ALAMO GROUP INC 10-K

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 continued to experienced strong demand for industrial equipment products in 2025, while demand for vegetation products was mixed. Agricultural, tree care and recycling markets remained weak. Operating margins declined as strong performance in the Industrial Equipment Division only partially offset lower margins in the Vegetation Management Division. Market conditions continue to be mixed. Demand for governmental and industrial products is healthy and vegetation product demand remains weak by soft commodity pricing, elevated interest rates, and reduced housing construction activity. 2025 Performance In 2025, the Company's net sales decreased by 2% and net income decreased by 10% compared to 2024. The decrease in net sales was primarily driven by the ongoing lower demand in tree care and recycling markets and operational challenges in the Vegetation Management Division related to consolidation of certain operations. Additionally, the sale of Herschel Parts on August 16, 2024, had an unfavorable impact on year-over-year sales, though immaterial for total Company results for the year. These challenges were only partially offset by strong sales growth in the Industrial Equipment Division. Net income was impacted by the CEO transition costs, acquisition and integration expenses, and ongoing restructuring efforts. Additional pressure on net income resulted from market-driven revenue declines and production inefficiencies in the Vegetation Management Division. Strong demand and solid margins in the Industrial Equipment Division only partially offset these challenges. The Company's Vegetation Management Division experienced a 17% decrease in net sales and a 59% decline in income from operations for the full year of 2025 compared to 2024. While continued market weakness and operational challenges led to lower revenue, the Division’s backlog increased 6% reflecting potential market stabilization. The Company continues to implement cost-saving initiatives and enhancement of operational efficiencies in an effort to improve operating margins. The Company's Industrial Equipment Division reported a 13% increase in net sales for the full year of 2025 compared to 2024. Sales growth was strong in all product lines, led by excavators, vacuum trucks and snow, followed by sweepers & safety. Income from operations for 2025 rose 19% versus 2024, driven by increased demand, greater operational efficiencies, and an improvement in supply chain performance. Consolidated income from operations was $152 million for the full year of 2025 compared to $165 million for the full year of 2024, a decrease of 8%, impacted by CEO transition costs, acquisition and integration expenses, and ongoing restructuring efforts. As part of our ongoing efforts to optimize operations in both of our Divisions, we have relocated applicable product families, sold the Gibson City, IL facility, repurposed one facility to support other brands, and completed initial set-ups for portions of the production lines. Over the next approximately one to two quarters, we plan to finish the remaining line installations and increase production. During this transition, we expect temporary production inefficiencies, duplicate costs, and shipment-timing effects that may pressure revenue and gross margin, along with potentially one-time expenses related to relocation and facility exit. Following completion, we expect improved capacity utilization, service levels and structural cost reductions. The anticipated timing, costs and benefits are forward-looking and subject to the risks and uncertainties described under “Forward- Looking Information.” 32 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): 2025 2024 2023 Vegetation Management $ 654,053 $ 785,199 $ 979,040 Industrial Equipment 949,662 843,314 710,611 Total net sales $ 1,603,715 $ 1,628,513 $ 1,689,651 Cost and profit margins, as percentages of net sales: Cost of sales 75.2 % 74.7 % 73.2 % Gross profit 24.8 % 25.3 % 26.8 % Selling, general, administrative, and amortization expenses 15.4 % 15.2 % 15.1 % Income from operations 9.5 % 10.1 % 11.7 % Income before income taxes 8.7 % 9.2 % 10.4 % Net income 6.5 % 7.1 % 8.1 % Results of Operations Fiscal 2025 compared to Fiscal 2024 The Company’s net sales in the fiscal year ended December 31, 2025 (“2025”) were $1,603.7 million, a decrease of $24.8 million or 1.5% compared to $1,628.5 million for the fiscal year ended December 31, 2024 (“2024”). The decrease in sales was attributable to continued weaknesses in tree care and recycling markets and operational challenges related to consolidating certain operations, partially offset by sustained strong demand for industrial equipment. Vegetation Management net sales were $654.1 million in 2025 compared to $785.2 million in 2024, a decrease of $131.1 million or 16.7%. The decline was attributable to sustained weakness in the tree care and recycling markets as well as operational challenges in consolidating certain operations. The sale of Herschel Parts on August 16, 2024 also impacted results compared to 2024, though it was immaterial to the year-over-year sales decrease. Industrial Equipment net sales were $949.7 million in 2025 compared to $843.3 million in 2024, representing an increase of $106.4 million or 