Alamo Group Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context and results
Alamo manufactures equipment reported in Industrial, Agricultural, and European segments. Management attributed the period’s results to soft demand in several markets and unfavorable currency translation, partly offset by improved production efficiency, lower material costs, and expense control.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $216.8 | $231.6 | $639.2 | $655.1 |
| Gross profit | $54.7 | $57.5 | $157.2 | $153.7 |
| Gross margin | 25.2% | 24.8% | 24.6% | 23.5% |
| Operating income | $21.0 | $23.6 | $55.3 | $52.1 |
| Operating margin | 9.7% | 10.2% | 8.7% | 8.0% |
| Net income | $13.2 | $14.8 | $32.5 | $31.8 |
| Diluted EPS | $1.14 | $1.28 | $2.81 | $2.77 |
Material changes and segment performance
- Q3 sales fell 6.4% year over year; nine-month sales fell 2.4%. More than half of the nine-month sales decline was attributed to currency translation.
- Q3 Industrial sales declined 4.9%, Agricultural sales declined 4.2%, and European sales declined 13.7%. Weak non-governmental vacuum-truck demand, soft agriculture markets, and currency effects were key factors.
- For nine months, Industrial sales were down 0.3%, Agricultural sales down 2.1%, and European sales down 8.6%.
- Despite lower sales, nine-month gross profit increased, which management attributed to efficiency improvements and lower material costs. The 2015 comparison also included $2.7 million of acquired-inventory fair-value step-up cost; Q3 2015 included $0.2 million.
- Nine-month net income increased 2.0%, while Q3 net income declined 10.3%. Q3 operating income also declined; lower interest expense and a lower effective tax rate partly mitigated the earnings decrease.
- Backlog was $137 million at September 30, down 21.5% from $175 million a year earlier. Management cited weaker vacuum-truck orders, agricultural market softness, European conditions and currency, and unusually high prior-year new-product orders.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $48.0 million, compared with $31.2 million in 2015. Investing activities used $6.5 million, including $7.2 million of capital expenditures; financing activities used $10.5 million. Cash rose to $56.5 million from $26.9 million at year-end 2015.
- Working capital was $308.1 million, up $30.2 million from December 31, 2015. Current assets were $392.7 million and current liabilities $84.6 million.
- Total debt and capital lease obligations were $135.4 million, including $134.0 million outstanding on the revolving facility. Available revolver borrowings were $114.7 million after $1.3 million committed to letters of credit. The company reported compliance with facility covenants.
- The unsecured $250 million revolving credit agreement matures May 12, 2019; the agreement permits a potential commitment increase of up to $50 million, subject to conditions. Management said operating cash generation and the facility should meet foreseeable cash needs, while noting credit-market uncertainty.
- $52.3 million of cash was held by foreign subsidiaries and, according to the filing, would not be available for U.S. use without U.S. federal and state tax consequences. Management intends to use it for non-U.S. capital expenditures or acquisitions.
- Long-term debt has variable interest rates. The filing estimates a two-percentage-point rate change would have changed Q3 interest expense by approximately $0.7 million, assuming the existing borrowing level.
Outlook, risks, and other notable items
- No specific earnings or revenue guidance was provided. Management expected markets to remain soft for the rest of 2016.
- Risks cited include continued agricultural weakness and low commodity prices, strong-dollar and other foreign-exchange effects, Brexit-related uncertainty, weak vacuum-truck demand, government budget constraints, customer credit availability, weather, raw-material costs, regulation, and general economic conditions.
- The company’s U.K. subsidiaries hedge approximately 90% of expected net foreign-currency collections over six months. A uniform 10% dollar strengthening was estimated to reduce nine-month gross profit by $4.3 million, excluding potential sales-volume or local-pricing responses.
- The Deere mower-patent litigation was finally adjudicated in the company’s favor in May 2016 and is no longer subject to further appeal. Environmental matters include chromium contamination at an Iowa property, for which the company reported a conditional state “no further action” letter, and potential asbestos remediation; management did not expect asbestos changes to materially affect results or financial position.
- The company notified participants of its decision to terminate the Gradall hourly pension plan and anticipated completing the termination by December 31, 2016; participants were not expected to lose benefits. No pension contribution was required for 2016, though one could be made.
- The quarterly dividend was $0.09 per share, versus $0.08 a year earlier. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog and order trends stabilize, particularly for vacuum trucks, agricultural equipment, and European products.
- How much future sales and earnings are affected by foreign exchange, Brexit-related uncertainty, and the company’s currency hedges.
- Whether gross-margin improvement from efficiency and material costs continues despite lower volume and competitive or market pressures.
- Cash generation, the use and U.S. availability of foreign-held cash, revolver utilization, and continued covenant compliance.
- Developments in the Iowa environmental monitoring matter and the timing and financial effects, if any, of the pension-plan termination.