Alamo Group Inc. — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Alamo manufactures equipment through its Industrial, Agricultural and European segments.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $215.4 million | $211.0 million | Up 2.1% |
| Gross profit / margin | $54.2 million / 25.1% | $50.3 million / 23.8% | Margin up 1.3 percentage points |
| Operating income / margin | $20.1 million / 9.3% | $16.3 million / 7.7% | Operating income up 23.4% |
| Net income | $12.2 million | $8.7 million | Up 40.5% |
| Diluted EPS | $1.05 | $0.75 | Up 40.0% |
| Operating cash flow | $(1.4) million | $(5.0) million | Less cash used |
| Capital expenditures | $2.3 million | $1.8 million |
Industrial sales were $125.8 million, up 2.1%; Agricultural sales were $51.8 million, up 6.4%; European sales were $37.8 million, down 3.2%, primarily from unfavorable currency translation. Segment operating income was $12.5 million for Industrial, $4.8 million for Agricultural and $2.8 million for European.
Management attributed stronger profit and margins to higher Industrial and Agricultural equipment and parts sales, improved production efficiency, lower material costs and control of operating expenses. SG&A was nearly flat at $34.1 million, or 15.8% of sales versus 16.1%. The effective tax rate was 34.7%, down from 39.5% in Q1 2016; management cited foreign-jurisdiction losses that did not generate tax benefits as a factor in the prior-year rate.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $70.7 million at March 31, 2017, versus $16.8 million at year-end. The company reported $68.9 million held by foreign subsidiaries, generally intended for use outside the U.S. and not available domestically without U.S. tax consequences.
- Total debt was $127.6 million, including $127.0 million outstanding on the revolving facility, versus $70.1 million at December 31, 2016. Cash less total debt was approximately $56.9 million net debt.
- The $250 million unsecured revolver had $121.4 million of available borrowings after $1.6 million reserved for letters of credit. It matures December 20, 2021; the company was in covenant compliance.
- Working capital increased to $324.5 million from $248.9 million at December 31. Management said the facility and internally generated funds should meet foreseeable cash needs.
- Operating cash use reflected seasonal working-capital investment, notably a $25.0 million increase in accounts receivable and $4.7 million in inventory. Financing cash flow was $56.9 million, primarily from net revolver borrowing.
Outlook, risks and notable items
- No quantified full-year earnings or revenue guidance was provided. Management said markets were expected to remain challenged for the rest of 2017.
- Quarter-end backlog was $147 million, down 3.8% from $153 million a year earlier, primarily due to softness in Industrial snow-removal and mowing products.
- Risks cited include continued agricultural weakness, stronger U.S. dollar and other currency movements, commodity and input-cost changes, weather, government budget constraints and regulation, credit availability, Brexit-related uncertainty, and the company’s ability to develop products and execute acquisitions. Management also noted possible effects from changing customer buying patterns and economic conditions.
- On May 2, 2017, after quarter-end, Alamo announced an agreement to acquire Brazilian agricultural-implements maker Santa Izabel. Closing was expected in Q2 2017; the filing does not report completion or purchase terms.
- Environmental matters include chromium contamination and detected chlorinated compounds at an Iowa property. The company reports completing remediation in 2006 and receiving a conditional “no further action” letter in 2009; monitoring remains relevant to obtaining an unconditional letter. The company also disclosed asbestos at certain assets and said it did not expect related liability changes to be material.
- Foreign-currency translation reduced reported non-U.S. results. The filing estimates that a uniform 10% strengthening of the U.S. dollar would reduce quarterly gross profit by about $1.5 million. A two-percentage-point change in variable borrowing rates was estimated to change quarterly interest expense by about $0.6 million.
- Accounting updates adopted in Q1, including inventory measurement and cash-flow classification changes, had no material effect. The company was assessing the effect of the revenue-recognition standard, effective for it in 2018, and the lease standard, effective in 2019.
Key facts for investors to verify
- Whether Q1 margin gains and Industrial/Agricultural demand persist, particularly given the lower backlog and challenged market outlook.
- Seasonal working-capital needs, cash conversion and the increase in revolver borrowings; confirm covenant headroom and liquidity as the year progresses.
- The extent of foreign-currency effects and the use and effectiveness of currency hedges.
- Santa Izabel acquisition closing, purchase price, financing and expected contribution or integration risks.
- Updates on Iowa environmental monitoring, potential remediation costs and other contingencies.
- Management’s completed assessment of revenue-recognition changes and the eventual balance-sheet effect of lease accounting.