Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary and Outlook
This re port contains forward-looking statements that are based on Alamo Group’s current expectations. Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section beginning on page 14 .
We experienced strong demand for industrial equipment products in 2024 while demand for forestry, tree care, and agricultural mowing products weakened. Gross profit margins declined slightly due to weaker Vegetation Management Division sales that slowed our production cadence and adversely impacted production efficiency. Market conditions are mixed; governmental and industrial product demand is robust while vegetation product demand has been hampered mainly by higher interest rates and elevated channel inventories.
2024 Performance
In 2024, the Company's net sales decreased by 4% and net income decreased by 15% compared to 2023. The decrease in net sales was primarily driven by weak forestry, tree care, and agricultural mowing markets, leading to lower demand in the Vegetation Management Division. Additionally, the sale of Herschel Parts on August 16, 2024, had a negative impact on year-over-year sales, though it was immaterial on a full-year basis. These challenges were nearly offset by strong sales growth in the Industrial Equipment Division.
The decline in net income was due to lower product demand in the Vegetation Management Division, which affected production efficiency, along with associated separation costs incurred to reduce division capacity. In the Industrial Equipment Division, nonrecurring costs related to the five-week labor strike at Gradall Industries negatively impacted second-quarter results. The Company reached a new five-year collective bargaining agreement at its Gradall plant in May 2024.
The Company's Vegetation Management Division experienced a 20% decrease in net sales for the full year of 2024 compared to 2023 due to a steep decline in forestry, tree care and agricultural mowing markets. The Division’s backlog has declined 47% year-over-year and is now at pre-Covid levels. Income from operations for 2024 decreased by 54% compared to 2023, reflecting market downturn and costs associated with separation and reduction of capacity. The Company continues to implement cost-saving initiatives and enhance operational efficiency, with the goal of improving operating margins.
The Company's Industrial Equipment Division reported a 19% increase in net sales for the full year of 2024 compared to 2023. Sales growth was strong in all product lines, with excavators, vacuum trucks, sweepers & safety, and snow removal contributing to year-over-year growth. Income from operations for 2024 rose 43% versus 2023, driven by increased demand, greater operational efficiencies, and an improvement in supply chain performance and truck chassis availability.
Consolidated income from operations was $165 million for the full year of 2024 compared to $198 million for the full year of 2023, a decrease of 17%. The Company's backlog decreased 22% to $669 million at the end of 2024 versus the backlog of $860 million at the end of 2023.
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The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Annual Report on Form 10-K.
The following tables set forth, for the periods indicated, certain financial data:
Fiscal Year Ended December 31,
Net sales (data in thousands): 2024 2023 2022
Vegetation Management $ 785,199 $ 979,040 $ 937,065
Industrial Equipment 843,314 710,611 576,551
Total net sales $ 1,628,513 $ 1,689,651 $ 1,513,616
Cost and profit margins, as percentages of net sales:
Cost of sales 74.7 % 73.2 % 75.1 %
Gross profit 25.3 % 26.8 % 24.9 %
Selling, general, administrative, and amortization expenses 15.2 % 15.1 % 15.1 %
Income from operations 10.1 % 11.7 % 9.8 %
Income before income taxes 9.2 % 10.4 % 8.9 %
Net income 7.1 % 8.1 % 6.7 %
Results of Operations
Fiscal 2024 compared to Fiscal 2023
The Company’s net sales in the fiscal year ended December 31, 2024 (“2024”) were $1,628.5 million, a decrease of $61.2 million or 3.6% compared to $1,689.7 million for the fiscal year ended December 31, 2023 (“2023”). The decrease in sales was attributable to weaker market demand in forestry, tree care, and agricultural mowing markets, partially offset by continued strong demand for industrial equipment.
Vegetation Management net sales were $785.2 million in 2024 compared to $979.0 million in 2023, a decrease of $193.8 million or 19.8%. The decline was primarily driven by the sustained weakness in forestry, tree care, and agricultural mowing markets. The sale of Herschel Parts on August 16, 2024 was immaterial to the year-over-year sales decrease.
