Alamo Group Inc. — Q1 2014 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2014, compared with the same quarter of 2013. Alamo manufactures equipment through its North American Industrial, North American Agricultural, and European segments.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $171.250 million | $158.429 million; up 8.1% |
| Gross profit / margin | $38.130 million / 22.3% | $34.912 million / 22.0% |
| Operating income / margin | $10.631 million / 6.2% | $9.739 million / 6.1% |
| Net income | $7.238 million | $6.950 million; up 4.2% |
| Diluted EPS | $0.59 | $0.57 |
| Cash and cash equivalents | $42.253 million at March 31 | $63.960 million at December 31, 2013 |
| Operating cash flow | $(19.388) million | $(20.293) million |
| Capital expenditures | $2.218 million | $3.116 million |
| Debt and credit availability | No revolver borrowings; $1.139 million current debt and capital lease obligations. $99.278 million available under the facility at March 31. | $10 million revolver borrowings at March 31, 2013 |
Working capital was $262.313 million, up $5.981 million from year-end, primarily reflecting seasonally higher receivables. Cash declined $21.707 million during the quarter, largely as receivables and inventories increased. The company reported $20.913 million of cash held by foreign subsidiaries, generally intended for use outside the United States.
Segment sales were Industrial $77.314 million, up 11.5%; Agricultural $49.845 million, up 0.4%; and European $44.091 million, up 11.7%. Segment operating income was $6.300 million, $2.415 million, and $1.916 million, respectively. Dividends declared were $0.07 per share, unchanged year over year.
Changes and management commentary
- Industrial and European growth drove consolidated sales gains; agricultural sales were essentially flat amid severe winter weather and softer market demand.
- Management attributed improved gross margin to higher volume and production efficiencies, partly offset by a greater mix of lower-margin tractor sales.
- SG&A rose to $27.499 million from $25.173 million, including acquisition costs, higher trade-show and advertising spending, recruiting and relocation costs, litigation fees, IT projects, marketing hires, and stock-option expense.
- The effective tax rate was 33.8%, versus 29.3%. Q1 2013 included a $350,000 benefit from reinstated research-and-development tax credits; 2014 credits had not yet been approved.
- Backlog increased 5.6% year over year to $117.938 million, with gains in Industrial and European divisions; management said this should support sales through the rest of the year.
Outlook, transactions, risks, and contingencies
- Management characterized 2014 markets as likely steady, while cautioning that economic weakness, agricultural commodity prices, weather, government budgets and regulation, customer credit availability, and buying confidence could weigh on demand. No numerical earnings or revenue guidance was provided.
- On February 24, Alamo agreed to acquire Specialized Industries’ Super Products, Wausau-Everest, and Howard P. Fairfield businesses for approximately $186 million, subject to adjustments. The acquisition was expected to close in Q2 2014; regulatory review was reported satisfactorily completed. On May 12, the revolving facility was expanded from $100 million to $250 million to support the transaction and combined-company needs.
- Alamo announced the April 2 acquisition of Kellands Agricultural and Multidrive Tractors in the UK; the group had approximately $11 million of 2013 sales. Purchase accounting values had not yet been determined. The SMC plant sale closed in April for $900,000, with an expected gain of approximately $840,000.
- Contingencies include a $1 million-plus-interest jury award against Gradall, fully reserved and on appeal; Deere patent litigation, in which the jury found no infringement and the patent invalid, with Deere appealing; environmental monitoring/remediation matters; and asbestos-related obligations. The filing does not quantify all potential future costs.
- Foreign currency remains a risk: the company reported a $926,000 translation loss and estimated that a uniform 10% dollar strengthening would reduce quarterly gross profit by $1.328 million, before considering changes in sales or local prices. It used forward contracts to hedge currency exposure.
- Goodwill was $31.980 million. Schwarze and Rivard reporting units were identified as more sensitive to valuation assumptions; future adverse changes could trigger impairment testing and charges. Management reported compliance with credit-facility covenants and effective disclosure controls.
Important facts for investors to verify
- Whether the Specialized Industries acquisition closed on the expected terms, its financing, and its contribution to results after closing.
- Subsequent cash generation and working-capital trends, particularly receivables and inventory as seasonal sales develop.
- Whether agricultural demand recovers and whether the reported backlog converts to sales and margins.
- Approval and effect of 2014 research-and-development tax credits, and the sustainability of the higher effective tax rate.
- Progress and outcomes in the appealed Gradall and Deere cases, environmental matters, and any resulting charges or cash costs.
- Changes in foreign-exchange exposure and goodwill valuation assumptions, especially for the Schwarze and Rivard reporting units.