Alamo Group Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted. The company manufactures equipment across Industrial, Agricultural, and European divisions.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $240.5 | $216.8 | $669.1 | $639.2 |
| Gross profit | $64.9 | $54.7 | $173.8 | $157.2 |
| Income from operations | $27.6 | $21.0 | $67.9 | $55.3 |
| Net income | $16.6 | $13.2 | $41.1 | $32.5 |
| Diluted EPS | $1.42 | $1.14 | $3.52 | $2.81 |
| Gross margin | 27.0% | 25.2% | 26.0% | 24.6% |
| Operating margin | 11.5% | 9.7% | 10.1% | 8.7% |
| Net margin | 6.9% | 6.1% | 6.1% | 5.1% |
Q3 sales grew 10.9%; nine-month sales grew 4.7%. Nine-month net income rose 26.6%, with management citing sales growth, improved production efficiency and expense control, and a lower effective tax rate. Nine-month effective tax rate was 33.3%, versus 36.3% in 2016; the decrease primarily reflected excess tax benefits from share-based payments.
Segments and operating changes
- Q3 sales were Industrial $132.4 million, Agricultural $64.9 million, and European $43.1 million. Nine-month sales were $375.5 million, $170.9 million, and $122.7 million, respectively.
- For the first nine months, Industrial sales increased 3.8%, Agricultural 8.9%, and European 1.7%. Acquisitions added $11.6 million to nine-month sales; currency translation weighed on European results.
- Gross-margin improvement reflected sales volume, productivity improvements, pricing actions, and purchasing initiatives. SG&A rose in dollars, mainly from acquired businesses, but declined slightly as a share of nine-month sales, to 15.8% from 15.9%.
- Q3 other expense was $1.4 million, compared with $0.1 million of other income in Q3 2016; nine-month other expense was $2.3 million versus $0.3 million. Management attributed these amounts primarily to exchange-rate changes.
- Backlog was $181.0 million at September 30, up 31.7% from $137.4 million a year earlier, reflecting demand across divisions and, to a lesser extent, acquisitions.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $41.9 million, down from $48.2 million. Working-capital movements included a $20.3 million use of cash from accounts receivable. Capital expenditures were $9.7 million, versus $7.2 million.
- Investing activities used $47.7 million, including $38.5 million for acquisitions. Financing activities provided $54.4 million, primarily reflecting net revolving-credit-facility borrowings.
- Cash was $69.1 million at September 30, 2017, versus $16.8 million at December 31, 2016. Working capital was $340.4 million, up from $248.9 million, primarily due to seasonality and acquisitions. Cash and equivalents included $65.4 million held by foreign subsidiaries, which management said generally would not be available for U.S. use without tax consequences.
- Total debt was $126.3 million, compared with $70.1 million at year-end 2016. The $250 million revolving facility matures December 20, 2021; $122.4 million of capacity remained available after letters of credit. The company reported compliance with its covenants. Management believed operating cash generation and the facility would meet foreseeable cash requirements.
- Quarterly dividend declared was $0.10 per share, compared with $0.09 a year earlier. The October 2017 quarterly dividend was also $0.10 per share.
Acquisitions, outlook, and risks
During 2017, Alamo acquired Santa Izabel Agro Industria in Brazil, Old Dominion Brush Company, and R.P.M. Tech for approximately $10 million, $18 million, and $13 million, respectively. Preliminary purchase accounting reported total acquisition consideration of $41.1 million and goodwill of $9.2 million; valuations remained subject to change. Management said the acquisitions broadened agricultural machinery, sweeper, and snow-removal offerings. Old Dominion contributed approximately $7.0 million in post-acquisition sales and $0.5 million in net income through September 30.
Management expected markets to be stable for the remainder of 2017, but gave no specific financial guidance. Risks cited include agricultural-sector weakness and commodity prices, weather, foreign-exchange movements and a strong U.S. dollar, input costs and steel availability, interest rates and credit availability, government budgets and regulation, Brexit-related effects, and acquisition integration and execution. The company also disclosed environmental compliance exposure generally; at its Indianola, Iowa property, remediation was reported complete and the state had issued a no-further-action letter subject to continuing property-use covenants.
Foreign-exchange sensitivity disclosures included a stated $4.8 million change in nine-month gross profit under a uniform 10% currency movement, before considering changes in sales volume or local pricing. A two-percentage-point change in the third-quarter average variable borrowing rate was estimated to change interest expense by approximately $0.6 million. These are sensitivity estimates, not forecasts.
Important investor verification points
- Track whether the elevated backlog converts to sales and earnings, and how much growth reflects underlying demand versus acquisitions.
- Review acquired-business performance and the final purchase-price allocations, including goodwill and intangible-asset valuations.
- Assess receivables and working-capital cash use, foreign-held cash availability, and the effect of seasonality on liquidity.
- Monitor variable-rate debt, covenant headroom, and foreign-exchange impacts on reported earnings and cash flows.
- Check whether margin improvements persist amid agricultural softness, weather-related demand swings, input-cost changes, and integration costs.