Alamo Group Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Alamo manufactures equipment serving industrial, agricultural, and European markets. Results are unaudited; management cautions that the quarter is not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $158.4 million | $155.9 million | +1.6% |
| Gross profit / margin | $34.9 million / 22.0% | $35.2 million / 22.6% | Profit down $0.3 million |
| Operating income / margin | $9.7 million / 6.1% | $11.0 million / 7.1% | Down 11.4% |
| Net income | $7.0 million | $6.8 million | Up 2.4% |
| Diluted EPS | $0.57 | $0.56 | Up $0.01 |
| Operating cash flow | $(20.3) million | $(17.7) million | Greater cash use |
| Capital expenditures | $3.1 million | $1.7 million | Up $1.4 million |
Sales by segment: North American Industrial $69.3 million (up 7.1%), North American Agricultural $49.6 million (up 2.8%), and European $39.5 million (down 8.0%). Operating income was $5.2 million for Industrial, $2.6 million for Agricultural, and $1.9 million for European.
Gross margin declined mainly because of lower sales of higher-margin replacement parts and increased lower-margin tractor sales. SG&A rose 3.8% to $25.2 million, including higher European trade-show costs and sales commissions. Interest expense fell to $0.2 million from $0.4 million, while other income improved to $0.3 million from a $0.6 million expense, primarily reflecting foreign-exchange movements and a $70,000 gain on sale of a warehouse.
Liquidity, debt, and cash flow
At March 31, cash was $33.5 million, down from $48.3 million at year-end. Working capital was $240.3 million, up $11.7 million from December 31, primarily due to seasonal increases in receivables and inventory. Operating cash use reflected working-capital growth, including a $31.4 million increase in receivables and an $11.1 million increase in inventory.
Long-term debt and capital lease obligations totaled $10.6 million, including $10.0 million drawn on the $100 million revolving facility; available revolver capacity was $89.0 million after letters of credit. The company reported compliance with credit-facility covenants. It also had $31.8 million of cash held by foreign subsidiaries, which management said would generally not be available for U.S. use without tax consequences. Management believes facilities and internally generated funds should meet foreseeable cash needs.
Changes, outlook, and risks
- Management described 2013 markets as expected to be steady and said first-quarter backlogs improved year over year, potentially supporting subsequent sales. No numerical full-year guidance was provided.
- Industrial growth came from mowing, sweeper, and vacuum-truck products; snow-removal sales were soft. Agricultural demand was moderate, with hobby-farmer equipment demand still depressed. European agricultural and government markets remained weak.
- The 2013 tax provision included a $350,000 benefit from the retroactive extension of the federal research and development credit. The effective tax rate was 29.3%, versus 32.4% a year earlier.
- Foreign-currency translation reduced other comprehensive income by $5.8 million. The company reported $1.7 million of outstanding foreign-exchange forward contracts and noted currency sensitivity in earnings.
- Risks cited include economic weakness, European uncertainty, commodity prices and farm income, government budgets, customer and company credit availability, weather, raw-material and energy costs, regulation, competition, and foreign-exchange movements.
- Potential environmental matters include contamination at the Indianola, Iowa site, for which the company is seeking an unconditional no-further-action determination, and ongoing monitoring/remediation at Bush Hog’s Selma, Alabama property. Management said asbestos-related liability changes were not expected to be material. The filing reports no material off-balance-sheet arrangements.
- Goodwill was $30.9 million. Management identified the Schwarze, Rivard, and Faucheux reporting units as particularly sensitive to valuation assumptions and warned that deterioration in conditions or forecasts could lead to future impairment charges.
Most important facts to verify
- Whether improved backlogs translate into stronger sales and margins, particularly given weaker European demand and reduced replacement-parts sales.
- Whether working-capital needs ease seasonally and operating cash flow improves after the quarter’s substantial receivables and inventory outflows.
- Availability and cost of credit, covenant compliance, and use of the revolver as cash needs evolve.
- Whether the $350,000 tax benefit and the warehouse-sale gain are nonrecurring when assessing earnings quality.
- Foreign-currency exposure and any changes in environmental obligations or goodwill impairment assumptions.