Alamo Group Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and results
Alamo manufactures equipment and parts for industrial vegetation management, infrastructure maintenance, forestry and recycling markets, as well as agricultural equipment. It reports Industrial and Agricultural divisions. The 2020 results include Morbark, acquired in October 2019, and Dutch Power, acquired in March 2019.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $268.6 | $285.2 | $583.1 | $547.1 |
| Gross profit / margin | $67.8 / 25.2% | $73.1 / 25.6% | $146.8 / 25.2% | $136.4 / 24.9% |
| Operating income / margin | $22.7 / 8.4% | $29.3 / 10.3% | $46.5 / 8.0% | $52.0 / 9.5% |
| Net income | $13.0 | $20.7 | $28.5 | $35.9 |
| Diluted EPS | $1.10 | $1.75 | $2.41 | $3.05 |
| Net cash from operating activities | Not separately provided for the quarter | $58.7 | $0.9 |
Q2 sales fell 5.8% year over year; Industrial sales decreased 6.2% and Agricultural sales 5.0%. For the first half, sales rose 6.6%, with Industrial up 12.1% and Agricultural down 4.7%. Acquisitions contributed $106.9 million of first-half sales; Morbark contributed $46.5 million in Q2. Management said legacy Industrial product sales were generally down, while North American Agricultural operations performed better than the U.K. and France.
Cash, debt and liquidity
- Cash and cash equivalents were $82.0 million at June 30, up from $42.3 million at December 31, 2019. Of June-end cash, $78.7 million was held by foreign subsidiaries.
- Operating cash flow was $58.7 million for the first half; investing used $9.4 million and financing used $8.5 million. Capital expenditures were $12.5 million.
- Total debt, including finance lease obligations, was $438.8 million, compared with $444.0 million at year-end. The company reported $122.3 million of available revolver borrowings after letters of credit. It was in compliance with its credit agreement covenants.
- Working capital was $438.4 million, versus $408.0 million at December 31. The filing states management expects credit-facility capacity and internally generated funds to meet foreseeable cash requirements, while noting uncertainty in credit markets.
- Dividends declared and paid were $0.13 per share in Q2. The company temporarily suspended share repurchases amid the pandemic.
Changes, outlook and risks
- First-half net income declined 20.6% despite higher sales, reflecting pandemic-related disruption and lower demand, higher acquisition-related expenses and interest expense. Interest expense rose to $9.5 million for the first half from $3.4 million.
- Acquisition-related items included $2.7 million of first-half inventory step-up expense and higher amortization; acquired businesses added $15.4 million of SG&A expense in the first half. Q2 SG&A also included $6.2 million of additional Morbark-related expense.
- Backlog at Q2-end was $216.6 million, down 6.9% from $232.8 million at Q2-end 2019. The filing attributes the decline primarily to COVID-19.
- Management expected the pandemic to adversely affect the business for the remainder of 2020, but said the extent could not be estimated. Plants were open at varying operating levels; temporary closures and reduced capacity had occurred. Cost measures included limiting capital spending, reducing inventory, restricting travel and delaying discretionary spending. The filing gives no quantified earnings or revenue guidance.
- Risks include prolonged pandemic effects on operations, demand, customers and suppliers; government and dealer budget pressure; agricultural-market weakness; foreign exchange and interest-rate movements; tariffs and trade disputes; raw-material costs; and acquisition integration. The company disclosed ordinary-course legal and environmental matters, but did not expect known litigation to have a material adverse effect; ultimate outcomes remain uncertain.
Important facts for investors to verify
- Whether demand, plant utilization and backlog recovered or deteriorated after June 30, 2020, especially given the absence of quantified guidance.
- How much of first-half sales growth and future performance depends on Morbark and Dutch Power, and the progress of their integration.
- Debt, variable-rate exposure, covenant headroom and available revolver capacity; $200 million of debt was covered by an interest-rate swap, while other borrowings remained variable-rate.
- The sustainability of operating cash flow and the effect of working-capital movements, foreign-held cash and planned capital spending.
- Potential further acquisition accounting adjustments, inventory obsolescence or other charges, and the outcome of legal and environmental contingencies.