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MarketScreener Homepage  >  Equities  >  Nyse  >  Alamo Group Inc.    ALG

ALAMO GROUP INC.

(ALG)
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Delayed Quote. Delayed Nyse - 01/17 04:01:47 pm
130.73 USD   +1.31%
01/15ALAMO GROUP INC. : Ex-dividend day for
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01/07ALAMO : Financial Statements and Exhibits (form 8-K/A)
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01/02ALAMO : January 2020 Dividends Declared
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ALAMO : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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10/31/2019 | 05:27am EST
The following tables set forth, for the periods indicated, certain financial
data:

                               Three Months Ended                            Nine Months Ended
                                 September 30,                                 September 30,
         As a
 Percent of Net Sales          2019              2018         2019              2018

Industrial                          58.3  %      60.8  %      59.2  %                58.3  %
Agricultural                        22.0  %      23.9  %      20.5  %                23.8  %
European                            19.7  %      15.3  %      20.3  %                17.9  %
Total sales, net                   100.0  %     100.0  %     100.0  %               100.0  %



                                          Three Months Ended                           Nine Months Ended
                                             September 30,                               September 30,

Cost Trends and Profit Margin, as

     Percentages of Net Sales              2019              2018        2019             2018

Gross profit                                    25.3  %     25.9  %     25.1  %                25.7  %
Income from operations                           9.0  %     11.0  %      9.3  %                10.1  %
Income before income taxes                       8.5  %     10.4  %      8.7  %                 9.6  %
Net income                                       6.4  %      9.1  %      6.5  %                 7.6  %



Overview

This report contains forward-looking statements that are based on Alamo Group's
current expectations.  Actual results in future periods may differ materially
from those expressed or implied because of a number of risks and uncertainties
which are discussed below and in the Forward-Looking Information section. Unless
the context otherwise requires, the terms the "Company", "we", "our" and "us"
means Alamo Group Inc.

For the first nine months of 2019, the Company's net income decreased by
approximately 6.3% when compared to the same period in 2018. This decrease was
primarily the result of a favorable one-time adjustment to our prior year tax
provision related to new tax legislation. Negatively affecting the Company's
performance during the first nine months of 2019 was the continued soft market
conditions in the agricultural market, which impacted our North American
agricultural sales. Also, while higher material costs hurt profitability during
the first quarter of 2019, steel costs have dropped during the second and third
quarters, although this positive effect on our margins has been more than offset
by unfavorable sales mix and lower production in our Agricultural Division.

The Company's Industrial Division experienced a 10.5% increase in sales for the
first nine months of 2019 compared to the first nine months of 2018. Sales
across all Industrial product groups, with the exception of mowing equipment
which was down, outperformed during the first nine months of 2019 compared to
the same period in 2018. Agricultural sales were down in the first nine months
of 2019 by 6.2% compared to the first nine months of 2018 as a result of
continued weak demand for our products due to soft agricultural market
conditions and declining farm incomes. Also negatively impacting results was a
shutdown during the first quarter of 2019 of the Division's largest
manufacturing facility for several days to install an upgrade to its paint
system and heavy rains and flooding throughout the mid-west part of the U.S.
that occurred during the second quarter. European sales for the first nine
months of 2019 were up in U.S. dollars by 23.2% compared to the same period in
2018, mainly due to the acquisition of Dutch Power. Excluding Dutch Power, sales
were up during the first nine months of 2019 compared to the same time in 2018
due to improved performance at our Rivard vacuum truck facility, despite being
negatively affected by changes due to currency translation. Consolidated income
from operations was $76.4 million in the first nine months of 2019 which was
relatively flat compared to the first nine months of 2018, but the Company's
backlog decreased 14.3% to $215.3 million at the end of the third quarter of
2019 versus the backlog of $251.2 million at the end of the third quarter of
2018. The decrease in the Company's backlog was attributable to softer new order
bookings for our products in the Agricultural and Industrial Divisions.
Excluding the acquisition of Dutch Power, increased orders in the European
Division partially offset these lower new orders for the quarter.

