Alamo Group reported mixed Q3 2025 results, with net sales up 5% to $420 million but adjusted net income down 3% to $28.2 million as gross margin fell 90 bps to 24.2% on Vegetation Management consolidation inefficiencies and tariff costs. The Industrial Equipment Division set a record with net sales up 17% (14.5% organic) to $247 million, its seventh straight quarter of double-digit growth, while Vegetation Management sales fell 9% to $173.1 million and its EBITDA margin dropped to 9.7%. The quarter marked new CEO Robert Hero's first earnings call, in which he laid out a four-pillar strategy, a shift from decentralization toward centralized procurement and supply chain, and stepped-up long-term targets of 10%+ sales growth, ~15% operating margin, and 18%-20% adjusted EBITDA margin. Management guided to a seasonal 4%-5% sequential sales decline in Q4 with Industrial margins in the 12%-13% range and no Vegetation improvement until later in the quarter. With $244.8 million of cash, $397 million of revolver availability, and 116% year-to-date cash conversion, the company emphasized a growing M&A pipeline of accretive tuck-in acquisitions as its primary use of capital.
Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746, and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-877-344-7529 with the passcode 5234040. Additionally, the call is being webcast on the company's website at www.alamogroup.com, and a replay will be available for 60 days. On the line with me today are Robert Hero, President and Chief Executive Officer, and Agnes Kamps, Executive Vice President and Chief Financial Officer. Management will make some opening remarks, and then we will open up the line for your questions.
During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Robert, I would like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results.
Among those factors which could cause actual results to differ materially are the following: adverse economic conditions, which could lead to a reduction in overall market demand, supply chain disruptions, labor constraints, competition, weather, seasonality, currency-related issues, geopolitical events, and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Robert Hero. Robert, please go ahead.
Thank you, Ed. I'd like to thank everyone for joining our third quarter earnings conference call. We appreciate your continued interest in the Alamo Group. Before we get started, I'd like to take a moment to say how excited I am to be part of such a great company, to have the opportunity to lead it through our next chapter of growth. The Alamo Group has some of the most talented and passionate employees, a portfolio of high-quality, purpose-built products that are loved by its operators, brands that are leaders in their respective markets, and a business model that is highly cash-generative. In addition, a key pillar of the company's business model is its strategic positioning in attractive end markets, including reliable municipal and contractor spending on infrastructure maintenance and public works, with additional upside in other end markets such as tree care and land management.
In my view, it's a really exciting time to join and be part of the Alamo Group as we shape its future and continue to create value for investors, employees, our customers, and our operators. Overall, the results for the third quarter were mixed, with continued strong performance in our Industrial Equipment Division and continued weakness in the Vegetation Management Division. Let me start by sharing a few highlights for the quarter. Net sales were $420 million, up 5% from the third quarter of 2024. Adjusted net income was $28 million, down 3% compared to adjusted net income of $29 million in the third quarter of 2024. Adjusted EBITDA was $55 million, or 13% of net sales, compared to $55 million, or 14% of net sales, in the third quarter of 2024.
Operating cash flow for the nine months ended September 30, 2025, was $102 million, or 116% of net income. While I'm not pleased with the results, I am optimistic and confident in the future performance of the company and the opportunities ahead. I'll turn the call over to Agnes to review our financial results in detail. When she's finished, I'll come back and share thoughts on a number of items, including a deeper look into the performance of each of our divisions, our go-forward strategy, and some thoughts on capital allocation. Agnes?
Thank you, Robert. Good morning, everyone. Net sales for Third Quarter of 2025 were $420 million, up 4.7%, including organic growth of 3.4% compared to the Third Quarter of 2024. Gross profit for the Third Quarter of 2025 was $101.7 million, up 0.8% compared to the Third Quarter of 2024. Gross margin for the Third Quarter of 2025 was 24.2%, down 90 basis points compared to the Third Quarter of 2024. The degradation in gross margin was primarily due to unforeseen production inefficiencies related to the consolidation of manufacturing facilities in the Vegetation Management Division and due to tariff costs in both divisions. Regarding the production inefficiencies in the Vegetation Management Division, we expect these to continue through the fourth quarter and into the first quarter before we start to realize the expected benefits.
