Alamo Group Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts below are in millions of U.S. dollars unless stated otherwise. The company manufactures equipment across Industrial, Agricultural, and European businesses.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $231.6 | $234.8 | $655.1 | $615.1 |
| Gross profit / margin | $57.5 / 24.8% | $55.4 / 23.6% | $153.7 / 23.5% | $140.9 / 22.9% |
| Operating income / margin | $23.6 / 10.2% | $21.5 / 9.2% | $52.1 / 8.0% | $47.0 / 7.6% |
| Net income | $14.8 | $13.4 | $31.8 | $29.8 |
| Diluted EPS | $1.28 | $1.10 | $2.77 | $2.43 |
- Sales mix: Q3 Industrial sales were $127.4 million, Agricultural $58.9 million, and European $45.3 million. Nine-month sales were $362.8 million, $160.4 million, and $132.0 million, respectively.
- Cash flow: Nine-month operating cash flow was $31.2 million, versus $24.4 million in 2014. Investing used $10.3 million, including $7.0 million of capital expenditures and $3.5 million for acquisitions. Cash increased $3.1 million to $42.7 million.
- Liquidity and debt: Working capital was $303.9 million, essentially unchanged from December 31, 2014. Total debt was $175.5 million, including $175.0 million drawn on a $250 million revolving facility; $73.2 million remained available after letters of credit. The company reported covenant compliance. Cash held by foreign subsidiaries was $39.6 million and generally was not available for U.S. use without tax consequences.
- Other metrics: Nine-month dividends declared were $0.24 per share, versus $0.21. Backlog was $175 million, up 8.2% from $162 million a year earlier.
Changes versus comparable periods
- Q3 sales fell 1.4%, while net income rose 10.4%. Currency translation, particularly in Europe, weighed on sales; improved production efficiency and lower material costs supported higher gross margin.
- Nine-month sales increased 6.5% and net income increased 6.8%. Acquisitions—especially Specialized, acquired in 2014—were the main sales and profit contributors. Management said operating income rose 4.2% excluding acquisitions.
- Reported nine-month Industrial sales rose 17.2%, primarily reflecting Specialized. Agricultural sales fell 1.8% amid low commodity prices, weaker farm income, and adverse winter weather. European sales fell 7.2% in U.S. dollars but increased 6.0% in local currency, according to management.
- Nine-month interest expense rose to $5.1 million from $2.8 million, reflecting acquisition-related borrowings and, to a lesser extent, the 2014 share repurchase. The effective tax rate increased to 35.5% from 34.3%, partly due to Specialized operations in higher-tax jurisdictions.
Outlook, risks, and notable items
- Management expected markets for the remainder of 2015 to be steady and said the higher backlog should support sales, particularly through the rest of the year. This was not formal quantitative guidance. Management believed operating cash flow and the credit facility would meet foreseeable cash needs.
- Risks cited include agricultural commodity prices and farm income, government budgets, weather, economic weakness, currency movements and a strong U.S. dollar, interest rates, credit availability, raw-material costs, regulation, competition, and the execution and integration of acquisitions. A 10% stronger dollar was estimated to reduce nine-month gross profit by $4.1 million; a two-percentage-point change in variable borrowing rates was estimated to change quarterly interest expense by approximately $0.9 million.
- Currency translation reduced stockholders’ equity by $16.0 million over the first nine months. The company’s $3.0 million of outstanding currency forward contracts hedge certain foreign-currency receivables.
- The company acquired Brazil-based Herder in March for approximately $4.0 million; its contribution through September was not material. The 2014 Specialized purchase-price allocation was revised to recognize a $3.3 million deferred tax liability, with a corresponding goodwill increase.
- Deere patent litigation remained subject to appeal; a ruling was expected in 2016. Environmental remediation at Bush Hog’s Selma property was deemed successful by the Alabama regulator in August 2015. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
- Comparative 2014 sales and cost of sales were reclassified for freight allowances, increasing both by $1.6 million for Q3 and $4.4 million for the nine-month period, with no effect on net income. No goodwill or intangible impairment was recorded. Management warned that weaker conditions or lower valuations could lead to future impairment.
Important facts for investors to verify
- Whether backlog converts to revenue and earnings, and whether underlying demand improves or weakens in each segment.
- How much future growth and profitability depends on acquisitions versus organic performance, including integration and acquisition-related costs.
- Revolver capacity, covenant headroom, variable-rate exposure, and the practical availability of foreign-held cash.
- Foreign-exchange impacts, agricultural market conditions, and the company’s assumptions supporting goodwill and intangible-asset valuations.
- Developments in the Deere appeal and any changes in environmental, warranty, product-liability, or other contingencies.