Industrial Equipment net sales were $843.3 million in 2024 compared to $710.6 million in 2023, representing an increase of $132.7 million or 18.7%. The increase was a result of strong performance in all product lines including excavator and vacuum trucks, sweepers & safety, and snow removal equipment.
Gross profit for 2024 was $412.5 million (25.3% of net sales) compared to $453.6 million (26.8% of net sales) in 2023, a decrease of $41.1 million. The decrease in gross profit was primarily attributable to the decline in Vegetation Management market demand, resulting in production inefficiencies, and the impact of costs to reduce capacity and separation expenses as the Division adjusted to market conditions. In addition, profitability was also impacted by the five-week strike at Gradall in Ohio, which negatively affected the Industrial Equipment Division.
Selling, general and administrative expenses (“SG&A”) were $231.5 million (14.2% of net sales) in 2024 compared to $240.2 million (14.2% of net sales) in 2023, a decrease of $8.7 million. The decrease in SG&A expenses in 2024 was attributable to labor cost savings actions taken in Vegetation Management partially offset by additional costs from the acquisition of Royal Truck. Amortization expense in 2024 was $16.2 million compared to $15.5 million in 2023, an increase of $0.7 million due to Royal Truck acquisition in the fourth quarter of 2023.
Interest expense for 2024 was $20.5 million compared to $26.1 million in 2023, a decrease of $5.6 million or 21.3%. The decrease in interest expense in 2024 was primarily due to debt reduction.
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Interest income for 2024 was $2.6 million compared to $1.5 million in 2023, an increase of $1.1 million or 77.6%. The increase in 2024 was primarily due to higher cash on hand.
Other income (expense), net was income of $2.7 million during 2024 compared to income of $1.8 million in 2023. The increase was primarily driven by foreign exchange transaction gains, offset by fixed asset losses.
Provision for income taxes was $33.7 million (22.5% of income before income taxes) for 2024 compared to $39.0 million (22.2% of income before income taxes) in 2023.
Net income for 2024 was $115.9 million compared to $136.2 million in 2023, with the decrease in 2024 net income resulting from the factors described above.
Fiscal 2023 compared to Fiscal 2022
The Company’s net sales in the fiscal year ended December 31, 2023 (“2023”) were $1,689.7 million, an increase of $176.1 million or 11.6% compared to $1,513.6 million for the fiscal year ended December 31, 2022 (“2022”). The increase in sales was attributable to continued strong customer demand for our products in both the Vegetation Management and Industrial Equipment Divisions, improved pricing, and higher throughput due to gradually improving supply chain conditions. Supply chain disruptions and a shortage of skilled labor negatively impacted net sales, especially in the first half of the year earlier.
Net Vegetation Management sales were $979.0 million in 2023 compared to $937.1 million in 2022, an increase of $41.9 million or 4.5%, coming from a strong performance in European agricultural and governmental mowing, forestry and tree care, and North American governmental mowing equipment. Skilled labor shortages and certain supplier issues constrained this division during 2023.
Net Industrial Equipment sales were $710.6 million in 2023 compared to $576.6 million in 2022, representing an increase of $134.0 million or 23.3%. The increase was a result of strong performance in all product lines including excavator and vacuum trucks, sweepers and debris collection, and snow removal equipment further supported by the acquisition of Royal Truck. This division was negatively impacted by a shortage of skilled labor and disruptions in parts of its supply chain, predominantly causing delays in receiving truck chassis.
Gross profit for 2023 was $453.6 million (26.8% of net sales) compared to $376.5 million (24.9% of net sales) in 2022, an increase of $77.1 million. The increase in gross profit was mainly attributable to higher sales volume and better operational performance during 2023 compared to 2022 as well as improved pricing which led to higher profitability as a percentage of sales in 2023 compared to 2022, though these results were partially offset by the negative impacts of supply chain disruptions and material inflation previously mentioned.
