Alamo Group Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Alamo manufactures equipment and parts across Industrial, Agricultural, and European segments. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $257.6 | $240.5 | $752.8 | $669.1 |
| Gross profit / margin | $66.8 / 25.9% | $64.9 / 27.0% | $193.5 / 25.7% | $173.8 / 26.0% |
| Operating income / margin | $28.2 / 11.0% | $27.8 / 11.5% | $76.4 / 10.1% | $68.3 / 10.2% |
| Net income | $23.5 | $16.6 | $56.9 | $41.1 |
| Diluted EPS | $2.00 | $1.42 | $4.84 | $3.52 |
- Q3 sales rose 7.1%; nine-month sales rose 12.5%. Nine-month net income increased about 38.5%.
- Industrial sales increased 18.4% in Q3 and 16.9% year to date. Agricultural sales declined 5.3% in Q3 but increased 4.8% year to date. European sales declined 8.7% in Q3 and increased 9.8% year to date.
- Nine-month segment operating income was $46.3 million Industrial, $18.0 million Agricultural, and $12.0 million European.
- Nine-month operating cash flow was $3.6 million, down from $41.9 million in 2017. Higher receivables, inventory, and rental equipment uses of cash were significant factors. Investing cash outflow was $17.7 million, including $18.8 million of capital expenditures.
- Cash was $48.9 million at September 30, 2018, versus $25.4 million at December 31, 2017. Debt and capital lease obligations totaled $101.2 million, compared with $60.1 million at year-end; net debt was approximately $52.3 million. The company had $147.7 million available under its $250 million revolving facility and reported compliance with its covenants.
- Working capital was $360.9 million, up $69.7 million from year-end. Dividends declared were $0.11 per share for Q3 and $0.33 per share for the first nine months.
Changes, outlook, and risks
- Growth reflected stronger Industrial and European demand, acquisitions completed in 2017, and operational improvements. The acquisitions contributed $37.1 million in nine-month sales. Q3 Industrial sales included $8.2 million from R.P.M.; Agricultural sales included $9.0 million from Santa Izabel for the nine-month period.
- Gross margin declined as higher steel, freight, and other input costs more than offset productivity, pricing, and purchasing improvements. Management also cited higher labor costs and supplier delays for critical components.
- The effective tax rate was 11.8% in Q3 and 21.0% for the first nine months, versus 33.3% in the comparable 2017 periods. The 2018 figures benefited from the Tax Cuts and Jobs Act and a $3.0 million net tax benefit from adjustments to provisional tax-reform estimates; the company expected to finalize remaining tax calculations in Q4 2018.
- Backlog at Q3 end was $251.2 million, up 38.8% from $181.0 million a year earlier. Management was optimistic about the remainder of 2018 but provided no numerical earnings or revenue guidance. It planned higher 2018 capital expenditures to expand capacity and improve efficiency.
- Key risks include tariffs and trade disputes, inflation in materials and freight, labor shortages, agricultural-market weakness, shipment and supplier delays, currency and interest-rate movements, government customer budget constraints, and acquisition integration. The company identified no material off-balance-sheet arrangements or material changes to previously disclosed risk factors other than trade-policy risks.
- Operating lease accounting guidance was expected to increase reported assets and liabilities upon adoption in 2019; management did not expect a material effect on earnings or liquidity.
Investor verification priorities
- Assess whether backlog converts to shipments and cash, particularly given the sharp decline in operating cash flow and working-capital build.
- Monitor input-cost inflation, tariffs, component availability, labor constraints, and the effect of these pressures on gross margins.
- Separate recurring earnings from the $3.0 million tax benefit and the lower statutory tax rate; check the company’s final tax-reform accounting.
- Review leverage, variable-rate exposure, and compliance with revolving-credit covenants as capital spending and demand continue.
- Track segment trends, including Q3 weakness in Agricultural and European sales, and the contribution and integration of acquired businesses.