Alamo Group Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. Alamo manufactures equipment across Industrial, Agricultural and European businesses.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $213.3 million | $211.5 million | $428.7 million | $422.5 million |
| Gross profit / margin | $54.7 million / 25.6% | $52.2 million / 24.7% | $108.8 million / 25.4% | $102.5 million / 24.3% |
| Operating income / margin | $20.2 million / 9.5% | $18.0 million / 8.5% | $40.3 million / 9.4% | $34.3 million / 8.1% |
| Net income | $12.3 million | $10.6 million | $24.5 million | $19.2 million |
| Diluted EPS | $1.05 | $0.92 | $2.10 | $1.67 |
| Operating cash flow | Not presented by quarter | $12.4 million | $5.0 million |
First-half sales rose 1.5%; net income increased approximately 27%. For Q2, sales grew 0.8% and net income grew $1.8 million year over year. Segment sales for the first half were Industrial $243.2 million (+1.1%), Agricultural $106.0 million (+5.5%) and European $79.5 million (-2.5%).
Balance sheet, cash flow and liquidity
- At June 30, cash and cash equivalents were $74.6 million, total debt was $146.1 million, and working capital was $342.5 million. Cash increased from $16.8 million at year-end 2016; long-term debt increased from $70.0 million.
- First-half investing cash outflow was $32.3 million, including $26.4 million for acquisitions and $6.3 million for capital expenditures. Financing provided $75.5 million, primarily through net revolving-credit borrowings.
- The $250 million unsecured revolver had $146.0 million outstanding, $1.6 million committed to letters of credit, and $102.4 million available. It matures December 20, 2021. The company reported covenant compliance and expects operating cash flows and the facility to meet foreseeable cash needs.
- $72.4 million of cash was held by foreign subsidiaries and, management said, would not be available for U.S. use without tax consequences; the company planned to use it for overseas capital expenditures or acquisitions.
Material changes and management commentary
- Margin gains reflected higher equipment and parts sales, pricing actions, productivity improvements and purchasing initiatives. SG&A rose modestly, while its share of first-half sales declined to 16.0% from 16.1%.
- Alamo acquired Brazil-based Santa Izabel Agro Industria for approximately $10 million on June 6 and Old Dominion Brush for approximately $18 million on June 26. Post-acquisition Q2 results were immaterial. Old Dominion’s purchase accounting remained preliminary; $3.0 million of goodwill was assigned to Industrial.
- Backlog was $157 million at June 30, up 20.7% from $130 million a year earlier, primarily due to higher European and Agricultural orders and, to a lesser extent, the acquisitions.
- The effective tax rate declined to 33.3% for the first half from 38.3%, primarily because adoption of share-based compensation guidance allowed recognition of excess tax benefits. This boosted reported earnings and may not recur at the same level.
- Foreign-exchange movements weighed on European sales and contributed to other expense. A modeled 10% strengthening of the U.S. dollar would reduce first-half gross profit by approximately $3.0 million; a two-percentage-point change in the second-quarter average variable borrowing rate would change interest expense by approximately $0.7 million under the company’s assumptions.
Outlook, risks and contingencies
Management provided no numerical earnings or sales guidance. It said markets for the remainder of 2017 would remain challenging. Risks cited include agricultural weakness and commodity prices, currency movements, input costs, weather, government budgets and regulation, customer credit, Brexit-related effects, competition and acquisition integration. Backlog provides an indicator of orders but does not assure future revenue.
The company disclosed environmental regulation and remediation risks. At its Indianola, Iowa property, a state “no further action” letter followed remediation, but ongoing environmental covenants restrict property use and development. Management said there were no off-balance-sheet arrangements with a material effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the elevated backlog converts to sales and margins, particularly in Agricultural and European markets.
- Integration, performance and final purchase accounting for Santa Izabel and Old Dominion.
- Working-capital and seasonal cash demands, the availability of foreign-held cash, and revolving-credit utilization and covenant headroom.
- The sustainability of margin improvement and the effect of share-based compensation tax benefits on future effective tax rates.
- Exposure to currency and variable-rate debt movements, and the status of the Iowa site’s environmental covenants.