Alamo Group Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Alamo manufactures equipment serving industrial, agricultural and European markets.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $211.0 million | $207.8 million |
| Gross profit / margin | $50.3 million / 23.8% | $45.5 million / 21.9% |
| Operating income / margin | $16.3 million / 7.7% | $12.1 million / 5.8% |
| Net income | $8.7 million | $7.4 million |
| Diluted EPS | $0.75 | $0.64 |
| Operating cash flow | $(5.1) million | $(12.9) million |
| Capital expenditures | $1.8 million | $1.9 million |
At March 31, cash was $49.7 million, including $47.7 million held by foreign subsidiaries that generally would not be available for U.S. use without tax consequences. Working capital was $322.0 million. Total debt was $173.1 million, primarily revolving-credit borrowings, versus $144.1 million at December 31, 2015. The $250 million unsecured facility had $75.4 million available after outstanding borrowings and letters of credit; the company reported covenant compliance. The facility expires May 12, 2019.
Changes and operating trends
- Sales rose 1.5%; Industrial increased 5.4%, Agricultural 0.4%, while European sales fell 8.0% in U.S. dollars and 4.0% in local currency.
- Operating income increased 34.3% and net income 17.7%. Management attributed improved gross margin mainly to production efficiencies, lower material costs and higher-margin mower-parts sales. Q1 2015 cost of sales included a $1.8 million inventory fair-value step-up charge related to the Specialized business units.
- Industrial operating income rose to $11.5 million from $9.3 million; Agricultural rose to $2.8 million from $0.8 million; European was approximately flat at $2.0 million.
- SG&A increased to $34.0 million from $33.4 million. Interest expense declined to $1.4 million from $1.6 million, while other expense was $0.6 million versus $0.9 million of other income, primarily reflecting currency movements. The effective tax rate increased to 39.5% from 35.5%, partly because losses in certain foreign jurisdictions did not generate tax benefits.
- Operating cash flow remained negative, although the outflow narrowed year over year. Receivables and inventories used cash; seasonal operations were funded in part by net revolving-credit borrowings of $29 million during the quarter.
Outlook, risks and other notable matters
- Management expected markets to be “steady” for the remainder of 2016, while cautioning that economic weakness, agricultural-sector softness, low commodity prices, weather, government budget constraints, credit availability and currency changes could adversely affect demand. Backlog was $153 million at quarter-end, down 3.8% from $159 million a year earlier, mainly due to Europe. No quantified earnings or revenue guidance was provided.
- Management cited mild winter weather and soft non-governmental demand as pressures on snow-removal equipment and vacuum-truck sales; agricultural demand remained weak. Foreign-exchange translation also weighed on sales and profits.
- Foreign-currency and variable-rate debt exposures are material risks. The filing estimates that a uniform 10% stronger U.S. dollar would reduce quarterly gross profit by about $1.2 million; a two-percentage-point change in borrowing rates would change quarterly interest expense by about $0.9 million, assuming current borrowings.
- Deere & Company patent litigation remained on appeal after a jury found no infringement and invalidated the patent; a final appeal ruling was expected in 2016. The filing also describes environmental monitoring/remediation matters and asbestos exposure, but states that any asbestos-liability change was not expected to materially affect results or financial position.
- After quarter-end, Alamo notified participants of its decision to terminate the Gradall hourly pension plan; completion was not expected until 2017. Participants would retain benefits through annuity or lump-sum settlement options.
- Management said the company was evaluating the potential effects of new revenue-recognition, inventory and lease accounting standards. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the expected European demand and backlog trends, and management’s “steady” market outlook, persist through the rest of 2016.
- How much of the improvement in gross margin reflects sustainable operating efficiencies versus the prior-year inventory step-up comparison.
- Seasonal working-capital needs, foreign-subsidiary cash availability, and debt levels and covenant headroom as borrowing fluctuates.
- Exposure to currency and interest-rate changes, and the timing and outcome of the Deere appeal and pension-plan termination.