Alamo Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017. Amounts are in U.S. dollars.
Business context and results
Alamo manufactures equipment for infrastructure maintenance, agriculture and related markets, reporting Industrial, Agricultural and European segments. First-quarter sales increased across all three segments. Results include contributions from Santa Izabel, Old Dominion Brush and R.P.M. Tech, acquired in 2017.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $238.1 million | $215.4 million |
| Gross profit / margin | $60.3 million / 25.3% | $54.2 million / 25.1% |
| Operating income / margin | $21.4 million / 9.0% | $20.3 million / 9.4% |
| Income before taxes | $20.0 million | $18.6 million |
| Net income | $14.6 million | $12.2 million |
| Diluted EPS | $1.24 | $1.05 |
| Effective tax rate | 27.0% | 34.7% |
| Cash from operating activities | $(28.1) million | $(1.4) million |
| Capital expenditures | $7.6 million | $2.3 million |
Financial position and liquidity
- At March 31, 2018, cash was $75.9 million, total assets $745.9 million and working capital $387.0 million. Working capital rose $95.8 million from year-end, primarily due to seasonality and, to a lesser extent, acquisitions.
- Total debt was $147.3 million, versus $60.1 million at December 31, 2017; the increase was chiefly revolving-credit borrowings. The company had $101.3 million of available revolver capacity after letters of credit and reported compliance with its credit covenants.
- Operating cash use increased to $28.1 million, reflecting higher receivables, inventory and rental equipment, among other working-capital movements. Financing provided $86.0 million, principally from net revolver borrowings. Cash ended the quarter at $75.9 million.
- Cash held by foreign subsidiaries was $73.1 million. Management intends to repatriate foreign cash exceeding foreign operating and investment needs, initially to reduce debt.
Material changes and management commentary
- Sales grew 10.5%. Industrial sales rose 5.0% to $132.2 million, Agricultural sales rose 13.3% to $58.6 million, and European sales rose 25.1% to $47.3 million. Acquisitions contributed approximately $14.5 million of quarterly revenue.
- Management attributed higher gross margin to sales mix, productivity improvements, pricing and purchasing initiatives that offset generally higher commodity costs. SG&A rose to $38.9 million, or 16.3% of sales, from $33.9 million, or 15.7%; acquisitions, commissions, selling costs and research and development contributed to the increase.
- Net income rose 19.9%; management attributed approximately $1.5 million of the increase to the lower tax rate following U.S. tax reform, with sales growth and operational improvements also contributing.
- Backlog was $237.8 million at quarter-end, up 62.0% from $146.8 million a year earlier. Management cited increased demand across divisions and, to a lesser extent, acquisitions.
- A labor strike at the Gradall facility began March 12 and was settled April 5, 2018; normal operations resumed April 9. The strike affected first-quarter excavator sales.
Outlook, risks and other items
- Management expects markets to be stable for the remainder of 2018 but remains cautious. It plans to add personnel and outsourcing to meet near-term demand and increase capital expenditures to improve efficiency and expand capacity. No specific full-year financial guidance was provided.
- Management reported higher raw-material and input costs and expects inflationary pressure to persist. Potential tariffs on inputs, exports or agricultural commodities could affect costs or demand. Other cited risks include agricultural-sector weakness, currency movements, government budget constraints, interest rates, weather, regulation and acquisition integration.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The company was still assessing the transition tax and GILTI; subsequent adjustments to provisional estimates could be material to tax expense.
- The company adopted revenue-recognition guidance effective January 1, 2018, with no reported impact on financial position or results. It said there were no material off-balance-sheet arrangements and no material change in previously disclosed risk factors.
- Environmental and other regulatory compliance may entail costs or liabilities; the filing does not quantify a specific material contingency. Foreign-exchange and floating-rate debt exposures remain: the filing estimates a $1.844 million gross-profit change for a uniform 10% currency movement and a $735,000 quarterly interest-expense change for a two-percentage-point rate movement, under stated assumptions.
Key facts for investors to verify
- Whether elevated backlog converts to shipments and revenue, particularly after the Gradall strike and as the company expands capacity.
- Whether working-capital investment and operating cash use moderate as seasonal receivables and inventory unwind.
- Debt levels, revolver availability and covenant compliance as capital spending increases and foreign cash is repatriated.
- Final tax-reform accounting, including transition-tax and GILTI effects, and any resulting material tax adjustments.
- Acquisition contributions and integration, along with the effects of commodity inflation, tariffs, agricultural-market conditions and currency movements on margins and demand.