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The Company incurred several challenges during the quarter and expect those to
likely continue for at least the balance of the year although customer inquiry
levels across the Company remain reasonable. Softer economic conditions in North
America are beginning to have an affect in the manufacturing sector and
consequently have dampened our sales. Also, the Company continues to be impacted
by a tight labor market and difficulties in hiring and retaining skilled
workers. Additional tariff costs, future changes in tariff regulations and
ongoing trade disputes could further impact the business by increasing the cost
of items used in the manufacturing of our products and by softening sales of our
products to our customers who may be impacted directly or indirectly by
increasing tariffs and other negative effects resulting from trade disputes. The
Company may also be negatively affected by several other factors such as
additional weakness in the overall economy; significant changes in currency
exchange rates; negative economic impacts resulting from geopolitical events
such as the unresolved Brexit situation, changes in trade policy, increased
levels of government regulations; weakness in the agricultural sector;
acquisition integration issues; budget constraints or revenue shortfalls in
governmental entities; and other risks and uncertainties as described in "Risk
Factors" section of the Company's Annual Report on Form 10-K for the year ended
December 31, 2018 (the "2018 Form 10-K").

On October 24, 2019, the Company completed the previously announced acquisition
of 100% of the outstanding capital shares of Morbark, LLC (Morbark), a former
portfolio company of Stellex Capital Management, for a total consideration of
approximately $352 million, on a debt free basis and subject to certain
post-closing adjustments.


Results of Operations

Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018

Net sales for the third quarter of 2019 were $271,829,000, an increase of $14,257,000 or 5.5% compared to $257,572,000 for the third quarter of 2018.

The

increase in sales was mainly attributable to $10,031,000 of net sales from the acquisition of Dutch Power and to a lesser extent, increased demand for our products in the Company's European and Industrial Division.


Net Industrial sales increased by $1,778,000 or 1.1% to $158,499,000 for the
third quarter of 2019 compared to $156,721,000 during the same period in 2018.
The increase was attributable to higher sales in most product groups
specifically sweeper, vacuum truck and snow product lines which were helped by
stable municipal demand offset by lower sales of mowing equipment and excavators
reflecting softer demand from some of our industrial and state-level
governmental customers.

Net Agricultural sales were $59,797,000 in the third quarter of 2019 compared to
$61,464,000 for the same period in 2018, a decrease of $1,667,000 or 2.7%. The
decrease was primarily the result of weak market conditions which limited sales
growth in wholegoods as farm incomes remained challenged. Also, an unfavorable
product mix of less high margin mowers sales negatively affected both sales and
profitability in this division.

Net European sales for the third quarter of 2019 were $53,533,000, an increase
of $14,146,000 or 35.9% compared to $39,387,000 during the third quarter of
2018.  The increase was mostly due to the acquisition of Dutch Power which added
$10,031,000 of net sales during the quarter. Excluding Dutch Power, sales in the
European Division were up mainly due to increased sales levels from Rivard which
more than offset unfavorable currency translation.

Gross profit for the third quarter of 2019 was $68,710,000 (25.3% of net sales)
compared to $66,772,000 (25.9% of net sales) during the same period in 2018, an
increase of $1,938,000.  The increase in gross profit during the third quarter
of 2019 was primarily due to the acquisition of Dutch Power. Excluding Dutch
Power, gross profit was essentially flat, but lower as a percent of sales due to
lower production and unfavorable sales mix which more than offset lower material
costs.

Selling, general and administrative expenses ("SG&A") were $44,255,000 (16.3% of
net sales) during the third quarter of 2019 compared to $38,523,000 (15.0% of
net sales) during the same period of 2018, an increase of $5,732,000. The
increase primarily came from the acquisition of Dutch Power in the amount of
$2,472,000. Also,
                                       20
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attributing to the increase was $843,000 in acquisition expenses along with increased bonus accrual and spending on research and development projects during the third quarter of 2019.