Regarding tariff costs, during the Third Quarter, we raised prices further to mitigate the impact of tariffs going forward. In addition, we are continuing to focus on a variety of supply chain initiatives to reduce costs and manage our supplier base. Selling, general, and administrative expense, or SG&A expense, for the Third Quarter was $59.9 million, up 5.6% from the Third Quarter of 2024. SG&A expense in the Third Quarter of 2025 included $3.3 million related to the CEO transition, acquisition, and integration costs. Excluding these items, our SG&A expense as a percentage of net sales in the Third Quarter of 2025 would have been slightly lower than the Third Quarter in 2024. Interest expense for the Third Quarter of 2025 was $3.9 million, down from $4.9 million in the Third Quarter of 2024. The reduction in interest expense was due to lower average outstanding debt.
Interest income for Third Quarter was $1.5 million, up from $0.6 million in the Third Quarter of 2024 due to higher average cash balances. For the nine-month period ended September 30th, 2025, our effective income tax rate was 25.3%, which was higher than the effective income tax rate for the nine-month period ended September 30th, 2024, and the full year 2024. However, the 2025 effective tax rate of 25.3% is in line with our current and long-term expectations. Adjusted net income for the Third Quarter of 2025 was $28.2 million, down slightly from adjusted net income of $28.6 million for the Third Quarter of 2024. Adjusted earnings per share on a fully diluted basis for the Third Quarter of 2025 was $2.34 compared to $2.38 for the Third Quarter of 2024. Now I'll share some comments regarding the results for each of the divisions.
Net sales in the Industrial Equipment Division for the third quarter of 2025 were $247 million, representing an increase of 17%, or 14.5% organic growth compared to the third quarter of 2024. This performance reflects another record quarter for the Industrial Equipment Division, with strong sales across all groups. Adjusted EBITDA as a percentage of net sales for the third quarter of 2025 was 15.5% compared to 15.7% for the third quarter of 2024. Net sales in the Vegetation Management Division for the third quarter of 2025 were $173.1 million, a decrease of 9% compared to the third quarter of 2024. The decrease in net sales reflected persistent weakness in certain end markets such as tree care and agriculture and some production challenges associated with our consolidation activities, as previously noted.
Adjusted EBITDA as a percentage of net sales for the third quarter of 2025 was 9.7% compared to 11.5% for the third quarter of 2024. Moving on to the balance sheet, we maintained a strong financial position and flexibility to support ongoing initiatives and future investments. At September 30, 2025, total assets were $1,595 million, up $113.6 million from the third quarter of 2024, driven primarily by higher cash and cash equivalents. Accounts receivable decreased $21.4 million to $335.2 million, reflecting an improvement in day sales outstanding versus prior year third quarter. Inventory increased slightly by $6.2 million to $378.2 million to support growth in the Industrial Equipment Division. However, day's inventory on hand improved year-over-year. Accounts payable increased $32 million to $129.3 million at quarter end.
As a result, cash provided by operating activities for the nine months ended September 30, 2025, was $102.4 million, a healthy conversion of 116% of net income. Cash used in investing activities for the nine-month period ended September 30, 2025, was $41.9 million and reflects cash used in acquisition of Rengomatic and $25.4 million used for capital expenditures. The increase in capital expenditure compared to the same period in prior year was primarily due to expansion of one of our manufacturing activities in the Industrial Equipment Division. Cash used in financing activities for the nine-month period ended September 30, 2025, was $23.6 million, reflecting repayments of principal on our long-term debt and dividend paid. As of September 30, 2025, our total debt was $209.4 million. In addition, as of September 30, 2025, we had $244.8 million in cash on the balance sheet and $397 million available under revolving facility.
