Alamo Group Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Alamo manufactures equipment through its Industrial and Agricultural divisions. Dollar amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $338.3M | $291.8M | $997.1M | $874.8M |
| Gross profit / margin | $86.3M / 25.5% | $78.6M / 27.0% | $250.9M / 25.2% | $225.4M / 25.8% |
| Operating income / margin | $30.0M / 8.9% | $30.9M / 10.6% | $89.1M / 8.9% | $77.4M / 8.9% |
| Net income | $17.5M | $20.0M | $61.0M | $48.6M |
| Diluted EPS | $1.47 | $1.69 | $5.13 | $4.10 |
| Operating cash flow | Not presented by quarter | $43.4M | $136.0M |
Q3 sales grew 16%, but net income fell about 13% and diluted EPS fell about 13%. For the nine-month period, sales rose 14% and net income rose 26%. Industrial sales increased 12% in Q3 and 9% year to date; Agricultural sales increased 25% and 26%, respectively. Nine-month operating income rose 1% in Industrial and 43% in Agricultural.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $89.2M; total debt and finance lease obligations were $294.3M, including $279.2M long-term and $15.1M current. Cash less total debt was approximately $205.1M.
- Working capital was $440.1M, up from $358.2M at year-end 2020. Current assets were $635.8M and current liabilities $195.7M.
- Operating cash flow declined to $43.4M from $136.0M, mainly reflecting increases in accounts receivable and inventory. Inventory rose to $294.3M from $242.5M; receivables rose to $245.5M from $209.3M.
- Capital expenditures were $14.6M. The company reported $191.6M of available revolver borrowings after letters of credit. It was in compliance with credit agreement covenants.
- The company declared a quarterly dividend of $0.14 per share. Nine-month dividends paid were $5.0M.
Material changes, outlook and risks
- Management cited strong demand and a backlog of $645.1M at quarter-end, up 154% from $254.5M a year earlier. No numerical earnings or revenue guidance was provided.
- Supply-chain and logistics disruptions, component shortages, skilled-labor shortages, and higher material, transportation and delivery costs constrained production and margins. Management expected these challenges to persist at least through the remainder of 2021 or near term.
- Higher steel and component costs reduced gross margin percentages despite higher sales volumes. Q3 SG&A increased as expenses returned toward pre-pandemic levels and included $1.1M of accelerated stock compensation related to the former CEO; the related non-deductible compensation also contributed to a 37% Q3 tax rate, versus 27% a year earlier.
- Nine-month results included $2.7M of other income, primarily reflecting foreign-exchange changes and a $3.4M gain on sale of a Netherlands facility. The 2020 comparison included $3.5M of non-cash inventory step-up expense related to the Morbark acquisition.
- Effective July 1, 2021, Alamo changed U.S. inventory accounting from LIFO to FIFO, retrospectively. The filing says the change had an immaterial income-statement and cash-flow impact; December 2020 inventory and retained earnings were adjusted upward by $12.5M and $9.4M, respectively.
- After quarter-end, Alamo acquired U.K. wood-chipper maker Timberwolf Limited for approximately $18.0M, announced October 26, 2021.
- Other stated risks include COVID-19 resurgence and operational disruption, inflation, foreign-exchange and interest-rate movements, agricultural-market conditions, governmental budgets, and acquisition integration. The company reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue amid the disclosed component, logistics and labor constraints.
- Whether pricing, productivity or easing input costs can recover gross margins, which declined year over year in both the quarter and nine-month period.
- Whether working-capital growth and lower operating cash flow reverse as elevated backlog is fulfilled.
- Debt levels, revolving-credit availability, covenant compliance and exposure to floating interest rates; $200M of $295M outstanding under the credit agreement was hedged.
- Timberwolf’s acquisition cost, integration, and subsequent operating contribution, which are not reflected in the September 30 financial results.