ALAMO GROUP INC annual report, FY2019

Alamo Group Inc. — FY2019 Form 10-K

Reporting period: Year ended December 31, 2019. The filing also reports fourth-quarter results. Alamo designs and manufactures agricultural and infrastructure-maintenance equipment, selling mainly through dealers and distributors. Beginning in Q4 2019, it reported two segments: Industrial and Agricultural; prior-period segment data was recast.

Financial performance

MetricFY2019FY2018
Net sales$1,119.1 million$1,008.8 million
Gross profit / margin$273.2 million / 24.4%$256.1 million / 25.4%
Operating income / margin$94.6 million / 8.5%$101.1 million / 10.0%
Net income / diluted EPS$62.9 million / $5.33$73.5 million / $6.25
Cash provided by operations$88.8 million$12.9 million
Capital expenditures$31.3 million$26.6 million
  • Fourth quarter: Sales were $300.2 million versus $256.0 million; net income was $9.6 million versus $16.6 million; diluted EPS was $0.81 versus $1.41.
  • Segment sales: Industrial revenue rose 20.4% to $768.5 million; Agricultural revenue fell 5.4% to $350.7 million. Segment operating income was $65.3 million Industrial and $29.4 million Agricultural.
  • Liquidity and debt: Cash was $42.3 million; working capital was $408.0 million. Debt under the credit agreement was $443.7 million, with $202.0 million of revolver capacity available. The company reported compliance with its debt covenants.
  • Operating cash flow increased substantially from 2018, while investing cash outflow reached $429.9 million, mainly reflecting acquisitions. Financing activities provided $349.2 million.

Material changes and notable items

  • Revenue increased 10.9%, largely due to the Dutch Power and Morbark acquisitions, which contributed approximately $71.5 million combined, and stronger Industrial demand. Dixie Chopper was also acquired in 2019.
  • Profitability declined despite higher sales: gross margin fell 1.0 percentage point and operating margin fell 1.5 points. Management cited lower agricultural production, unfavorable mix, acquisition-related amortization and expenses, and a $3.3 million Morbark inventory step-up charge. Interest expense nearly doubled to $10.7 million due to acquisition financing.
  • Net income also reflected a higher effective tax rate: 25.4% in 2019 versus 22.3% in 2018, when a $3.3 million tax-reform benefit reduced the rate.
  • Year-end unfilled orders were $261.0 million, up from $240.3 million; management expected substantially all to ship during 2020. Orders can be cancelled and are not necessarily predictive of shipments.
  • Acquisitions materially expanded the balance sheet: total assets rose to $1.21 billion from $721.6 million; goodwill increased to $198.0 million. Purchase-price allocations remained preliminary. Morbark generated $35.1 million of post-acquisition sales and a $1.5 million net loss through year-end.

Outlook, risks and contingencies

  • Management expressed caution about 2020 amid global uncertainty, weak agricultural markets, slowing industrial conditions, trade disputes, tight labor markets, input-cost changes, Brexit and U.S. election uncertainty. It expected to maintain high capital expenditures and pursue operational improvements and acquisition synergies; no specific earnings or revenue guidance was provided.
  • Key risks include demand changes in government and agricultural markets, weather, commodity and steel costs, supply-chain disruption (including potential coronavirus-related effects noted in the filing), foreign exchange, interest rates, tariffs, acquisition integration, goodwill impairment, cybersecurity, regulation, and product-liability claims.
  • Legal matters arise in the ordinary course, principally product-liability claims generally covered by insurance subject to retentions. Management did not expect a material adverse outcome, but final resolution could not be determined.
  • The company reported no material off-balance-sheet arrangements. Contractual obligations totaled approximately $701.2 million, including debt, interest, leases and purchase obligations.
  • KPMG issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded Dutch Power and Morbark from the internal-control assessment, covering combined acquired assets of $452 million and net sales of $71 million.

Important facts for investors to verify

  • Whether the acquired businesses deliver expected growth, synergies and margins, particularly Morbark’s post-acquisition performance.
  • Whether margin pressure and higher interest costs persist as agricultural conditions and input costs evolve.
  • Debt repayment, covenant headroom, floating-rate exposure and the planned use of repatriated foreign cash.
  • Quality and conversion of the $261.0 million backlog, given cancellation rights and seasonal demand.
  • Acquisition purchase-price allocations, goodwill and intangible-asset assumptions, including the potential for future impairment.