Alamo Group Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless noted otherwise, amounts below are in U.S. dollars.
Business context and results
Alamo manufactures equipment for vegetation management and industrial markets. Management reported continued strong demand, improved pricing and manufacturing efficiencies, and a moderately improving supply chain. Skilled-labor constraints and some supply disruptions remained.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $419.6 million | $368.8 million | $1,272.1 million | $1,127.0 million |
| Gross profit / margin | $114.1 million / 27.2% | $92.4 million / 25.0% | $344.7 million / 27.1% | $278.7 million / 24.7% |
| Operating income / margin | $49.8 million / 11.9% | $35.8 million / 9.7% | $153.2 million / 12.0% | $105.9 million / 9.4% |
| Net income | $34.9 million | $25.8 million | $104.6 million | $72.8 million |
| Diluted EPS | $2.91 | $2.16 | $8.73 | $6.10 |
Q3 sales increased 14% year over year; nine-month sales rose 13% and net income rose 44%. For the nine months, Vegetation Management sales grew 9% and Industrial Equipment sales grew 20%. Operating income in those segments increased 31% and 84%, respectively. Backlog was $890.9 million at September 30, versus $908.9 million a year earlier.
Cash flow, debt and liquidity
- Operating cash flow was $77.0 million for the first nine months of 2023, compared with cash used of $21.2 million in 2022. Working-capital movements included uses of $60.9 million from receivables and $19.2 million from inventory.
- Capital expenditures were $27.1 million, versus $23.5 million in the prior-year period. Management expected full-year 2023 capital expenditures of approximately $33–$37 million.
- Cash and cash equivalents were $113.5 million at September 30, up from $47.0 million at December 31, 2022. Working capital was $654.0 million, up $117.3 million since year-end. The company said $109.9 million of cash was held by foreign subsidiaries.
- Total debt, including finance leases, was $323.9 million, compared with $302.0 million at year-end. Revolver borrowings were $85.0 million, with $312.6 million of available borrowings after letters of credit. The company reported compliance with credit-agreement covenants.
- Interest expense increased to $19.5 million for the nine months from $9.6 million, primarily due to higher interest rates. The company’s debt bears variable rates.
Management commentary, outlook and risks
Management attributed improved margins to positive pricing, higher volume, better supply-chain performance, manufacturing efficiencies and capacity utilization. It cited inflation, labor shortages, foreign-exchange effects and residual supply-chain disruption as constraints. Incoming orders softened in certain Vegetation Management categories, although the division’s backlog remained strong. The filing provides no quantified revenue or earnings guidance; management said available credit and internally generated funds should meet expected cash requirements for the foreseeable future.
Risks highlighted include weaker domestic or global markets, higher interest rates, inflation and input costs, supply-chain disruption, labor availability, currency movements, tariffs and trade disputes, geopolitical events, agricultural-market weakness, government-customer budget constraints, and acquisition integration. A 10% currency movement in either direction was estimated to change nine-month gross profit by $9.6 million. A two-percentage-point change in the third-quarter average variable borrowing rate was estimated to change quarterly interest expense by approximately $1.6 million.
Subsequent to quarter-end, Alamo acquired Royal Truck & Equipment for approximately $28 million, subject to post-closing adjustments. The acquisition adds highway safety equipment and its results were expected to be immaterial. The company also recorded a roughly $1.7 million gain on the sale of a manufacturing facility during the first nine months. Foreign-currency translation reduced equity by $12.7 million in Q3. Management reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether backlog and incoming orders remain resilient, particularly in forestry and North American agricultural mowing.
- Whether margin gains persist as supply-chain conditions, labor availability, pricing and input costs evolve.
- Debt exposure to variable interest rates, covenant headroom and use of the available revolver.
- Cash generation and working-capital requirements, including receivables and inventory levels.
- Royal Truck’s final purchase price, integration and subsequent contribution to results.