Alamo Group Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $206.4 | $178.1 | $377.6 | $336.5 |
| Gross profit | $47.3 | $44.1 | $85.4 | $79.0 |
| Gross margin | 22.9% | 24.8% | 22.6% | 23.5% |
| Operating income | $14.8 | $17.6 | $25.4 | $27.3 |
| Net income | $9.2 | $11.8 | $16.4 | $18.7 |
| Diluted EPS | $0.75 | $0.97 | $1.34 | $1.54 |
| Operating margin | 7.2% | 9.9% | 6.7% | 8.1% |
Q2 sales rose 15.9%, while net income fell 22.0%; first-half sales increased 12.2%, while net income declined 12.3%. Acquisitions contributed materially to sales growth. Agricultural sales weakened, and lower factory absorption, higher SG&A, acquisition costs, increased stock compensation and debt-related interest weighed on profitability.
- Segment sales, Q2 / first half: Industrial $105.1 / $182.4; Agricultural $52.6 / $102.5; European $48.6 / $92.7. Q2 Agricultural sales fell 8.1%; first-half sales fell 4.1%. Industrial and European sales increased, with acquisitions and currency effects contributing.
- Cash flow, first half: Operating activities used $15.1, compared with $21.6 used in the prior-year period. Investing activities used $198.9, including $195.6 for acquisitions. Financing activities provided $186.9, principally from revolver borrowings. Cash declined to $37.4 from $64.0 at year-end.
- Liquidity and debt: Working capital was $321.5, up $65.2 from year-end, primarily due to acquisitions. Total debt was $189.2, including $188.0 outstanding on the revolving facility. The $250.0 facility had $61.3 of available borrowings after letters of credit; the company reported covenant compliance. Cash included $31.5 held by foreign subsidiaries, which management said would not be available for U.S. use without tax consequences.
- Other: Capital expenditures were $4.3 for the first half, versus $7.2 a year earlier. Dividends declared were $0.07 per share for Q2 and $0.14 for the first half, unchanged from 2013.
Material changes and notable items
- On May 13, Alamo acquired Specialized Industries’ operating businesses for a preliminary purchase price of about $193.0 million, financed primarily with new revolver borrowings. Specialized contributed approximately $19.0 million of revenue and $1.5 million of net income after closing. The preliminary allocation included $39.4 million of goodwill and $57.5 million of acquired intangible assets; purchase accounting remained subject to finalization.
- Alamo also acquired Kellands Agricultural and Fieldquip Australia in April for combined consideration of $6.2 million. The filing also identifies Superior as an acquisition contributor, but does not provide its transaction terms in the supplied text.
- Reported goodwill increased to $73.6 million from $32.1 million at year-end, and intangible assets increased to $63.2 million from $5.5 million, principally reflecting acquisitions.
- Q2 included $1.7 million of acquisition-related costs in SG&A. First-half SG&A also rose due to acquired businesses, higher advertising, recruiting and IT costs, and accelerated vesting of stock awards. Stock-based compensation was $1.7 million for the first half, versus $0.6 million.
- First-half effective tax rate was 33.9%, compared with 31.7%; management cited the absence of 2014 research and development tax credits, which had not yet been approved.
Outlook, risks and contingencies
- Management described 2014 markets as likely to be steady, while cautioning that economic weakness, agricultural commodity prices and farm income, government budgets, credit availability, weather and customer buying patterns could affect demand. No specific earnings or revenue guidance was provided.
- Backlog increased 69% to $163 million from $96 million year over year; excluding acquisitions, it increased 9%. Growth was concentrated in Industrial and European businesses, while lower Agricultural orders were a drag. Management said backlog should benefit sales through the remainder of 2014.
- Acquisition integration and realization of expected synergies are risks. The company also cited potential pressure from Tier 4 engine-emissions requirements, including supplier availability, compliance costs, pricing and demand effects.
- Other identified exposures include variable-rate debt, foreign exchange, raw-material and energy costs, litigation, environmental matters and possible goodwill impairment. The company disclosed a $1.0 million jury award plus interest against Gradall, which it appealed and fully reserved. Deere appealed a patent-case verdict favorable to the defendants. Environmental remediation and monitoring matters were also described; the filing does not quantify a material total exposure for these matters.
- Management stated that existing credit facilities and internally generated funds should meet foreseeable cash needs, but noted uncertainty around credit-market availability. The filing also warns that acquisition purchase-price estimates and goodwill valuations remain sensitive to assumptions.
Most important facts for investors to verify
- Whether the acquisitions deliver expected growth, margins and synergies, and whether final purchase accounting materially changes acquired asset values or goodwill.
- Whether backlog converts into sales and whether Agricultural demand and dealer inventories recover.
- Whether operating cash flow improves as receivables and inventory normalize after seasonal and acquisition-related increases.
- Debt repayment capacity, borrowing costs, covenant headroom and access to the revolving facility; the filing reports variable-rate exposure.
- Progress on the appealed litigation and environmental matters, and the assumptions supporting goodwill impairment testing, particularly for the Schwarze and Rivard reporting units.