Alamo Group Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Alamo Group manufactures equipment through its Vegetation Management and Industrial Equipment divisions. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $368.8 | $338.3 | $1,127.0 | $997.1 |
| Gross profit / margin | $92.4 / 25.0% | $86.3 / 25.5% | $278.7 / 24.7% | $250.9 / 25.2% |
| Operating income / margin | $35.8 / 9.7% | $30.0 / 8.9% | $105.9 / 9.4% | $89.1 / 8.9% |
| Net income | $25.8 | $17.5 | $72.8 | $61.0 |
| Diluted EPS | $2.16 | $1.47 | $6.10 | $5.13 |
Q3 sales increased 9% year over year; nine-month sales rose 13%. Nine-month net income increased 19%. Vegetation Management sales grew 16% in the first nine months and operating income rose 29%; Industrial Equipment sales grew 9%, while operating income declined 2%.
At September 30, cash and cash equivalents were $75.3; current assets were $750.6 and current liabilities $192.9. Working capital was $557.7, up $138.1 from year-end 2021. Total debt, including finance leases, was $363.5, compared with $269.6 at December 31, 2021. The company reported $216.7 of available revolver borrowings after letters of credit.
Nine-month operating cash flow was negative $21.2, versus positive $43.4 in 2021, reflecting higher accounts receivable and inventory. Investing cash outflow was $25.0, including $23.5 of capital expenditures. Financing cash inflow was $87.2, primarily reflecting increased revolving-credit borrowings. Cash ended the period at $75.3.
Changes, management commentary and outlook
- Management attributed sales growth to strong demand and pricing actions. Pricing and higher volume supported operating income, while supply-chain disruption, material and inbound freight inflation, component shortages, and skilled-labor constraints weighed on costs and gross margins.
- Quarterly gross margin fell 0.5 percentage point year over year; nine-month gross margin fell 0.5 point. Operating margins improved in both periods, helped by sales volume and expense discipline.
- Backlog increased 41% to $908.9 at quarter-end from $645.1 a year earlier. Management reported improvement in Vegetation Management backlog across product lines except Brazilian Herder products.
- The company expected normalized 2022 capital expenditures of approximately $30.0. It provided no specific revenue or earnings guidance in the supplied filing text.
- On October 28, 2022, after quarter-end, the company entered a new credit agreement providing up to $655.0 in aggregate facilities: a $255.0 term loan and a $400.0 revolving facility maturing October 28, 2027. Management said available credit and internally generated funds should meet foreseeable cash requirements; it also noted uncertainty around credit-market availability. The filing states the company was covenant-compliant under its prior agreement at September 30.
- Key risks include persistent supply-chain and logistics disruptions, inflation, labor availability, COVID-19 effects, higher interest rates, foreign-exchange movements, geopolitical events, agricultural and government-customer demand, and acquisition integration. Management cautioned that forward-looking statements are subject to risks and actual results may differ.
Other notable items
- Foreign-currency translation reduced equity by $24.9 in Q3 and $43.1 for the first nine months; nine-month comprehensive income was $33.2.
- Nine-month other expense of $0.5 included an excise-tax audit and foreign-exchange effects. The prior-year period included $2.7 of other income, primarily foreign-exchange effects and a $3.4 facility sale.
- The company declared and paid quarterly dividends of $0.18 per share in Q3, compared with $0.14 a year earlier. The October 3 dividend declaration was also $0.18 per share.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue, given continuing component, chassis, freight, and labor constraints.
- Whether pricing can continue to offset input-cost inflation without further gross-margin pressure.
- Working-capital and cash-flow trends, particularly receivables and inventory, and the extent of future revolver use.
- The terms and covenant headroom of the October 2022 credit agreement, including exposure to variable interest rates and the transition from LIBOR-based arrangements.
- Foreign-exchange impacts, including the substantial translation loss and the company’s sensitivity to currency movements.