To conclude, I would like to emphasize our commitment to delivering long-term value to our shareholders. We are pleased that our board has approved a quarterly dividend of $0.30 per share. As we move forward, we will remain focused on driving growth and optimization of our operations. Thank you. I'll turn it back over to Robert.
Thank you, Agnes. Let me start by providing a little more color in the operating performance for each of our divisions. First, the Industrial Equipment Division. As Agnes mentioned, the performance in the division continued to be quite strong, with net sales up 17% compared to the third quarter of 2024. The third quarter was the seventh consecutive quarter of year-over-year double-digit net sales growth for the Industrial Division. Net sales in each of our excavators and vacuum trucks, snow, and sweepers and safety crews performed well during the quarter. The net sales growth of 17% was due to several factors, including price, market growth, market share gains, and the acquisition of Rengomatic. I'd like to share some thoughts on each. Regarding price, during the year, many of the business groups executed fairly typical annual price increases.
In addition, many of our businesses took price again more recently, as Agnes mentioned, to mitigate the impact of tariffs. As it relates to tariffs, our aim in both divisions will be to pass these costs along to customers and to continue availing ourselves of applicable tariff exemptions. In tandem with price increases, we continue to focus on local sourcing and supplier diversification where appropriate. Regarding our core end markets, they continue to be resilient. Our municipal and contractor exposure to end markets such as infrastructure, public works, and utilities generates good, solid long-term growth. To help put this in perspective, state and local spending over the past nearly 20 quarters has grown at a healthy compound annual rate of approximately 5%. Regarding market share, we continue to demonstrate our leadership position in wind share in certain businesses.
Our teams have been doing great work innovating our products and partnering with good dealers and customers. Let me share a quick example of what we mean related to product innovation. We recently showcased our new non-CDL vacuum truck at the Utility Expo in Louisville. This product was intentionally designed to accomplish several goals with a high level of standardization. The product can be built either as a hydro excavator or as a sewer combo cleaner. Additionally, both modules will fit into a container for economic international shipping where they can be upfitted on a chassis in-country. This is a great example of how we can attract new customers and penetrate deeper with existing customers through product innovation. You'll continue to hear more about product innovation as a theme going forward. Lastly, as you know, we completed the acquisition of Rengomatic in the second quarter of this year.
While small, it contributed to the year-over-year growth in net sales. As a reminder, Rengomatic produces trailer-mounted vacuum equipment. The addition of this type of product nicely rounds out our product offering in this attractive end market and continues to strengthen our leadership position. As I mentioned, the Industrial Equipment Division has delivered double-digit growth for seven consecutive quarters. Looking forward, however, we do not expect that double-digit pace of growth to continue. We expect it on an organic basis to return to more moderate but still attractive levels. During the third quarter, net orders were down year-over-year, resulting in a book-to-bill of less than one. That book-to-bill reflects some lumpiness in the sequential order pattern, some intentional reduction in our lead times through improved manufacturing throughput, and a little bit of cooling in the end markets.
The early order pattern in the fourth quarter has started off in a reasonable position, and we have a healthy level of backlog in the division. Overall, we're pleased with the Industrial Equipment Division's performance. Now let's discuss the Vegetation Management Division. As Agnes mentioned, the performance in our Vegetation Management Division continued to experience weakness. Net sales were down 9% compared to the third quarter of 2024. Specifically, net sales in each of our tree care, government mowing, and agricultural groups were down. The net sales decline of 9% was due to several factors, including the end markets and challenges with the consolidation of two of our facilities, partly offset by pricing. Regarding pricing, similar to the Industrial Equipment Division, many of the Vegetation Management businesses increased price during the year and more recently increased price again to mitigate the impact of tariffs.
