Alamo Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Alamo manufactures equipment across Industrial, Agricultural, and European segments.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $207.8 million | $172.6 million |
| Gross profit / margin | $45.5 million / 21.9% | $38.1 million / 22.1% |
| Operating income / margin | $12.1 million / 5.8% | $10.6 million / 6.2% |
| Income before taxes | $11.4 million | $10.9 million |
| Net income | $7.4 million | $7.2 million |
| Diluted EPS | $0.64 | $0.59 |
| Operating cash flow | $(12.9) million | $(19.4) million |
| Capital expenditures | $1.9 million | $2.2 million |
Revenue increased 20.4%, while net income rose about 2%. SG&A was $33.4 million (16.1% of sales), versus $27.5 million (15.9%). Interest expense increased to $1.6 million from $0.2 million, principally due to acquisition-related and other borrowings. The effective tax rate rose to 35.5% from 33.8%.
Segments and material changes
- Industrial: Sales were $116.9 million, up 50.4%, largely reflecting $47.5 million of Specialized acquisition sales. Excluding Specialized, management reported sales down 6%; operating income was $9.3 million versus $6.3 million.
- Agricultural: Sales fell 4.6% to $48.5 million; operating income declined to $0.8 million from $2.4 million. Management cited lower crop prices, weak demand, and winter weather.
- European: Sales fell 3.8% to $42.4 million; excluding Kellands, sales were down 9.3% in U.S. dollars but increased in local currency. Operating income was $2.0 million versus $1.9 million.
Acquisitions materially affect comparisons: Specialized contributed approximately $44.3 million of sales and $2.3 million of net income in Q1 2015. Herder was acquired in March for approximately $4.0 million, subject to adjustments; its post-acquisition results were not material. Gross margin was pressured by $1.8 million of Specialized inventory fair-value step-up costs. Foreign-currency translation reduced comprehensive income by $13.7 million and stockholders’ equity by the same amount.
Cash, debt, and liquidity
- Cash and cash equivalents were $36.7 million at March 31, 2015, down from $39.5 million at year-end. The company reported $34.7 million held by foreign subsidiaries, generally intended for use outside the U.S.
- Total debt was $208.5 million, compared with $190.6 million at December 31, 2014; $208.0 million was outstanding on the revolving facility. The facility had $40.6 million available, after letters of credit, and matures May 12, 2019.
- Working capital was $315.7 million, up $11.8 million from year-end, primarily due to seasonally higher receivables. Management said cash from operations and the credit facility should meet foreseeable requirements. The company was in covenant compliance.
- Operating cash use reflected increases in receivables and inventories. Financing provided $17.7 million, including $33.0 million of revolver borrowings and $15.0 million of repayments.
Outlook, risks, and contingencies
No specific earnings or revenue guidance was provided. Management expected markets to be steady for the remainder of 2015 and said the 37% increase in backlog to $159 million could support sales; excluding acquisitions, backlog grew 4%. Weak agricultural demand remained a constraint. Risks cited include economic and credit conditions, government budgets, commodity prices, adverse weather, raw-material costs, regulation, acquisitions, and foreign-exchange movements. Management estimated that a uniform 10% stronger dollar would reduce quarterly gross profit by about $1.2 million; a two-percentage-point change in variable borrowing rates would change quarterly interest expense by about $1.0 million.
Other matters include environmental monitoring/remediation at company properties; a patent case involving Bush Hog in which the defendants prevailed at trial, with Deere’s appeal pending; and asbestos-containing assets that may require remediation. Management did not expect the asbestos liability change to have a material adverse effect. The company reported no material off-balance-sheet arrangements. It also corrected a prior freight-revenue classification, increasing 2014 reported sales and cost of sales by about $1.4 million with no net-income effect.
Important facts for investors to verify
- How much future growth and profitability depend on acquisitions versus underlying demand, particularly in Industrial and Agricultural markets.
- Whether the higher backlog converts to revenue and cash, given seasonal working-capital needs and Q1 operating cash outflow.
- Debt repayment capacity and exposure to variable interest rates, foreign exchange, and restricted availability of overseas cash.
- Progress on the Deere appeal and environmental matters, including any changes to reserves or potential liabilities.
- Future impairment indicators for goodwill and acquired intangible assets, and the effects of acquisition accounting and purchase-price allocations.