Alamo Group Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Alamo manufactures equipment and parts for industrial and agricultural markets. Results include Morbark, acquired in October 2019, and Dutch Power, acquired in March 2019.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $291.8m | $271.8m | $874.8m | $818.9m |
| Gross profit / margin | $78.6m / 27.0% | $68.7m / 25.3% | $225.4m / 25.8% | $205.2m / 25.1% |
| Operating income / margin | $30.9m / 10.6% | $24.5m / 9.0% | $77.4m / 8.9% | $76.4m / 9.3% |
| Net income | $20.0m | $17.4m | $48.6m | $53.3m |
| Diluted EPS | $1.69 | $1.47 | $4.10 | $4.52 |
- Revenue mix: Q3 Industrial sales rose 10.1% to $196.2m; Agricultural sales rose 2.0% to $95.5m. For nine months, Industrial sales increased 11.4% to $608.5m, while Agricultural sales declined 2.4% to $266.4m.
- Cash flow: Nine-month operating cash flow was $136.0m, versus $44.2m a year earlier. Cash at September 30 was $93.5m, up from $42.3m at year-end 2019. Investing activities used $11.5m and financing activities used $74.1m.
- Debt and liquidity: Total debt was $374.1m, down from $444.0m at December 31, 2019. Working capital was $409.5m. The company reported $186.3m of available revolver borrowings and compliance with its credit agreement covenants.
- Other: Nine-month capital expenditures were $15.0m, compared with $19.5m. Dividends declared were $0.13 per share for Q3 and $0.39 per share year to date.
Changes versus comparable periods
- Q3 sales increased 7.3% and net income increased $2.6m year over year; Q3 diluted EPS rose to $1.69 from $1.47. Morbark contributed $43.9m of Q3 sales.
- For the first nine months, sales increased 6.8%, primarily reflecting $149.2m of sales from Morbark and Dutch Power. Management said legacy Industrial product sales were generally down, while Agricultural sales were also affected by the pandemic.
- Nine-month net income declined 9.0% and diluted EPS fell to $4.10 from $4.52, despite higher sales and gross margin. Acquisition-related borrowing increased interest expense to $12.9m from $5.2m; amortization rose to $11.1m from $3.1m.
- Q3 gross margin improvement primarily reflected the acquisitions. Morbark inventory step-up charges reduced gross profit by $0.9m in Q3 and $3.5m year to date.
Outlook, risks and notable items
- Management provided no numerical earnings or revenue guidance. It expects COVID-19 to continue adversely affecting the business for the remainder of 2020, but said the scale of the effect was not reasonably estimable. All manufacturing plants were operating at varying production levels.
- Management described improving activity and recovery signs in parts of the Agricultural Division, and uneven Industrial performance. Backlog increased 18.2% year over year to $254.5m at quarter-end.
- In response to uncertainty, the company restricted travel, reduced inventory, limited capital spending, suspended share repurchases and delayed discretionary spending. Management said operating cash generation and credit availability should meet foreseeable cash requirements.
- Key risks include pandemic-related demand, operational and supply-chain disruption; agricultural and industrial market weakness; government customer budget constraints; tariffs and trade disputes; foreign exchange movements; acquisition integration; and input costs. The company also has variable-rate debt; $200m of its $375m credit-agreement borrowings was hedged through an interest-rate swap. A 2 percentage-point rate change was estimated to alter quarterly interest expense by approximately $1.9m.
- Legal matters, mainly product-liability claims generally covered by insurance subject to self-insured retentions, were not expected by management to materially adversely affect results or financial position, although outcomes remain uncertain. Environmental and other regulatory compliance may also create costs.
Important facts for investors to verify
- How much of reported sales growth and backlog reflects acquired businesses versus underlying demand, and whether backlog converts to revenue.
- Whether pandemic-related disruptions, customer demand and Agricultural Division recovery developed as management expected after September 30.
- Debt repayment progress, revolver availability, covenant headroom and the effect of floating rates beyond the hedged portion.
- The durability of the higher operating cash flow, including the contribution from reductions in receivables, inventory and other working-capital items.
- Future impacts of Morbark acquisition-related amortization, inventory step-up charges, integration and purchase-accounting estimates.