Alamo Group Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Alamo Group manufactures equipment across its Industrial, Agricultural and European segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $211.5 million | $215.7 million | $422.5 million | $423.5 million |
| Gross profit / margin | $52.2 million / 24.7% | $50.7 million / 23.5% | $102.5 million / 24.3% | $96.2 million / 22.7% |
| Operating income / margin | $18.0 million / 8.5% | $16.4 million / 7.6% | $34.3 million / 8.1% | $28.6 million / 6.7% |
| Net income | $10.6 million | $9.7 million | $19.2 million | $17.1 million |
| Diluted EPS | $0.92 | $0.84 | $1.67 | $1.49 |
Cash flow and liquidity: Six-month operating cash flow was $4.9 million, compared with cash used of $8.8 million in 2015. Capital expenditures were $6.2 million. Cash at June 30 was $45.0 million; working capital was $317.1 million. Cash flow benefited from earnings and seasonal financing, while receivables and inventory absorbed cash.
Debt: Total debt was $165.2 million, including $164.0 million outstanding on the revolving facility, versus $144.1 million total debt at December 31, 2015. The $250 million facility matures May 12, 2019; $84.4 million remained available at quarter-end after letters of credit. The company reported compliance with covenants. Cash interest paid for the first half was $2.9 million.
Other metrics: Dividends declared were $0.09 per share in Q2 and $0.18 per share for the first half. The July quarterly dividend was also $0.09 per share.
Material changes and management commentary
- Q2 sales fell 2.0% year over year; first-half sales were down 0.3%. First-half net income rose approximately 12.6% and operating income rose 20.2%.
- Management attributed improved gross margins and earnings mainly to production efficiency improvements and lower material costs. Lower interest expense also supported results; higher effective tax rates partly offset gains.
- First-half Industrial sales increased 2.1%, while Agricultural sales declined 0.9% and European sales fell 5.9% in U.S. dollars. Currency translation weighed on international results.
- Backlog was $130 million at June 30, down 19.8% from $162 million a year earlier. Management cited weaker vacuum-truck orders from non-governmental customers, European economic and currency pressures, and the prior-year comparison from new-product orders.
- Management expected markets to be steady for the remainder of 2016, but warned of potential pressure from economic weakness, soft agriculture, commodity prices, government budgets, foreign exchange, credit conditions and Brexit-related uncertainty.
Risks, contingencies and unusual items
- Brexit: The company added the U.K.’s planned departure from the EU as a risk, citing possible trade restrictions, regulatory divergence, economic disruption and sterling/euro volatility. Management said the effects were uncertain.
- Foreign exchange and rates: A 10% strengthening of the U.S. dollar was estimated to reduce first-half gross profit by $2.7 million. A two-percentage-point change in the second-quarter average variable borrowing rate was estimated to change quarterly interest expense by approximately $820,000.
- Legal and environmental matters: In May 2016, the Federal Circuit affirmed a lower court ruling that Deere’s mower-related patent was invalid and not infringed. The company described ongoing monitoring of contamination at its Indianola, Iowa property and potential asbestos remediation; it stated that asbestos-related changes were not expected to materially affect results or financial position.
- Pension plan: Alamo notified participants of its decision to terminate the Gradall hourly pension plan; termination was expected to take until 2017, with participants retaining benefit options.
- The company reported no material off-balance-sheet arrangements and said disclosure controls were effective. It was evaluating the effects of several forthcoming accounting standards, including revenue recognition and leases.
Most important facts for investors to verify
- Whether backlog and demand stabilize, particularly for vacuum trucks, agricultural equipment and European products.
- Whether margin improvement from efficiencies and lower material costs is sustained as sales and product mix change.
- How currency movements, Brexit developments and foreign-market conditions affect sales, margins and accumulated currency losses.
- Seasonal working-capital needs, revolver borrowings and covenant headroom; confirm that available credit remains sufficient.
- Future tax rates and cash taxes, given the higher first-half effective tax rate and foreign-jurisdiction losses.
- Any material cost or liability changes from environmental monitoring, asbestos, pension-plan termination or other contingencies.