,159 — Wells Fargo Multi-Manager Small Cap 1,434 — 1,434 — Wells Fargo BlackRock Russell 2000 Index Fund 667 — 667 — Wells Fargo BlackRock S&P Mid Cap Index Fund 732 — 732 — Wells Fargo/MFS Value CIT F 599 — 599 — Wells Fargo/T. Rowe Price Large-Cap Growth Managed CIT 602 — 602 — Wells Fargo/T. Rowe Price Equity Income Managed CIT 590 — 590 — Wells Fargo Voya Large Cap Growth CIT F 605 — 605 — Cash & Short-term Investments 368 368 — — Total $ 20,605 $ 7,060 $ 13,545 $ — Our interests in the common collective trust investments are managed by one custodian. Consistent with our investment policy, the custodian has invested the assets across a widely diversified portfolio of U.S. and international equity and fixed income securities. Fair values of each security within the collective trust as of December 31, 2020 were obtained from the custodian and are based on quoted market prices of individual investments; however, since the fund itself does not have a quoted market price, these assets are considered Level 2. The common collective funds noted in the above table have estimated fair value using the net asset value per share of investments. Investments can be redeemed immediately at the current net asset value per share based on the fair value of the underlying assets. Redemption frequency is daily. The categories contain investments in equity securities of smaller growing companies, medium-sized U.S. companies, large value-oriented and growth-oriented companies, and foreign companies traded on international markets. 77 Expected benefit payments are estimated using the same assumptions used in determining our benefit obligation as of December 31, 2020. The following table illustrates the estimated pension benefit payments that are projected to be paid: Projected Future Benefit Payments (in thousands) Employees’ Retirement Plan 2021 $ 1,219 2022 1,273 2023 1,291 2024 1,300 2025 1,309 Years 2026 through 2030 6,365 Supplemental Retirement Plan The Board of Directors of the Company adopted the Alamo Group Inc. Supplemental Executive Retirement Plan (the “SERP”), effective as of January 3, 2011. The SERP will benefit certain key management or other highly compensated employees of the Company and/or certain subsidiaries who are selected by the Compensation Committee and approved by the Board to participate. The SERP is intended to provide a benefit from the Company upon retirement, death or disability, or a change in control of the Company. Accordingly, the SERP obligates the Company to pay to a participant a Retirement Benefit (as defined in the SERP) upon the occurrence of certain payment events to the extent a participant has a vested right thereto. A participant’s right to his or her Retirement Benefit becomes vested in the Company’s contributions upon 10 years of Credited Service (as defined in the SERP) or a change in control of the Company. The Retirement Benefit is based on 20 % of the final three-year average salary of each participant on or after his or her normal retirement age ( 65 years of age). In the event of the participant’s death or a change in control, the participant’s vested retirement benefit will be paid in a lump sum to the participant or his or her estate, as applicable, within 90 days after the participant’s death or a change in control, as applicable. In the event that the participant is entitled to a benefit from the SERP due to disability, retirement or other termination of employment, the benefit will be paid in monthly installments over a period of fifteen years . The Company records amounts relating to the SERP based on calculations that incorporate various actuarial and other assumptions, including discount rates, rate of compensation increases, retirement dates and life expectancy. The net periodic costs are recognized as employees render the services necessary to earn the SERP benefits. 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 highly compensated employees to the plan. As of December 31, 2020, the current retirement benefit (as defined in the plan) for the participants ranges from 10 % to 20 %. 