Selling, general and administrative expenses (“SG&A”) were $240.2 million (14.2% of net sales) in 2023 compared to $212.6 million (14.0% of net sales) in 2022, an increase of $27.6 million. The increase in SG&A expenses in 2023 was largely attributable to higher marketing expenses related to trade shows, sales promotions and commissions and to a lesser extent, sales volume-driven administration expense. Amortization expense in 2023 was $15.5 million compared to $15.3 million in 2022, an increase of $0.2 million.
Interest expense for 2023 was $26.1 million compared to $14.4 million in 2022, an increase of $11.7 million or 81.7%. The increase in interest expense in 2023 primarily came from higher interest rates compared to 2022.
Other income (expense), net was income of $1.8 million during 2023 compared to expense of $0.7 million in 2022. The increase in 2023 was primarily the result of a gain on fixed assets relating to the sale of a manufacturing facility located in Kent, Washington partially offset by loss on currency exchange. The expense in 2022 was primarily the result of an excise tax audit and to a lesser extent, changes in exchange rates.
Provision for income taxes was $39.0 million (22.2% of income before income taxes) for 2023 compared to $32.4 million (24.1% of income before income taxes) in 2022.
Net income for 2023 was $136.2 million compared to $101.9 million in 2022, with the increase in 2023 net income resulting from the factors described above.
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Liquidity and Capital Resources
In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to conduct the Company’s business, including inventory purchases and capital expenditures. The Company’s accounts receivable, inventory and accounts payable levels, particularly in its Vegetation Management Division, build in the first quarter and early spring and, to a lesser extent, in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts receivable historically build in the first and fourth quarters of each year as a result of pre-season sales and year-round sales programs. These sales, primarily in the Vegetation Management Division, help balance the Company’s production during the first and fourth quarters.
As of December 31, 2024, the Company had working capital of $667.2 million, which represents an increase of $77.2 million from working capital of $590.0 million as of December 31, 2023. The increase in working capital was primarily a result of higher cash and cash equivalents.
Capital expenditures were $25.0 million for 2024, compared to $37.7 million for 2023. The Company will fund any future expenditures from operating cash flows or through our revolving credit facility, described below.
Net cash provided by operating activities was $209.8 million for 2024, compared to $131.2 million for 2023. The increase of cash from operating activities is primarily the result of improved receivables and inventory compared to 2023.
Net cash used in investing activities was $22.2 million for 2024, compared to $52.6 million for 2023. The decrease in investing activities was in part driven by the acquisition of Royal Truck in 2023. Net cash used by financing activities was $32.0 million for 2024, compared to net cash used of $76.9 million for 2023. This reduction in cash used by financing activities is due to repayment of revolving credit.
The Company had $147.2 million in cash and cash equivalents held by its foreign subsidiaries as of December 31, 2024. The majority of these funds are held at our European and Canadian facilities. The Company will continue to repatriate European and Canadian cash and cash equivalents in excess of amounts needed to fund operating and investing activities, but will need to monitor exchange rates to determine the appropriate timing of such repatriation given the current relative strength of the U.S. dollar. Repatriated funds will initially be used to reduce funded debt levels under the Company's current credit facility and subsequently used to fund working capital, capital investments and acquisitions company-wide.
On October 28, 2022, the Company, as the borrower, and each of its domestic subsidiaries as guarantors, entered into a Third Amended and Restated Credit Agreement (the “2022 Credit Agreement”) with Bank of America, N.A., as Administrative Agent. The 2022 Credit Agreement provides the Company with the ability to request loans and other financial obligations in an aggregate amount of up to $655.0 million. Under the 2022 Credit Agreement, the Company has borrowed $255.0 million pursuant to a Term Facility, while up to $400.0 million is available to the Company pursuant to a Revolver Facility which terminates in five years. The Term Facility requires the Company to make equal quarterly principal payments of $3.75 million over the term of the loan, with the final payment of any outstanding principal amount, plus interest, due at the end of the five year term. Borrowings under the 2022 Credit Agreement bear interest, at the Company’s option, at a Term Secured Overnight Financing Rate (“SOFR”) or a Base Rate (each as defined in the 2022 Credit Agreement), plus, in each case, an applicable margin. The applicable margin ranges from 1.25% to 2.50% for Term SOFR borrowings and from 0.25% to 1.50% for Base Rate borrowings with the margin percentage based upon the Company's consolidated leverage ratio. The Company must also pay a commitment fee to the lenders ranging between 0.15% to 0.30% on any unused portion of the $400.0 million Revolver Facility. The 2022 Credit Agreement requires the Company to maintain two financial covenants, namely, a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio. The Agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on the 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 2022 Credit Agreement, including the Term Facility and the Revolver Facility, is October 28, 2027.
