Alamo Group Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2015. Alamo operates Industrial, Agricultural, and European equipment businesses. Comparisons are with the corresponding 2014 periods; amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $215.7 | $207.8 | $423.5 | $380.4 |
| Gross profit / margin | $50.7 / 23.5% | $47.3 / 22.8% | $96.2 / 22.7% | $85.4 / 22.5% |
| Operating income / margin | $16.4 / 7.6% | $14.8 / 7.1% | $28.6 / 6.7% | $25.4 / 6.7% |
| Net income | $9.7 | $9.2 | $17.1 | $16.4 |
| Diluted EPS | $0.84 | $0.75 | $1.49 | $1.34 |
| Operating cash flow | Not separately presented quarterly | $(8.8) | $(15.1) |
Q2 sales rose 3.8%, net income 5.6%, and diluted EPS 12.0%. First-half sales increased 11.4%, net income 3.9%, and diluted EPS 11.2%. Interest expense rose to $1.8 million in Q2 and $3.5 million for the half, versus $1.0 million and $1.3 million, respectively. First-half cash used in operations improved year over year but remained negative, principally amid increases in receivables, inventory, and rental equipment.
At June 30, cash was $34.5 million; current assets were $417.5 million and current liabilities $98.1 million, yielding working capital of $319.4 million. Total debt was $203.5 million, including $203.0 million drawn on the revolving facility. The $250 million facility had $45.2 million available after letters of credit; the company reported covenant compliance. Total assets were $665.2 million and stockholders’ equity $347.9 million. First-half capital expenditures were $5.1 million and dividends paid were $1.8 million.
Material changes and management commentary
- Acquisitions, particularly Specialized, drove much of the sales increase. Specialized contributed $34.2 million of Q2 sales versus $19.0 million in Q2 2014; first-half acquired-business sales were $82.5 million versus $19.0 million. Specialized-related inventory fair-value step-up costs reduced gross profit by $0.8 million in Q2 and $2.5 million for the first half.
- Q2 Industrial sales increased 12.4% to $118.5 million, largely reflecting Specialized. Agricultural sales declined 1.2% to $53.0 million; European sales declined 9.1% in U.S. dollars to $44.2 million, although local-currency European sales increased. For the first half, Agricultural sales fell 2.9% and European sales fell 6.5% in U.S. dollars; European sales rose 7.6% in local currency.
- Management cited weak agricultural conditions, low commodity prices, adverse winter weather, softer non-governmental markets, and unfavorable currency translation. Excluding acquisitions, first-half Industrial and Agricultural sales each declined 4.4%; consolidated operating income was described as essentially flat excluding acquisitions.
- Backlog was approximately $162 million, slightly above $161 million a year earlier; management said the backlog should benefit sales through the remainder of 2015. Management characterized markets as likely steady, not as formal numerical guidance, and said credit availability and internally generated funds should meet foreseeable cash needs.
Risks, contingencies, and unusual items
- Risks include economic and market weakness, agricultural commodity prices and farm income, government budgets, weather, stronger U.S. dollar and other currency movements, interest rates, raw-material costs, regulation, customer credit, and successful integration of acquisitions.
- Debt carries variable interest rates. The filing estimates that a two-percentage-point rate change at the period’s borrowing level would change interest expense by approximately $1.0 million. A uniform 10% strengthening of the dollar was estimated to reduce first-half gross profit by $2.6 million.
- Environmental matters include chromium contamination at an Iowa property subject to monitoring and a conditional no-further-action status, and remediation at a former Bush Hog site awaiting regulatory acceptance. Deere patent litigation remains on appeal after a jury found no infringement and the patent invalid. The company stated asbestos-related changes were not expected to materially affect results.
- Specialized purchase accounting was finalized with a previously unrecognized $3.3 million deferred tax liability and corresponding goodwill adjustment. Prior-period freight presentation was reclassified to increase both sales and cost of sales, with no effect on net income.
- Cash held by foreign subsidiaries was $31.5 million and generally would not be available for U.S. use without tax consequences. The board revoked its longstanding authorization to repurchase up to one million shares on August 6, 2015; no shares had been repurchased under that authorization in 2014 or through Q2 2015.
Important facts for investors to verify
- How much of reported growth and backlog converts to organic sales and sustainable operating profit, especially if agricultural and non-governmental markets remain soft.
- Whether acquisition integration, purchase accounting, and inventory step-up costs affect future margins, and whether acquired goodwill and intangible assets remain recoverable.
- Cash conversion and seasonal working-capital needs, given negative first-half operating cash flow and rising receivables, inventory, and rental equipment.
- Borrowing levels, variable-rate exposure, covenant headroom, and the practical availability of foreign-held cash.
- Developments in the environmental matters and Deere appeal, and the potential effects of currency movements, commodity prices, weather, and customer demand.