Alamo Group Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with the same period in 2020. Alamo manufactures equipment serving industrial and agricultural markets.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $311.2 million | $314.4 million |
| Gross profit / margin | $76.4 million / 24.6% | $78.9 million / 25.1% |
| Operating income / margin | $25.4 million / 8.2% | $23.9 million / 7.6% |
| Net income | $17.5 million | $15.5 million |
| Diluted EPS | $1.47 | $1.31 |
| Operating cash flow | $(8.6) million | $5.6 million |
| Capital expenditures | $3.5 million | $7.4 million |
Industrial sales declined 7.9% to $211.9 million; Agricultural sales increased 17.5% to $99.3 million. Segment operating income was $16.1 million for Industrial and $9.3 million for Agricultural, compared with $18.1 million and $5.7 million, respectively, a year earlier.
At March 31, 2021, cash was $105.3 million, total debt including finance leases was $353.7 million, and working capital was $439.4 million. Revolver borrowings were $77.0 million, with $98.2 million available after letters of credit. Cash and cash equivalents increased $55.1 million during the quarter; financing provided $67.4 million, while operating activities used $8.6 million.
Changes and drivers
- Sales decreased 1.0%, while net income increased 12.5%. Lower SG&A and interest expense helped offset lower sales and gross margin.
- Gross margin declined to 24.6%, with management citing steel and other input-cost inflation and higher component-delivery costs, including airfreight. SG&A fell by $3.9 million, partly reflecting COVID-related cost reductions.
- Interest expense declined to $2.6 million from $5.5 million, attributed to debt reduction during 2020. Other expense was $0.6 million, primarily due to currency movements; Q1 2020 included $2.3 million of other income, including a gain on sale of a building.
- The Q1 2020 gross-profit comparison included $2.0 million of Morbark acquisition-related inventory step-up charges. Q1 2021’s 22.3% effective tax rate was lower than Q1 2020’s 26.2%, with management citing discrete tax benefits.
Outlook, risks and contingencies
Management reported record orders and backlogs in both divisions; consolidated backlog was $452.5 million at quarter-end, up 94.5% from $232.6 million a year earlier. The company said it was operating at full or nearly full capacity at most facilities and expected to return to a more normalized level of capital expenditures in 2021. No numerical earnings or sales guidance was provided.
Management expects COVID-19 effects to continue during 2021, with uncertain duration and severity. Plant quarantines, supply-chain and shipping bottlenecks, component and raw-material availability, inflation, and a tightening labor market may delay shipments, increase costs, or constrain fulfillment. Other cited risks include changes in agricultural conditions, government budgets, tariffs and trade policy, foreign exchange, interest rates, and acquisition integration. The company reported compliance with its credit-agreement covenants and no material off-balance-sheet arrangements. It stated that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the large backlog converts to sales on schedule despite supply-chain, logistics, labor, and inflation constraints.
- Whether gross margins recover as input and expedited-shipping costs evolve, and whether reduced SG&A is sustainable.
- Working-capital demands, operating cash generation, and revolving-credit borrowings; Q1 operating cash flow was negative despite higher net income.
- Debt and interest-rate exposure: $354.5 million was outstanding under the credit agreement, and $200 million was covered by an interest-rate swap; covenant compliance was reported at quarter-end.
- COVID-19, currency and tax-related impacts, including the timing of foreign cash repatriation and the effect of exchange-rate movements.