As of December 31, 2024, $220.5 million was outstanding under the Credit Agreement, $220.5 million on the Term Facility and zero on the Revolver Facility. On December 31, 2024, $2.7 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 $397.3 million in available borrowings. The Company is in compliance with the covenants under the Agreement.
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Management believes the Agreement and the Company’s ability to internally generate funds from operations should be sufficient to meet the Company’s cash requirements for the foreseeable future. However, future challenges affecting the banking industry and credit markets in general could potentially cause changes to credit availability, which creates a level of uncertainty.
Inflation
The Company is exposed to the risk that the price of energy, steel and other purchased components may increase and the Company may not be able to increase the price of its products correspondingly. If this occurs, the Company’s results of operations would be adversely impacted. In 2024, while inflation moderated compared to prior years, the cost of commodities, components, parts, and accessories remained elevated relative to historical levels. Throughout 2024, we continued to implement strategic pricing actions and operational efficiency measures to help offset these sustained cost pressures. While the rate of inflation decreased during 2024, prices for many key inputs remained higher than pre-pandemic levels. Looking ahead to 2025, we expect the cost environment to remain challenging, though with less volatility than in recent years. We anticipate modest increases in the average cost of commodities, components, parts, and accessories compared to 2024 levels. However, cost inflation continues to be an ongoing challenge that could have a material impact on the Company's business and financial results, particularly if there are unexpected shifts in political policy changes (including the imposition of tariffs), global economic environment or supply chain dynamics.
New Accounting Pronouncements
As discussed in Note 2 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements became effective January 1, 2024, or will become effective in the future. The effect on our financial statements upon adoption of these pronouncements is discussed in the above-referenced note.
Payment due by period
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical Accounting Policies
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policy reflects its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements. For further information on the critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.
Business Combinations
We account for the acquisition of a business in accordance with the accounting standards codification guidance for business combinations, whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to intangible assets based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
Assigning estimated fair values to the assets acquired and liabilities assumed requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of intangible assets that are separately identifiable from goodwill, inventory step-up, and property, plant, and equipment, and are based on available
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historical information, future expectations, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors. Such significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach, or the cost approach; estimating future cash flows based on projected revenues and/or margins that we expect to generate subsequent to an acquisition; applying an appropriate discount rate to estimate the present value of those projected cash flows we expect to generate subsequent to an acquisition; selecting an appropriate royalty rate or estimating a customer attrition or technological obsolescence factor where necessary and appropriate given the nature of the respective asset; assigning the appropriate contributory asset charge where needed; determining an appropriate useful life and the related depreciation or amortization method for the respective asset; and assessing the accuracy and completeness of other historical financial metrics of the acquiree used as standalone inputs or as the basis for determining estimated projected inputs such as margins, customer attrition, and costs to hold and sell product.
In determining the estimated fair value of intangible assets that are separately identifiable from goodwill, we typically utilize the income approach, which discounts the projected future cash flows using an appropriate discount rate that reflects the risks associated with the projected cash flows. However, in certain instances, particularly in relation to developed technology or patents, we may utilize the cost approach depending on the nature of the respective intangible asset and the recency of the development or procurement of such technology. In determining the estimated fair value of acquired inventory, we typically utilize the cost approach for raw materials and the sales comparison approach for finished goods, work in process and component parts. In determining the estimated fair value of acquired property, plant, and equipment, we typically utilize the sales comparison approach or the cost approach depending on the nature of the respective asset and the recency of the construction or procurement of such asset.
We may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known at the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to an acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill will affect any measurement of goodwill impairment taken during the measurement period, if applicable.