Alamo Group Inc. — FY 2016 Form 10-K
Business context and reporting period. Alamo designs, manufactures and distributes agricultural and infrastructure-maintenance equipment, aftermarket parts and related products through three segments: Industrial, Agricultural and European. This annual report covers the year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $844.7 million | $879.6 million | Down 4.0% |
| Gross profit / margin | $205.1 million / 24.3% | $202.4 million / 23.0% | Profit up $2.7 million |
| Operating income / margin | $67.6 million / 8.0% | $66.5 million / 7.6% | Up 1.6% |
| Income before taxes | $62.2 million | $66.9 million | Down 7.0% |
| Net income / diluted EPS | $40.0 million / $3.46 | $43.2 million / $3.76 | Down 7.3% / 8.0% |
| Operating cash flow | $75.6 million | $52.6 million | Up $23.0 million |
| Capital expenditures | $9.7 million | $15.5 million | Down $5.8 million |
FY 2016 sales by segment were Industrial $484.1 million (down 2.9%), Agricultural $205.8 million (down 1.2%) and European $154.8 million (down 10.3%). Industrial operating income fell to $36.0 million from $42.2 million; Agricultural rose to $20.7 million from $17.3 million; European rose to $10.9 million from $7.0 million.
Fourth-quarter sales were $205.5 million versus $224.4 million; net income was $7.6 million versus $11.4 million; diluted EPS was $0.65 versus $0.99.
Liquidity, debt and capital
At year-end, cash was $16.8 million, working capital $248.9 million and total debt approximately $70.1 million, compared with $26.9 million, $277.9 million and $144.1 million, respectively, at year-end 2015. The company repaid $74 million net under its revolver during 2016. Its $250 million unsecured revolving facility expires December 20, 2021; $178.3 million was available at year-end after letters of credit. The company reported covenant compliance and believes operating cash generation and the facility should meet foreseeable cash needs. Cash held by foreign subsidiaries was $14.5 million and generally was intended for use outside the U.S.
Changes, outlook and notable items
- Gross margin improved despite lower sales, attributed to manufacturing efficiencies and lower material costs. SG&A rose to $137.5 million, including $2.9 million of pension expense from terminating the Gradall hourly pension plan and recognizing previously deferred actuarial losses.
- Net income also reflected other income of only $0.3 million in 2016, versus $6.9 million in 2015, which included a $3.8 million gain on U.K. land. Interest expense declined to $5.9 million from $6.7 million as borrowings fell.
- Management provided no quantified earnings or revenue guidance. It expected substantially all year-end backlog of $147.2 million, down from $163.0 million, to ship in fiscal 2017; some orders are cancellable and backlog may not predict shipments.
- In January 2017, the board raised the quarterly dividend from $0.09 to $0.10 per share. In February 2017, the company announced an agreement to acquire substantially all assets of Old Dominion Brush Company, subject to pre-closing requirements.
- Key risks include weakness in government and agricultural demand, weather and seasonality, steel and component costs and availability, foreign exchange, competition, acquisition integration, pension exposures, regulatory compliance and the possible effects of Brexit. A 10% stronger U.S. dollar was estimated to reduce gross profit by $5.8 million; a 200-basis-point interest-rate change would affect 2016 interest expense by about $3.0 million.
- Environmental matters include chromium contamination and detected chlorinated compounds at the Indianola, Iowa property; the state issued a conditional no-further-action letter, with continued monitoring needed for an unconditional determination. The company also disclosed asbestos at certain assets, which management did not expect to materially affect its financial position or results.
Important facts for investors to verify
- Whether sales and segment profitability stabilize, particularly in Europe and agriculture, and how much currency translation affects results.
- Whether backlog converts to shipments and cash, given cancellations, seasonality and lower year-end backlog.
- The recurring earnings effect of the Gradall pension-plan termination charge and the absence of the prior-year land-sale gain.
- Integration, purchase terms and expected contribution of the announced Old Dominion Brush acquisition.
- Revolver covenant headroom, variable-rate debt exposure, and the availability and intended use of foreign-held cash.
- Progress on environmental monitoring and the potential cost of compliance or remediation; also monitor adoption of new accounting standards, particularly revenue recognition and leases.