Interest expense was $1,837,000 for the third quarter of 2019 compared to $1,399,000 during the same period in 2018, an increase of $438,000. The increase during the third quarter of 2019 came from increased borrowings due to the Dutch Power acquisition.


Other income (expense), net was $242,000 of income for the third quarter of 2019
compared to $265,000 of expense during the same period in 2018.  The income in
2019 was primarily due to the the sale of property for $350,000 and the expense
in 2018 was primarily the result of changes in currency exchange rates.

Provision for income taxes was $5,801,000 (25.0% of income before income tax) in
the third quarter of 2019 compared to $3,142,000 (11.8% of income before income
tax) during the same period in 2018. During the third quarter of 2018, the
Company recorded a net benefit to income taxes of $2,995,000 relating to the
adjustment in the provisional amounts recorded in the fourth quarter of 2017
upon enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), as more fully
described in Note 12 of the Interim Condensed Consolidated Financial Statements.
The net benefit to income taxes reduced the Company's effective income tax rate
for the third quarter of 2018 to 11.8%.

The Company's net income after tax was $17,418,000 or $1.47 per share on a diluted basis for the third quarter of 2019 compared to $23,543,000 or $2.00 per share on a diluted basis for the third quarter of 2018. The decrease of $6,125,000 resulted from the factors described above.

Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018


Net sales for the first nine months of 2019 were $818,949,000, an increase of
$66,165,000 or 8.8% compared to $752,784,000 for the first nine months of 2018.
The increase was primarily attributable to increased demand for our products in
the Company's Industrial Division. Our recent acquisition of Dutch Power also
contributed to the increase in net sales in the amount of $27,679,000.
Negatively affecting sales during the first nine months of 2019, were weak
agricultural market conditions as well as unfavorable currency translation
effects primarily in our European Division.
Net Industrial sales increased during the first nine months by $46,005,000 or
10.5% to $484,924,000 for 2019 compared to $438,919,000 during the same period
in 2018. The increase came from higher sales of all product lines, with the
exception of mowing equipment which was down compared to the same time in 2018
due to soft market conditions and adverse weather conditions experienced during
the second quarter of 2019.

Net Agricultural sales were $168,129,000 during the first nine months of 2019
compared to $179,182,000 for the same period in 2018, a decrease of $11,053,000
or 6.2%. The decrease in sales for the first nine months of 2019 compared to the
first nine months of 2018 was a result of weak market conditions and lower farm
incomes which have been impacted by lower commodity prices as well as trade
disputes. A first quarter 2019 shutdown in the Division's largest manufacturing
facility to install an upgrade to its paint system in addition to heavy rains
and flooding throughout the mid-west part of the U.S. during the second quarter
of 2019 also negatively hampered sales.

Net European sales for the first nine months of 2019 were $165,896,000, an
increase of $31,213,000 or 23.2% compared to $134,683,000 during the same period
of 2018. The increase in 2019 was mainly due to the acquisition of Dutch Power
in the amount of $27,679,000 and to a lesser extent increased sales of Rivard
equipment. Excluding Dutch Power, sales in local currency were up during the
first nine months of 2019 compared to the same time in 2018 due to improved
Rivard vacuum truck sales, despite being partially offset by unfavorable
currency translation.

Gross profit for the first nine months of 2019 was $205,151,000 (25.1% of net
sales) compared to $193,483,000 (25.7% of net sales) during the same period in
2018, an increase of $11,668,000. The increase in gross profit for the first
nine months of 2019 came from the acquisition of Dutch Power and higher
equipment sales in the Company's Industrial Division. Negatively affecting both
gross margin and margin percentage for the first nine months of 2019 were the
effects of lower production and unfavorable product mix, partially offset by
lower material costs and improvements in the Rivard vacuum truck business.

