Alamo Group Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Dollar amounts are in millions unless otherwise stated.
Business context and results
Alamo manufactures equipment for infrastructure maintenance, vegetation management and agriculture. Its reporting segments are Industrial, Agricultural and European. Results include Dutch Power Company from its March 4, 2019 acquisition.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $285.2 | $257.1 | $547.1 | $495.2 |
| Gross profit | $73.1 | $66.5 | $136.4 | $126.7 |
| Income from operations | $29.3 | $26.8 | $52.0 | $48.1 |
| Net income | $20.7 | $18.8 | $35.9 | $33.4 |
| Diluted EPS | $1.75 | $1.60 | $3.05 | $2.84 |
| Gross margin | 25.6% | 25.8% | 24.9% | 25.6% |
| Operating margin | 10.3% | 10.4% | 9.5% | 9.7% |
Financial position and cash flow
- Six-month operating cash flow was $0.9 million, versus cash used of $27.7 million in first-half 2018. Working-capital investment included $32.4 million in receivables, $11.0 million in inventory and $11.9 million in rental equipment.
- Investing activities used $64.3 million, including $52.5 million for acquisitions and $12.4 million in capital expenditures. Financing activities provided $76.7 million, mainly through revolving-credit borrowings.
- Cash was $48.2 million at June 30, 2019. Total debt and finance lease obligations were $166.4 million, compared with $85.3 million at December 31, 2018. Revolver borrowings were $166.0 million; $80.8 million of borrowing capacity remained available after letters of credit.
- Working capital was $418.9 million, up from $352.0 million at year-end 2018. The company reported compliance with its credit-facility covenants and said available credit and internally generated funds should meet foreseeable cash needs.
Material changes and management commentary
- Q2 sales rose 10.9% and first-half sales rose 10.5%. First-half Industrial sales increased 15.7%; Agricultural sales fell 8.0%; European sales increased 17.9%, largely reflecting Dutch Power. The acquisition contributed $17.6 million of first-half sales.
- First-half net income increased 7.7%. Higher Industrial sales and the acquisition supported results, while weak agricultural demand, weather disruption, higher input costs and currency translation were offsets.
- Management said steel costs eased in Q2 and margins improved from Q1, but margins remained below first-half 2018 levels. Productivity, pricing and purchasing initiatives partly offset higher steel, freight and other costs.
- Backlog increased 3.9% year over year to $228.8 million at quarter-end, supported by Industrial demand and Dutch Power, partly offset by lower new orders in Agricultural and European segments.
- The company was “cautiously optimistic” about the remainder of 2019. It provided no numerical earnings or revenue guidance. It expected higher 2019 capital expenditures for capacity, efficiency, technology and facility projects.
Risks, contingencies and unusual items
- Management cited agricultural-market weakness, tariffs and trade disputes, input-cost inflation, component lead times, labor availability, weather, currency movements, Brexit and acquisition integration among key uncertainties. Government-customer budget constraints and access to credit are also risks.
- Dutch Power was acquired for approximately $52.6 million; the purchase-price allocation included $9.7 million of goodwill, with some estimated fair values still subject to change.
- The company adopted the new lease standard in 2019, recognizing initial right-of-use assets of $7.7 million and lease liabilities of $7.9 million; management said adoption had no effect on operating results or liquidity.
- Ordinary-course legal matters, including product-liability claims, were not expected by management to materially adversely affect financial position or results, though ultimate outcomes could not be determined. The filing also notes potential environmental and regulatory liabilities.
- Variable-rate debt creates interest-rate exposure. Management estimated a two-percentage-point rate change at the current borrowing level would change Q2 interest expense by approximately $0.8 million. Foreign-exchange sensitivity and hedging arrangements are also disclosed.
Important facts for investors to verify
- Whether Industrial demand and the reported backlog convert into sales, and whether Agricultural demand continues to weaken.
- How much of revenue and earnings growth is organic versus attributable to Dutch Power, and whether the acquisition integrates as expected.
- Whether easing steel costs, pricing and productivity improvements can restore gross margins while freight, labor and other input-cost pressures persist.
- Whether operating cash flow improves after substantial working-capital use, and how planned capital expenditures affect liquidity.
- Debt levels, interest costs, available revolver capacity and compliance with credit-facility covenants.
- Exposure to tariffs, currency movements, weather, Brexit, labor constraints and legal or regulatory contingencies.