Alamo Group Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 1, 2018. The filing also reports fourth-quarter results. Alamo designs and manufactures agricultural and infrastructure-maintenance equipment, selling primarily through dealers across North America, Europe, South America and Australia.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $912.4 million | $844.7 million |
| Gross profit / margin | $234.7 million / 25.7% | $205.1 million / 24.3% |
| Operating income / margin | $88.7 million / 9.7% | $67.6 million / 8.0% |
| Income before taxes | $82.4 million | $62.2 million |
| Net income / diluted EPS | $44.3 million / $3.79 | $40.0 million / $3.46 |
| Operating cash flow | $70.8 million | $75.8 million |
| Cash and cash equivalents | $25.4 million | $16.8 million |
| Total debt | $60.1 million | $70.1 million |
Working capital was $291.2 million, up from $248.9 million. The $250 million unsecured revolving facility had $60 million drawn and $188.3 million of available borrowings at year-end, after letters of credit; it expires December 20, 2021. The company reported compliance with its covenants. Capital expenditures were $13.5 million. Investing activities used $51.3 million, including $38.6 million for acquisitions.
Fourth-quarter sales were $243.3 million versus $205.5 million in 2016; net income was $3.2 million versus $7.6 million, and diluted EPS was $0.27 versus $0.65. Fourth-quarter 2017 earnings included a one-time U.S. tax-reform charge of approximately $10.1 million.
Material changes versus prior year
- Full-year sales rose 8.0%, reflecting increased demand in all three divisions and $25.5 million of sales attributed to 2017 acquisitions. Industrial sales increased 8.0%, Agricultural 10.5%, and European 4.8%.
- Gross margin improved 1.4 percentage points, which management attributed to productivity improvements, pricing actions and purchasing initiatives. SG&A increased in dollars but declined as a share of sales, to 16.0% from 16.3%.
- Operating cash flow decreased $5.0 million, primarily due to working-capital changes associated with sales growth. Debt declined by about $10 million.
- Net income increased despite a higher reported tax rate: the 2017 effective rate was 46.2%, including a net $10.236 million tax-reform impact. Excluding that impact, management reported an effective rate of 33.8%.
- Alamo acquired Santa Izabel, Old Dominion Brush Company (ODB) and R.P.M. Tech for an aggregate preliminary purchase price of $41.1 million. The acquisitions added complementary Brazilian agricultural, leaf-collection/sweeper-parts and heavy-duty snow-removal products.
Outlook, commentary and risks
Management described agricultural, non-governmental vacuum-truck rental and sales, and European markets as improving in 2017, with a softer U.S. dollar also supportive. It remained cautious about 2018 and provided no quantified earnings or revenue guidance. Year-end unfilled orders were $218.2 million, up from $147.2 million; management expected substantially all to ship in 2018, while noting orders may be cancellable and backlog may not predict shipments. To address potential production lead-time pressure, Alamo planned further operational improvements and said 2018 capital spending would likely exceed the average of recent years. It anticipated greater inflation pressure from tighter labor availability and higher commodity prices, including steel.
- Key business exposures include government budgets, agricultural commodity prices and farm income, weather and seasonality, raw-material and component costs, competition, foreign exchange and interest rates.
- Management highlighted acquisition integration, Brexit-related uncertainty, trade-policy changes, regulation including GDPR, cybersecurity, and the risk of goodwill impairment. Goodwill was $84.8 million; no impairment was recorded in 2017.
- The 2017 tax-reform accounting included provisional estimates. The company recorded a $13.1 million transition-tax charge and a $3.3 million benefit from remeasuring deferred taxes, with other effects bringing the net impact to $10.236 million. Management said estimates could change and expected to complete its analysis by the fourth quarter of 2018.
- The Indianola, Iowa property has environmental covenants following completed remediation and a state “no further action” letter; certain company assets contain asbestos that may require remediation. The filing describes routine litigation and regulatory exposures but reports no material off-balance-sheet arrangements.
- Revenue standard Topic 606 was expected to have no material effect upon adoption in 2018. The effect of the 2019 lease standard was still under evaluation.
The board raised the quarterly dividend from $0.10 to $0.11 per share in January 2018. The independent auditor gave an unqualified opinion on the financial statements and internal control. Management and the auditor excluded the acquired businesses’ controls, associated with $47 million of assets and $25 million of revenue, from the year-end internal-control assessment.
Important facts for investors to verify
- Whether the elevated backlog converts to 2018 shipments on schedule and without material cancellations or margin pressure.
- Whether improved gross and operating margins persist as steel, labor and other input costs rise.
- The final tax-reform accounting, including transition-tax estimates, GILTI treatment and any subsequent adjustments.
- Integration progress and final purchase-price allocations for Santa Izabel, ODB and RPM, and the acquired entities’ internal-control integration.
- Cash conversion and working-capital needs as sales grow, alongside planned capital spending and the use of repatriated foreign cash to reduce debt.
- Exposure to floating interest rates, foreign-currency movements, government spending and environmental or product-liability costs.