                                       21
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SG&A expenses were $128,741,000 (15.7% of net sales) during the first nine
months of 2019 compared to $117,087,000 (15.6% of net sales) during the same
period of 2018, an increase of $11,654,000. The increase primarily came from
increased spending on research and development projects, higher selling expenses
due to increased sales, as well as acquisition expenses in the amount of
$1,240,000. Our recent acquisition of Dutch Power added $5,421,000 in SG&A
expenses.

Interest expense was $5,222,000 for the first nine months of 2019 compared to
$4,233,000 during the same period in 2018, an increase of $989,000. The increase
during the first nine months of 2019 came from increased borrowings due to the
Dutch Power acquisition.
Other income (expense), net was $442,000 of expense during the first nine months
of 2019 compared to $491,000 of expense in the first nine months of 2018. The
expenses in 2019 and 2018 were primarily the result of changes in exchange
rates.

Provision for income taxes was $18,270,000 (25.5% of income before income taxes)
in the first nine months of 2019 compared to $15,084,000 (21.0% of income before
income taxes) during the same period in 2018. During the third quarter of 2018,
the Company recorded a net benefit to income taxes of $2,995,000 relating to the
adjustment in the provisional amounts recorded in the fourth quarter of 2017
upon enactment of TCJA, as more fully described in Note 12 of the Interim
Condensed Consolidated Financial Statements. The net benefit to income taxes
reduced the Company's effective income tax rate for the first nine months of
2018 to 21.0%.

The Company's net income after tax was $53,338,000 or $4.52 per share on a
diluted basis for the first nine months of 2019 compared to $56,897,000 or $4.84
per share on a diluted basis for the first nine months of 2018. The decrease of
$3,559,000 resulted from the factors described above.

Liquidity and Capital Resources


In addition to normal operating expenses, the Company has ongoing cash
requirements which are necessary to operate the Company's business, including
inventory purchases and capital expenditures.  The Company's inventory and
accounts payable levels typically build in the first half of the year and in the
fourth quarter in anticipation of the spring and fall selling seasons.  Accounts
receivable historically build in the first and fourth quarters of each year as a
result of fall preseason sales programs and out of season sales, particularly in
our Agricultural Division.  Preseason sales, primarily in the Agricultural
Division, help level the Company's production during the off season.

As of September 30, 2019, the Company had working capital of $404,314,000 which
represents an increase of $52,323,000 from working capital of $351,991,000 at
December 31, 2018. The increase in working capital was primarily due to
seasonality and the acquisition of Dutch Power.

Capital expenditures were $19,488,000 for the first nine months of 2019,
compared to $18,781,000 during the first nine months of 2018. The Company
expects higher capital expenditures in 2019 in order to consolidate production
capacity, support improvements in operational efficiencies, invest in technology
and for the previously announced construction of a new manufacturing facility
for its Super Products vacuum truck operation in Wisconsin, as well as the
expansion of our Tenco facility in Canada. The Company will fund future
expenditures from operating cash flows or through our revolving credit facility,
described below.

Net cash used for acquisitions was $58,531,000 during the first nine months of
2019. The amount used to acquire Dutch Power was approximately $52,611,000 with
the remaining balance used for the Dixie Chopper acquisition.
Net cash provided by financing activities was $58,423,000 and $39,151,000 during
the nine month periods ended September 30, 2019 and September 30, 2018,
respectively. The majority of the increase in net cash provided by financing
activities in 2019 as compared to the prior year, was mainly due to borrowings
to finance the acquisition of Dutch Power, partially offset by the repurchase
activity related to the Company's common stock.

