Alamo Group Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless otherwise stated, amounts below are in millions of dollars. Comparisons are with the corresponding 2018 periods.
Business context and results
Alamo manufactures equipment for industrial, agricultural, and European markets. Nine-month sales growth was led by Industrial and the Dutch Power acquisition; Agricultural markets remained weak. The company completed its Dutch Power acquisition in March and acquired Dixie Chopper during 2019. It completed the substantially larger Morbark acquisition after quarter-end.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $271.8 | $257.6 | $818.9 | $752.8 |
| Gross profit / margin | $68.7 / 25.3% | $66.8 / 25.9% | $205.2 / 25.1% | $193.5 / 25.7% |
| Operating income / margin | $24.5 / 9.0% | $28.2 / 11.0% | $76.4 / 9.3% | $76.4 / 10.1% |
| Net income | $17.4 | $23.5 | $53.3 | $56.9 |
| Diluted EPS | $1.47 | $2.00 | $4.52 | $4.84 |
| Operating cash flow | Not presented separately | Not presented separately | $44.2 | $3.6 |
Performance changes and financial position
- Q3 sales increased 5.5%; nine-month sales rose 8.8%. Nine-month Industrial sales grew 10.5%, Agricultural sales fell 6.2%, and European sales rose 23.2%, including $27.7 million from Dutch Power.
- Despite higher sales, Q3 operating income fell to $24.5 million. Management cited lower production and unfavorable product mix, partly offset by lower material costs. SG&A rose, including Dutch Power costs and acquisition expenses.
- Nine-month net income declined 6.3%. Management attributed much of the year-over-year decline to the favorable $3.0 million tax adjustment recorded in Q3 2018 under the Tax Cuts and Jobs Act; 2019’s nine-month effective tax rate was 25.5%, versus 21.0% in 2018.
- Nine-month operating cash flow was $44.2 million, versus $3.6 million a year earlier. Investing used $76.0 million, including $58.5 million for acquisitions and $19.5 million of capital expenditures. Cash increased to $60.3 million from $34.0 million at year-end 2018.
- At September 30, current assets were $524.5 million and current liabilities $120.2 million; working capital was $404.3 million. Total debt, including finance leases, was $150.3 million, up from $85.3 million at December 31. The company reported $96.8 million of available revolver capacity at September 30.
- Backlog was $215.3 million at quarter-end, down 14.3% from $251.2 million a year earlier, reflecting softer new orders in Industrial and Agricultural.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said operating challenges were likely to continue at least through the balance of 2019, while customer inquiries remained reasonable.
- Management cited softer North American economic and manufacturing conditions, weak farm incomes, tight labor and hiring conditions, tariffs and trade disputes, foreign-exchange movements, weather, government spending constraints, and acquisition-integration risks.
- On October 24, 2019, Alamo completed the Morbark acquisition for approximately $352 million, subject to post-closing adjustments. The company expanded its credit facility to $650 million, including a $300 million term loan and $350 million revolver, each with a five-year term. As of October 30, $510 million was outstanding and $134.0 million was available under the revolver; the company reported covenant compliance.
- Legal matters arise in the ordinary course, notably product-liability claims generally covered by insurance subject to retentions. The company believes these matters will not materially adversely affect its financial position or results, but ultimate outcomes are uncertain. Environmental and regulatory compliance may also involve costs or liabilities.
- Foreign-currency translation reduced stockholders’ equity by $9.8 million in Q3. The filing estimates a $6.6 million nine-month gross-profit sensitivity to a uniform 10% currency movement. Variable-rate debt also exposes earnings to rate changes.
Key facts for investors to verify
- Whether weaker Agricultural demand, reduced backlog, and lower production persist, and how they affect margins.
- Morbark’s purchase accounting, integration costs, contribution to earnings, and effect on leverage and covenant headroom.
- Cash conversion and working-capital needs, particularly inventory, receivables, and rental-equipment investment.
- Whether margin pressure from mix and production is offset by lower material costs and operating improvements.
- Exposure to tariffs, labor availability, foreign exchange, interest rates, weather, and potential legal or regulatory costs.