Regarding our core end markets, like land management, agriculture, and tree care, they continued to show weakness, and as a result, sales volumes were lower. Regarding the consolidation of our manufacturing facilities, I'd like to highlight a few items. Recall, we launched an initiative in the second half of 2024 to consolidate various facilities. The objective of the consolidations is simply to remove fixed costs, make them more productive, particularly given where we are in the end market cycle. These are absolutely the right initiatives. We made some progress in prior quarters. That progress was primarily centered around the winding down of operations in the originating facilities and a reduction in workforce. The progress during the third quarter was a bit more challenging. Those challenges centered around production activities in the manufacturing locations to which the operations were moved. These are complex products and complex processes.
These types of consolidations simply take time. In addition, these activities were occurring while the end markets continued to decline. Both our net sales and operating margins were impacted in the quarter. As we sit today, we expect to make progress on these initiatives going forward, but it will take one or two more quarters before operations in those specific facilities will normalize and yield the full operating efficiencies we anticipate. Now, at the same time, net orders in the Vegetation Management Division in the third quarter of 2025 increased double digits on a percentage basis compared to the same quarter in 2024, and the book-to-bill was a solid one. The early order pattern in the fourth quarter is also off to a reasonable start. In addition, if the Fed continues to reduce interest rates, it's possible we'll see stabilization or improvement in the end markets in 2026.
Overall, we're not pleased with the Vegetation Management Division's performance in the quarter, but are confident we'll finish the consolidation activity and drive margin improvement as originally planned. I'd now like to share some comments regarding the broad framework of our long-term strategy. There are four pillars of the strategy in which we'll focus and devote resources. One, people and culture. Two, commercial excellence. Three, operational excellence. Four, acquisitions. Let me share some color on each. First, as it relates to people and culture, we intend to continue building on the good work that's been done around developing a safe and engaging work environment, investing in our future leaders, and developing a mindset of continuous improvement. With a truly engaged workforce, we believe we can outperform over the long run.
Second, as it relates to commercial excellence, our emphasis will be on winning through product innovation and catering to the needs of our customers and the users of our products. In addition, expect emphasis on higher margin profit pools such as parts and service. Third, as it relates to operational excellence, we intend to drive margin improvement through a more efficient, lean-oriented manufacturing platform and a more cost-effective, high-quality-focused supply chain. Lastly, acquisitions. Let me address this and share some thoughts in the context of a broader capital allocation framework. First, our primary use of cash will be aimed at acquisitions. In general, our interest will be more focused on tuck-in-type acquisitions that can be accretive to organic revenue growth and even to margins, executed at attractive multiples in end markets that are non-discretionary, less cyclical, and close to our core, have good management teams and are market leaders.
This does not rule out larger transactions. There may be unique opportunities for larger deals that have a great strategic fit. As Agnes highlighted, we have cash on the balance sheet and capacity to use leverage in a responsible manner. Our pipeline of targets is growing. We are working to continue the flow of good opportunities and are spending our time prioritizing them. Simultaneously, we will continue to invest in capital projects, allocating these dollars between revenue-generating projects, cost-reduction projects, back-office areas to support long-term growth, which will be needed, and various maintenance items. Capital expenditures in some years may be more or less than others, but on average, we should be running around 2% of sales. In addition, we expect to continue with the dividend, which today is running around $15 million annually or $0.30 per share per quarter.
Lastly, recall that in 2024, the board approved a $50 million share buyback program. While this program is still authorized, we are very mindful of a growing and exciting M&A pipeline and the limited float of stock we have today. Before I conclude, I'd like to share with you a few thoughts on our financial targets. It's important to understand these are long-term through-the-cycle targets. First, sales growth of 10%+, including the effects of acquisitions. Second, adjusted operating income margins of around 15%. Third, Adjusted EBITDA margins of around 18%-20%. Finally, fourth, free cash flow as a percentage of net income of 100%. We believe these targets are achievable and will demonstrate our leadership within the markets we compete. We look forward to updating you on our progress in the future.
In summary, I'd like to say that I'm incredibly excited about the road ahead, confident in our ability to unlock the full potential of the Alamo Group. This concludes our prepared remarks. Operator, please open the lines.