Alamo Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Alamo manufactures equipment for industrial, agricultural, and European markets. Comparisons are with Q1 2018 unless otherwise stated. Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $261.9 | $238.1 | +10.0% |
| Gross profit / margin | $63.3 / 24.2% | $60.3 / 25.3% | Margin down 1.1 points |
| Operating income / margin | $22.6 / 8.6% | $21.4 / 9.0% | Income up 5.8% |
| Net income | $15.3 | $14.6 | +4.6% |
| Diluted EPS | $1.30 | $1.24 | +4.8% |
| Operating cash flow | $(32.4) | $(28.1) | Greater cash use |
| Capital expenditures | $5.3 | $7.6 | Down $2.4 |
Industrial sales rose 19.9% to $158.4 million; Agricultural sales fell 9.3% to $53.2 million; and European sales increased 6.5% to $50.3 million, including Dutch Power. Industrial operating income increased to $16.5 million from $11.8 million, while Agricultural and European operating income declined to $2.2 million and $4.0 million, respectively. SG&A was $40.7 million, or 15.5% of sales, versus $38.9 million, or 16.3%. The effective tax rate was 27.2%, compared with 27.0%.
Liquidity, debt, and balance sheet
- Cash was $39.0 million at March 31, 2019, including $36.0 million held by foreign subsidiaries. Working capital was $417.1 million, up $65.1 million from year-end, primarily due to seasonality and higher sales and backlog.
- Total debt, including finance leases, was $180.4 million, versus $85.3 million at December 31, 2018. The revolving credit facility had $180.0 million drawn and $66.8 million available after letters of credit; the company reported compliance with its covenants.
- Operating cash use reflected increases in accounts receivable, inventories, and rental equipment. Financing provided $92.3 million, including $103.0 million of revolver borrowings, primarily to fund the Dutch Power acquisition. Investing used $55.3 million, including $50.5 million for acquisitions.
- Total assets were $852.3 million, up from $721.6 million at year-end. Current assets were $532.0 million and current liabilities $114.9 million.
Material changes and unusual items
- Alamo acquired all of Dutch Power Company B.V. on March 4 for approximately $52.6 million; the purchase price allocation remained preliminary. Dutch Power contributed $3.6 million of Q1 sales. The acquisition added $5.7 million of goodwill and $15.8 million of intangible assets.
- Higher raw-material costs, particularly steel, pressured gross margin. Pricing actions and easing steel costs began to mitigate the impact toward quarter-end. Agricultural results were also affected by soft demand and a multi-day plant shutdown for a paint-system upgrade.
- Backlog rose 8.4% year over year to $257.8 million, supported by Industrial demand and Dutch Power, partly offset by lower new orders in Agricultural and European divisions.
- Adoption of the new lease standard on January 1 recognized a $7.7 million right-of-use asset and a corresponding lease liability; management said adoption did not affect operating results or liquidity.
- The company repurchased 15,000 shares in March for an average $99.34 per share. Q1 dividends declared and paid were $0.12 per share, compared with $0.11 a year earlier.
Outlook, risks, and contingencies
Management was “cautiously optimistic” about the remainder of 2019 but provided no specific numerical earnings or revenue guidance in the filing. It expected higher 2019 capital spending to expand capacity, improve efficiency, invest in technology, and build a new Wisconsin manufacturing facility for its Super Products vacuum-truck operation. Management believed operating cash generation and the credit facility would meet foreseeable cash needs.
Management cited elevated material, freight, tariff, and labor costs; longer lead times for some components; and difficulty hiring and retaining skilled workers. Risks also include continued agricultural weakness, tariffs and trade disputes, currency movements, economic and geopolitical conditions, government customer budget constraints, acquisition integration, and weather-related demand changes. Ordinary-course legal matters, including product-liability claims generally insured subject to retentions, were not expected by management to materially affect financial position or results, though ultimate outcomes could not be determined. The company also noted environmental and regulatory compliance exposures.
Market sensitivities disclosed include an estimated $1.9 million change in quarterly gross profit from a uniform 10% currency movement, and approximately $0.9 million change in quarterly interest expense from a two-percentage-point rate change at the then-current variable-rate borrowings. Alamo entered into €40 million (approximately $45 million) of cross-currency swaps to hedge part of its euro-denominated net investment.
Key facts for investors to verify
- Whether Industrial growth and the $257.8 million backlog translate into sustained orders and earnings, and whether Agricultural demand stabilizes.
- Whether pricing and easing input costs recover the 1.1-point gross-margin decline, while monitoring labor, freight, tariff, and component constraints.
- Dutch Power’s integration, contribution to results, and final acquisition accounting and purchase price.
- Cash conversion and seasonal working-capital needs, planned capital expenditures, and the increased revolver balance and covenant headroom.
- Actual 2019 performance against management’s qualitative outlook; the filing provides no numerical guidance.