12.6%. The increase was driven by the strong ongoing demand across the division in excavators, vacuum trucks, sweepers, and snow removal equipment. Gross profit for 2025 was $397.8 million (24.8% of net sales) compared to $412.5 million (25.3% of net sales) in 2024, a decrease of $14.7 million. The decrease in gross profit was driven by lower revenue and production inefficiencies in the Vegetation Management Division, partially offset by the healthy demand in Industrial Equipment Division. Selling, general and administrative expenses (“SG&A”) were $229.7 million (14.3% of net sales) in 2025 compared to $231.5 million (14.2% of net sales) in 2024, a decrease of $1.8 million attributable to labor cost savings actions taken in Vegetation Management, offsetting the additional costs related to the CEO succession, and acquisition and integration expenses. Amortization expense in 2025 was $16.5 million compared to $16.2 million in 2024, an increase of $0.3 million due to the acquisition of Ring-O-Matic. Interest expense for 2025 was $14.9 million compared to $20.5 million in 2024, a decrease of $5.6 million or 27.6% primarily related to debt reduction. 33 Interest income for 2025 was $5.6 million compared to $2.6 million in 2024, an increase of $3.0 million or 111.2%, related to higher cash on hand. Other income (expense), was a net expense of $2.8 million during 2025 compared to income of $2.7 million in 2024. The expense increase was primarily driven by foreign exchange transaction losses, offset by gains related to the sale of former Rhino Ag facility in Gibson City, IL. Provision for income taxes was $35.7 million (25.6% of income before income taxes) for 2025 compared to $33.7 million (22.5% of income before income taxes) in 2024. The tax rate was impacted by stock compensation related to the CEO transition, lower R&D credit, and a large release of a valuation allowance in 2024. Net income for 2025 was $103.8 million compared to $115.9 million in 2024, with the decrease in 2025 net income resulting from the factors described above. 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, 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. 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. 34 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, 2025, the Company had working capital of $779.7 million, which represents an increase of $112.5 million from working capital of $667.2 million as of December 31, 2024. The increase in working capital was primarily a result of higher cash and cash equivalents. Capital expenditures were $30.6 million for 2025, compared to $25.0 million for 2024. 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 $177.5 million for 2025, compared to $209.8 million for 2024. The decrease of cash from operating activities is a result of lower net income as well as higher inventory, which was partially offset by lower accounts receivable and improved accounts payable. Net cash used in investing activities was $46.2 million for 2025, compared to $22.2 million for 2024. The increase in investing activities was in part driven by the acquisition of Ring-O-Matic in 2025. Net cash used by financing activities was $30.8 million for 2025, compared to net cash used of $32.0 million for 2024. This reduction in cash used by financing activities is due to payment of contingent consideration in 2024 offset by higher dividend payments in 2025. The Company had $174.5 million in cash and cash equivalents held by its foreign subsidiaries as of December 31, 2025. 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, 2025, $205.7 million was outstanding under the Credit Agreement, $205.7 million on the Term Facility and zero on the Revolver Facility. On December 31, 2025, $2.8 million of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' 35 contracts resulting in $397.2 million in available borrowings. The Company is in compliance with the covenants under the Agreement. Management believes the Agreement and the Company’s ability to internally generate funds from operations should be sufficient to meet the Company’s cash requirements for the foreseeable future. However, future challenges affecting the banking industry and credit markets in general could potentially cause changes to credit availability, which creates a level of uncertainty. 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 2025, the cost of commodities, components, parts, and accessories somewhat normalized relative to historical levels. Throughout 2025, we continued to implement strategic pricing actions and operational efficiency measures to help offset tariffs and other supply chain cost pressures. Looking ahead to 2026, we expect the cost environment to return to more historically normal levels than we have seen in recent years. We anticipate modest increases in the average cost of commodities, components, parts, and accessories compared to 2025 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 continued 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, 2025, 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 there are currently no critical accounting policies. 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 historical information, future expectations, and assumptions determined to be reasonable but are inherently 36 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.