Alamo Group Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Alamo manufactures equipment across its Industrial, Agricultural and European divisions. Results are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $257.1 million | $213.3 million | $495.2 million | $428.7 million |
| Gross profit / margin | $66.5 million / 25.8% | $54.7 million / 25.6% | $126.7 million / 25.6% | $108.8 million / 25.4% |
| Operating income / margin | $26.8 million / 10.4% | $20.3 million / 9.5% | $48.1 million / 9.7% | $40.6 million / 9.5% |
| Net income | $18.8 million | $12.3 million | $33.4 million | $24.5 million |
| Diluted EPS | $1.60 | $1.05 | $2.84 | $2.10 |
Six-month operating cash flow was negative $27.7 million, versus positive $12.4 million a year earlier. The filing attributes the cash use principally to increases in receivables, inventory and rental equipment, and income tax payments. Capital expenditures were $10.8 million, compared with $6.3 million in the prior-year period.
At June 30, cash and cash equivalents were $43.6 million; working capital was $368.0 million. Total debt was $119.0 million, up from $60.1 million at December 31, 2017. The $250 million revolving facility had $129.3 million available after outstanding borrowings and letters of credit; the company reported compliance with its covenants. The quarterly dividend was $0.11 per share.
Business trends and changes versus prior year
- Q2 sales rose 20.6%; six-month sales rose 15.5%. Six-month net income increased 36.2%, supported by sales growth, operational improvements, acquisitions and a lower tax rate.
- Six-month Industrial sales increased 16.1%, Agricultural sales 11.1%, and European sales 19.9%. Acquisitions contributed $28.9 million of six-month sales; Old Dominion and R.P.M. contributed $19.8 million in Industrial, and Santa Izabel contributed $9.0 million in Agricultural.
- Management cited stronger demand, productivity gains, pricing and purchasing initiatives as supporting gross-margin improvement despite higher input costs. The Q2 effective tax rate was 25.8%, versus 31.9%; the six-month rate was 26.4%, versus 33.3%. Management estimated the lower six-month tax rate increased net income by approximately $3.1 million.
- Backlog was $220.2 million at quarter-end, up 40.1% from $157.2 million a year earlier, largely reflecting Industrial demand and, to a lesser extent, the R.P.M. acquisition.
Outlook, risks and unusual items
- Management was optimistic about the remainder of 2018. It planned to increase personnel and outsourcing to meet near-term demand and raise capital spending to expand capacity and improve production efficiency. Higher 2018 capital expenditures were expected; the filing provides no specific full-year amount.
- Management warned that inflation in raw materials, freight, labor and other inputs was expected to persist. Longer lead times for components, including truck chassis, and newly imposed or future tariffs could raise costs or weaken demand.
- Other cited risks include agricultural-market weakness, currency movements, economic or geopolitical disruption, government budget constraints, weather, acquisition integration, competition, regulation and credit availability.
- Tax accounting under the 2017 Tax Cuts and Jobs Act remained incomplete. The company was still refining provisional amounts for the transition tax and assessing GILTI; future adjustments could materially affect tax expense. The filing also noted that any related state taxes would be recorded after the federal estimate was finalized.
- Foreign-currency translation reduced equity by $11.9 million in Q2. The company reported $39.5 million of cash held by foreign subsidiaries and repatriated approximately $24 million of excess European cash during Q2, intending to use repatriated funds initially to reduce debt.
- The filing describes potential environmental, workplace and other regulatory liabilities but does not identify a specific material legal proceeding or quantify a contingency. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the substantial backlog converts to shipments and revenue, and whether capacity constraints or component delays affect delivery and margins.
- Whether pricing and productivity continue to offset inflation and tariff-related costs.
- How working-capital investment and cash generation evolve, given negative first-half operating cash flow and increased borrowings.
- Final Tax Act accounting, including transition-tax and GILTI estimates, and any resulting effect on tax expense.
- Foreign-exchange exposure and the pace and use of additional foreign-cash repatriation.