Alamo Group Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparison with the corresponding 2010 periods. Alamo manufactures equipment serving industrial, agricultural and European markets. Unless stated otherwise, amounts below are in U.S. dollars; financial statement figures are in thousands.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $160.8 million | $138.1 million | $301.5 million | $269.2 million |
| Gross profit / margin | $37.4 million / 23.2% | $28.7 million / 20.8% | $69.3 million / 23.0% | $56.8 million / 21.1% |
| Operating income | $13.7 million | $7.3 million | $23.0 million | $13.8 million |
| Net income | $8.9 million | $4.9 million | $14.6 million | $8.9 million |
| Diluted EPS | $0.74 | $0.41 | $1.22 | $0.75 |
Q2 sales increased 16.5%; first-half sales increased 12.0%. Q2 operating margin was 8.5% versus 5.3%, and first-half operating margin was 7.6% versus 5.1%. SG&A rose in dollars but declined as a share of sales. Interest expense fell in both periods, primarily because of lower rates.
Q2 segment sales were Industrial $59.3 million, Agricultural $55.5 million and European $46.0 million. Segment operating income was $4.7 million, $5.8 million and $3.2 million, respectively. First-half segment sales were $108.4 million, $105.2 million and $88.0 million; operating income was $8.1 million, $8.8 million and $6.2 million, respectively.
Cash flow, liquidity and debt
- First-half operating cash flow was a use of $33.5 million, compared with $9.1 million provided in 2010. The filing attributes the cash use principally to increases in receivables and inventory, reflecting seasonal working-capital needs.
- Cash was $26.1 million at June 30, 2011, down from $30.2 million at year-end 2010. Capital expenditures were $3.0 million; dividends paid were $1.4 million.
- Working capital was $238.3 million, up $52.4 million from year-end, mainly due to seasonal receivables and inventory.
- Total debt, including current maturities, was approximately $57.9 million, versus $25.4 million at December 31, 2010. The company had drawn $54.5 million on its revolving facility and reported approximately $44 million of remaining availability after letters of credit.
- The revolving facility was amended in March 2011: its maturity was extended to March 28, 2016, commitments reduced to $100 million, with an option to request up to $50 million of additional commitments, and certain pricing and covenant terms changed. The company reported compliance with its credit facilities and said available credit and internally generated funds should meet foreseeable cash requirements.
Changes and management commentary
- Sales improved in all three segments. Industrial Q2 sales rose 19.7%, Agricultural 18.0% and European 11.0%. Agricultural demand benefited from commodity prices, farm income and preseason orders; Industrial gains included excavators and mowing equipment. European markets remained soft overall despite improvement, particularly in U.K. operations.
- Management cited higher replacement-parts sales, improved manufacturing efficiencies and lower manufacturing costs as contributors to margin improvement. Governmental customers continued to face budget constraints.
- Freight billed to customers was reclassified from a reduction of cost of sales to sales and cost of sales. This increased reported sales and cost of sales by $4.4 million in Q2 2011 and $3.7 million in Q2 2010; first-half increases were $7.8 million and $6.5 million. The change did not affect reported net income.
- A supplemental executive retirement plan began in January 2011. The company recorded a $2.0 million unfunded long-term liability at inception; first-half net periodic benefit cost was $237,000.
Outlook, risks and contingencies
No quantified earnings or revenue guidance was provided. Management said favorable agricultural conditions were expected to continue benefiting that division for the remainder of 2011, while noting uncertainty in governmental markets and the broader economy. Risks identified include weak economic conditions, customer credit availability, government budget shortfalls, agricultural commodity prices and farm income, adverse weather or animal disease, steel and energy costs, regulation, competition, foreign exchange and interest-rate movements, and the ability to develop products profitably.
- Environmental matters include a $1.474 million reserve related to the acquired Gradall facility, including groundwater remediation and asbestos matters. The filing describes other site contamination and ongoing monitoring or remediation; management did not quantify all potential future costs.
- The company had $3.354 million of foreign-exchange forward contracts outstanding related to receivables. It estimated a 15% exchange-rate fluctuation would change their fair value by about $503,000, expected to be offset by the hedged transactions. A uniform 10% U.S. dollar strengthening was estimated to reduce first-half gross profit by $2.521 million.
- At existing variable-rate borrowings, a two-percentage-point change in the average borrowing rate was estimated to change Q2 interest expense by approximately $545,000.
- Management reported effective disclosure controls and procedures. It reported no material off-balance-sheet arrangements.
Investor facts to verify
- Assess whether working-capital investment and negative operating cash flow reverse as seasonal receivables and inventory are converted to cash.
- Review revolver utilization, covenant headroom and the effect of variable interest rates on financing costs.
- Separate underlying sales growth from the freight reclassification when comparing periods.
- Monitor agricultural demand, public-sector purchasing, European conditions and margin sustainability.
- Follow environmental remediation reserves and the assumptions behind goodwill valuations, particularly the Schwarze reporting unit.