Alamo Group's net sales for the third quarter of 2021 were $338.3 million compared to net sales of $291.8 million in the third quarter of 2020, an increase of 16%. Net income for the quarter was $17.5 million, or $1.47 per diluted share, compared to $20 million, or $1.69 per diluted share, in the previous year's third quarter, a decrease of 13% in both net income and net income per diluted share.

For the first nine months of 2021, net sales were $997.1 million compared to $874.8 million in the previous year's first 9-month period, an increase of 14%. Net income for the first nine months of 2021 was $61 million, or $5.13 per diluted share, versus $48.6 million, or $4.10 per diluted share, for the same period in 2020, an increase of 26% in net income and 25% in net income per diluted share.

Operating results for the third quarter of 2021 included a $1.1 million pre-tax charge for the acceleration of stock grants for our former CEO, while comparable 2020 results included the negative effects of non-cash inventory step up charges of approximately $0.9 million in the third quarter of 2020 related to the Morbark acquisition. Excluding the effects of these non-recurring items, third quarter 2021 adjusted operating income was $31.1 million, compared to $31.8 million in the prior year third quarter, a decrease of 2%. Excluding the same non-recurring items, third quarter adjusted net income was $19 million, compared to $20.7 million, a decrease of 8%.

While Alamo Group's results for the third quarter and first 9 months of 2021 continue to reflect strong customer demand, percentage margins still have not yet rebounded to pre-pandemic levels. The favorable sales performance and leveraging effects normally resulting from higher customer demand continued to be constrained by supply chain disruptions and labor shortages, as well as input cost inflation that outpaced the Company's offsetting pricing actions. Further affecting the third quarter 2021 operating income comparison was a lower percentage of high-margin service parts sales, and a heavier mix of essentially no margin freight sales in the quarter. The year-to-year comparison of selling, general and administrative expense also reflects post-pandemic spending normalization, higher sales commissions and the end of government wage subsidies in our international operations. Third quarter 2021 net income was further negatively affected by an income tax provision for stock-based compensation in anticipation of a 28% full year effective tax rate and a non-deductible acceleration of restricted stock awards related to the retirement of our former CEO.

Results by Division

Net sales for Alamo Group's Industrial Division in the third quarter of 2021 were $219 million, compared to $196.2 million in the prior year, an increase of 12%. The Division's income from operations for the quarter was $16 million compared to $19.2 million in the third quarter of 2020, a decrease of 17%. For the first 9 months of 2021, the Industrial Division's net sales were $662.1 million vs. $608.5 million in the first nine months of 2020, an increase of 9%. The Division's income from operations for the first nine months of 2021 was $52 million versus $51.5 million in the same period of the prior year, an increase of 1%.

The Industrial Division's current year results benefited from customer demand growth but were constrained by the supply chain disruptions and the unfavorable input cost changes previously mentioned. Prior year results were impacted by the COVID-19 pandemic and included the negative effects of the Morbark non-cash inventory step up charges mentioned above.

The Company's Agricultural Division net sales in the third quarter of 2021 were $119.3 million compared to $95.5 million in the prior year's third quarter, an increase of 25%. The Division's income from operations for the quarter was $14.1 million compared to $11.7 million in 2020, an increase of 21%. For the first nine months of 2021, the Agricultural Division's net sales were $334.9 million versus $266.4 million in the prior year, an increase of 26%. The Division's income from operations for the first nine months of 2021 was $37.1 million compared to $26 million in the prior year, an increase of 43%.

The Agricultural Division continues to benefit from high customer demand and low dealer inventories. Supply chain disruptions and input cost increases continued to constrain shipments and pressure margins, but this Division was somewhat less affected by these issues as compared to the Company's Industrial Division.

Comments on Results

Jeff Leonard, Alamo Group's President and Chief Executive Officer, commented, "This was certainly an interesting quarter in that we experienced both sustained market tailwinds as well as persistent headwinds in the form of cost inflation, skilled labor shortages and supply chain disruptions.  Activity in our markets remained at a healthy level during the third quarter across all segments of our business.  The strong market momentum we carried out of the second quarter continued, with third quarter order bookings and ending backlog again setting all-time records for the Company.  Our sales improved nicely relative to the third quarter of 2020, but declined modestly from the level achieved in the second quarter of 2021 as persistent labor and supply chain shortages disrupted our operations.  The sales mix was also less favorable as somewhat higher spare parts sales declined modestly this quarter as a percentage of our total sales. 