78 The change in the Projected Benefit Obligation (PBO) as of December 31, 2020 and 2019, is shown below: Reconciliation of Benefit Obligation Year Ended December 31, (in thousands) 2020 2019 Benefit obligation at January 1, $ 9,022 $ 7,446 Service cost 305 240 Interest cost 236 298 Liability actuarial loss (gain) 1,168 1,193 Benefits paid ( 1,025 ) ( 155 ) Plan amendments 454 — Benefit obligation at December 31, $ 10,160 $ 9,022 The components of net periodic pension expense were as follows: Components of Net Periodic Benefit Cost Year Ended December 31, (in thousands) 2020 2019 Service cost $ 305 $ 240 Interest cost 236 298 Amortization of prior service cost 317 318 Amortization of net (gain)/loss 158 — Recognition of settlement 188 — Net periodic benefit cost $ 1,204 $ 856 The Company estimates that $ 0.7 million of unrecognized actuarial expense will be amortized from accumulated other comprehensive income into net periodic benefit costs during 2021. In determining the projected benefit obligation and the net pension cost, we used the following significant weighted-average assumptions: Assumptions used to determine benefit obligations at December 31: Rates to Determine Benefit Obligation 2020 2019 Discount rate 2.05 % 2.95 % Composite rate of compensation increase 3.00 % 3.00 % Assumptions used to determine net periodic benefit cost for the years ended December 31: Rates to Determine Net Periodic Benefit Cost 2020 2019 Discount rate 2.95 % 4.10 % Composite rate of compensation increase 3.00 % 3.00 % Long-term rate of return on plan assets N/A N/A 79 Future estimated benefits expected to be paid from the plan over the next ten years as follows: Projected Future Benefit Payments (in thousands) SERP 2021 $ 360 2022 464 2023 469 2024 503 2025 575 Years 2026 through 2030 3,702 Defined Contribution Plans The Company has two defined contribution plans, The Gradall Salaried Employees’ Savings and Investment Plan (“Salary Plan”) and The International Association of Machinist and Aerospace Workers Retirement Plan (“IAM Plan”). The Company contributed $ 0.4 million, $ 0.6 million, and $ 0.4 million to the IAM Plan for the plan years ended December 31, 2020, 2019 and 2018, respectively. The Company converted the Salary Plan into its 401(k) retirement and savings plan and put the Hourly Plan into a separate 401(k) retirement and savings plan. The Company provides a defined contribution 401(k) retirement and savings plan for eligible U.S. employees. Company matching contributions are based on a percentage of employee contributions. Company contributions to the plan during 2020, 2019 and 2018 were $ 3.5 million, $ 2.8 million, and $ 2.3 million, respectively. Three of the Company’s international subsidiaries also participate in a defined contribution and savings plan covering eligible employees. The Company’s international subsidiaries contribute between 0 % and 10 % of the participant’s salary up to a specific limit. Total contributions made to the above plans were $ 0.9 million, $ 0.9 million, and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. 18. REVENUE AND SEGMENT REPORTING Disaggregation of revenue is presented in the tables below by product type. Management has determined that this level of disaggregation would be beneficial to users of the financial statements. Revenue by Product Type December 31, (in thousands) 2020 2019 2018 Net Sales Wholegoods $ 885,254 $ 875,805 $ 802,403 Parts 247,126 207,766 186,979 Other 31,086 35,567 19,440 Consolidated $ 1,163,466 $ 1,119,138 $ 1,008,822 Other includes rental sales, extended warranty sales and service sales as it is considered immaterial. Effective for the fourth quarter of 2019, the Company began reporting its operating results on the basis of two segments, the Industrial Division and Agricultural Division. Prior to the fourth quarter of 2019, the Company had been reporting its operating results on the basis of three segments which included the Company's European Division. The Company's European Division was a mixture of industrial and agricultural products similar to those within the other two segments. The Company's prior period segment information has been retrospectively adjusted to reflect the current segment presentation. 