Alamo Group Inc. — Q1 2020 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Alamo manufactures equipment for industrial vegetation management and agricultural markets. Results included Morbark, acquired in October 2019, and Dutch Power, acquired in March 2019.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $314.4 million | $261.9 million |
| Gross profit / margin | $78.9 million / 25.1% | $63.3 million / 24.2% |
| Operating income / margin | $23.9 million / 7.6% | $22.6 million / 8.6% |
| Income before taxes | $21.0 million | $20.9 million |
| Net income / diluted EPS | $15.5 million / $1.31 | $15.3 million / $1.30 |
| Operating cash flow | $5.6 million | $(32.4) million |
| Capital expenditures | $7.4 million | $5.3 million |
- Industrial sales rose 32.5% to $230.0 million; agricultural sales fell 4.4% to $84.5 million. Management attributed the overall sales increase chiefly to the acquisitions, while COVID-19 began to disrupt operations and demand in March.
- Cash and cash equivalents were $84.4 million at quarter-end, versus $42.3 million at December 31, 2019. Total debt, including finance leases, was $490.3 million, versus $444.0 million. Working capital was $461.2 million.
- The revolving credit facility had $119.2 million of available borrowings after letters of credit. The company reported compliance with its credit covenants at March 31, 2020.
Changes, commentary and risks
- Revenue increased 20.0% year over year, but net income rose only 1.8%. Operating margin declined to 7.6% from 8.6%; SG&A and amortization increased, and interest expense rose to $5.5 million from $1.5 million, primarily reflecting acquisition-related borrowings and acquired intangible assets.
- Gross profit included nearly $2.0 million of Morbark inventory step-up expense. Amortization was $3.8 million, up from $0.9 million, mainly due to acquired intangibles.
- Quarter-end backlog was $232.6 million, down 9.8% from $257.8 million a year earlier. Management said the decrease was primarily due to COVID-19 effects.
- Management expected the pandemic to continue adversely affecting business in Q2 2020, but said the scale and duration of the impact could not be estimated. Reported impacts included temporary plant closures, operating disruptions, delivery delays and softer demand. The company adjusted staffing, restricted travel, reduced inventory, limited capital spending, suspended share repurchases and delayed discretionary spending.
- Management cited additional risks including agricultural-market weakness, trade and tariff changes, foreign-exchange movements, acquisition integration, government customer budgets, supply disruptions and credit-market availability. No quantified full-year guidance was provided.
- Other notable items: other income included foreign-exchange effects and a $0.7 million gain on sale of the Super Products building. Foreign-currency translation reduced equity by $20.5 million, and unrealized derivative losses were $4.4 million. The filing says COVID-19’s full financial impact could not be reasonably estimated.
- Ordinary-course product-liability and other legal matters were disclosed; the company did not expect them to have a material adverse effect, although outcomes remain uncertain.
Investor verification points
- Track subsequent sales, margins, cash flow and backlog to assess the extent and duration of pandemic-related disruption.
- Review debt, variable-rate exposure, revolver availability and covenant headroom as operating conditions evolve.
- Assess whether acquired businesses deliver expected contributions and whether integration, acquisition-related amortization and financing costs pressure margins.
- Monitor working-capital needs, foreign-subsidiary cash and currency effects, including the timing and economics of any cash repatriation.
- Check for updated guidance, material legal or environmental developments, and further changes to capital spending or shareholder returns.