"While thankfully the Company experienced fewer problems directly related to COVID-19 illness, the efficiency of our manufacturing operations was negatively impacted during the third quarter as shortages of both purchased materials and skilled labor disrupted our normal production cadence.  These supply chain and people related shortages constrained sales growth during the quarter in both of our operating divisions, but most notably in our Industrial Division where the supply chain impact was more significant.  Results for the third quarter of 2021 were also adversely impacted by the combined effects of material cost inflation, and sharply higher transportation costs that were incurred to meet customer requirements.  Third quarter sales, general and administrative costs were also higher than the comparison period because salaries and accruals for profit sharing and management incentive plans were frozen in the third quarter of 2020 in response to the impact of COVID-19.  Selling costs were also higher as sales commissions increased and our sales teams began to travel more frequently with increased trade show attendance.  The Company also incurred higher administrative costs resulting from the timing of certain stock based compensation expenses as well as certain one-time costs associated with the CEO succession process, both of which contributed to a significantly higher effective tax rate for the third quarter. 

"Our Agricultural Division continued to perform at a very high level in the third quarter in spite of some mixed signals from the markets.   While corn and soybean prices declined somewhat relative to the levels achieved in the second quarter, they remained at historically good levels.  Cattle prices rose steadily through July and August before giving back the gains in September to end the quarter slightly lower.  Finally, tractor sales rose modestly compared to the third quarter 2020 but with the gains more concentrated in the higher horsepower machines.  Dealer inventories also remained low, and have not yet recovered to levels evident before the pandemic.  Against this backdrop, demand for the Agricultural Division's products remained strong and the Division's sales increased by 25% compared to the third quarter of 2020.  A favorable product mix supported by solid contributions from operations in the U.K., Europe, Brazil and Australia contributed to this Division's earnings in the quarter.

"Alamo's Industrial Division continued to experience healthy demand for its products from state and municipal government entities, contractors and industrial end users.  Sales in this Division increased by 12% versus the third quarter of 2020 primarily driven by strong demand for its forestry and tree care products, excavators and vacuum trucks.  Division profitability was lower than the comparison period of 2020 partly due to the fact that governmental agencies, with only rare exceptions, do not allow post-order inflationary price adjustments.  Truck chassis delivery delays due to the ongoing computer chip shortage also had a meaningful negative impact on Industrial Division sales and profitability, more so than had been the case in the previous quarters of 2021.  This Division's operational efficiency was significantly impacted by these supply chain problems and shortages.  Lower sales and higher warranty costs in the Division's engineered snow removal products business also negatively impacted profitability in the quarter.

"In retrospect, while the impact that several one-time items and a higher effective tax rate had on our third quarter earnings was disappointing,  I remain pleased with the way our employees have continued to react positively to the challenges evident in the current business environment.  On a positive note, our gross margin, while lower than third quarter 2020 gross margin,  improved slightly compared to the second quarter of 2021 gross margin. We were also able to further strengthen the company's balance sheet by reducing our long term debt by over $20 million during the quarter.  Notably, despite the significantly higher backlog and resulting longer lead-times to deliver equipment to our customers, we have not experienced any significant order cancellations to date.

"As we announced last week, it was gratifying to complete the acquisition of Timberwolf Limited, a leading U.K. based manufacturer of tree-care brush and limb chippers.  While this is a fairly small transaction financially, it is strategically and operationally important because Timberwolf has developed a solid distribution network that covers the United Kingdom, Europe and certain other markets.  This network will provide us with important new access points into these market areas for our Morbark, Rayco and Denis Cimaf forestry and tree-care products.  In addition, the chippers produced by Timberwolf fill gaps in Morbark's chipper offering and provide opportunities for cross branding.

"Looking ahead to the fourth quarter, I expect we will continue to experience the same headwinds associated with cost inflation, supply chain disruptions and skilled labor shortages that we experienced to a greater degree in the third quarter.  These challenges are not expected to improve significantly in the short term.  However, the one-time administrative costs we encountered this quarter are not expected to repeat.  I also expect that our effective tax rate will return to a more traditional level in the fourth quarter.  

"Looking ahead into 2022, the consensus of professional opinion seems to be that the computer chip shortage will potentially persist throughout most of the year.  Inflation is also expected to remain elevated through at least the first half of 2022, along with skilled labor shortages.  In spite of these persistent issues, I remain optimistic about Alamo Group's long term prospects.  With a very strong backlog and ongoing market momentum, we are well positioned to benefit when the supply chain issues begin to resolve. We continue to invest in training our people and in improving our facilities to regain efficiencies lost in the short term.  We will also continue to work closely with our key suppliers to do all we can to minimize the disruption impact on our operations and to get the best possible outcomes for our customers."