80 The Company has included a summary of the financial information by reporting segment. The following table presents the revenue and income from operations by reporting segment for the years ended December 31, 2020, 2019, and 2018: December 31, (in thousands) 2020 2019 2018 Net Revenue Industrial $ 811,161 $ 768,454 $ 638,198 Agricultural 352,305 350,684 370,624 Consolidated $ 1,163,466 $ 1,119,138 $ 1,008,822 Income from Operations Industrial $ 59,881 $ 65,262 $ 65,077 Agricultural 33,284 29,386 36,011 Consolidated $ 93,165 $ 94,648 $ 101,088 The following table presents the goodwill and total identifiable assets by reporting segment for the years ended December 31, 2020 and 2019: December 31, (in thousands) 2020 2019 Goodwill Industrial $ 181,338 $ 183,307 Agricultural 13,794 14,715 Consolidated $ 195,132 $ 198,022 Identifiable Assets Industrial $ 868,688 $ 922,738 Agricultural 240,641 290,025 Consolidated $ 1,109,329 $ 1,212,763 19. INTERNATIONAL OPERATIONS AND GEOGRAPHIC INFORMATION Following is selected financial information on the Company’s international operations, which include the United Kingdom, France, Netherlands, Canada, Brazil, Australia, and China: International Operations Financial Information December 31, (in thousands) 2020 2019 2018 Net sales $ 312,462 $ 357,602 $ 297,246 Income from operations 31,166 32,518 28,301 Income before income taxes 30,674 31,975 29,254 Identifiable assets 304,536 333,392 244,888 81 Following is other selected geographic financial information on the Company’s operations: Geographic Financial Information December 31, (in thousands) 2020 2019 2018 Geographic net sales: United States $ 862,430 $ 774,854 $ 726,582 France 81,259 99,145 90,956 Canada 65,313 72,950 62,077 United Kingdom 47,757 52,098 51,043 Brazil 16,592 17,919 16,829 Netherlands 23,946 23,462 3,983 Germany 9,328 7,825 1,600 Australia 10,999 7,550 9,055 Other 45,842 63,335 46,697 Total net sales $ 1,163,466 $ 1,119,138 $ 1,008,822 Geographic location of long-lived assets: United States $ 480,940 $ 515,189 $ 191,958 Netherlands 39,063 37,930 — Canada 33,573 32,606 21,647 United Kingdom 18,843 19,840 19,270 France 21,033 19,513 18,650 Brazil 11,123 15,096 15,701 Australia 964 1,021 815 Total long-lived assets $ 605,539 $ 641,195 $ 268,041 Net sales are attributed to countries based on the location of customers. 20. OTHER COMMITMENTS AND CONTINGENCIES The Company is subject to various unresolved legal actions that arise in the ordinary course of its business. The most significant of such actions relates to product liability, which is generally covered by insurance after various self-insured retention amounts. While amounts claimed might be substantial and the liability with respect to such litigation cannot be determined at this time, the Company believes that the 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. Also, 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. 82 21. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 2020 and 2019 are presented below. Seasonal influences affect the Company’s sales and profits, with heavier business occurring in May through August. (in thousands, except per share amounts) 2020 2019 First Second Third Fourth First Second Third Fourth Sales $ 314,448 $ 268,635 $ 291,759 $ 288,624 $ 261,934 $ 285,186 $ 271,829 $ 300,189 Gross profit 78,940 67,825 78,636 66,709 63,308 73,133 68,710 68,076 Net income 15,528 12,989 20,033 8,080 15,253 20,667 17,418 9,568 Earnings per share Diluted $ 1.31 $ 1.10 $ 1.69 $ 0.68 $ 1.30 $ 1.75 $ 1.47 $ 0.81 Average shares Diluted 11,827 11,842 11,851 11,859 11,777 11,798 11,813 11,811 Dividends per share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.12 $ 0.12 $ 0.12 $ 0.12 Market price of common stock High $ 131.87 $ 117.35 $ 116.67 $ 144.75 $ 101.58 $ 106.19 $ 124.33 $ 129.74 Low $ 70.99 $ 76.04 $ 94.90 $ 105.89 $ 74.74 $ 93.00 $ 93.11 $ 103.60 The sum of quarterly earnings per share may not equal total year earnings per share due to rounding of earnings per share amounts, and differences in weighted-average shares and equivalent shares outstanding for each of the periods presented. 83