The Company had $51,888,000 in cash and cash equivalents held by its foreign
subsidiaries as of September 30, 2019. The majority of these funds are at our
European and Canadian facilities. As a result of the
                                       22
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fundamental changes to the taxation of multinational corporations created by Tax
Cuts and Jobs Act, we no longer intend to permanently reinvest all of the
undistributed earnings of our European foreign affiliates. While the Company
intends to use some of these funds for working capital and capital expenditures
outside the U.S., recent changes in the U.S. tax laws have substantially
mitigated the cost of repatriation. During the second quarter of 2018, the
Company repatriated excess cash from its European operations of approximately
$24,000,000. The Company will continue to repatriate foreign cash and cash
equivalents in excess of amounts needed to fund foreign operating and investing
activities. Repatriated funds will initially be used to reduce funded debt
levels under the Company's current credit facility and subsequently used to fund
working capital, capital investments and acquisitions company-wide.

On October 24, 2019, the Company, as Borrower, and each of its domestic
subsidiaries as guarantors, entered into a Second Amended and Restated Credit
Agreement (the Credit Agreement) with Bank of America, N.A., as Administrative
Agent. The Credit Agreement provides the Company with the ability to request
loans and other financial obligations in an aggregate amount of up to
$650,000,000. Pursuant to the Credit Agreement, the Company has borrowed
$300,000,000 pursuant to a Term Facility repayable with interest quarterly at a
percentage of the initial principal amount of the Term Facility of 5.0% per year
with the remaining principal due in 5 years. Up to $350,000,000 is available
under the Credit Agreement pursuant to a Revolver Facility which terminates in 5
years. The Agreement requires the Company to maintain two financial covenants, a
maximum leverage ratio and a minimum asset coverage ratio. The Agreement also
contains various covenants relating to limitations on indebtedness, limitations
on investments and acquisitions, limitations on sale of properties and
limitations on liens and capital expenditures. The Agreement also contains other
customary covenants, representations and events of defaults. The expiration date
of the Term Facility and the Revolver Facility is October 24, 2024. As of
October 30, 2019, $510,000,000 was outstanding under the Agreement. On October
30, 2019, $4,152,000 of the revolver capacity was committed to irrevocable
standby letters of credit issued in the ordinary course of business as required
by vendors' contracts resulting in $133,964,000 in available borrowings. The
Company is in compliance with the covenants under the Agreement.

Management believes the Agreement and the Company's ability to internally
generate funds from operations should be sufficient to meet the Company's cash
requirements for the foreseeable future. However, future challenges affecting
the banking industry and credit markets in general could potentially cause
changes to credit availability, which creates a level of uncertainty.

Critical Accounting Estimates


Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with GAAP.  The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of
contingent assets and liabilities.  Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources.  Actual results may differ from these
estimates under different assumptions or conditions.

Critical Accounting Policies


An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur periodically, could materially impact the financial statements.
Management believes that of the Company's significant accounting policies, which
are set forth in Note 1 of the Notes to Consolidated Financial Statements in the
2018 Form 10-K, the policies relating to the business combinations, sales
discounts, and goodwill and other intangible assets involved a higher degree of
judgment and complexity. There have been no material changes to the nature of
estimates, assumptions and levels of subjectivity and judgment related to
critical accounting estimates disclosed in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the 2018 Form
10-K.
                                       23
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Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are likely to have a current or future material effect on our financial condition.

Forward-Looking Information


Part I of this Quarterly Report on Form 10-Q and the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
2 of this Quarterly Report contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.  In addition, forward-looking statements may be made
orally or in press releases, conferences, reports or otherwise, in the future by
or on behalf of the Company.

Statements that are not historical are forward-looking.  When used by or on
behalf of the Company, the words "estimate," "anticipate," "expect," "believe,"
"intend", "will", "would", "should", "could" and similar expressions generally
identify forward-looking statements made by or on behalf of the Company.

Forward-looking statements involve risks and uncertainties.  These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the Company and the markets it serves.  Particular risks
and uncertainties facing the Company include changes in market conditions;
ongoing weakness in the agricultural sector; changes in tariff regulations and
the imposition of new tariffs; a strong U.S. dollar; increased competition;
trade wars or other negative economic impacts resulting from geopolitical
events; decreases in the prices of agricultural commodities, which could affect
our customers' income levels; increase in input costs; our inability to increase
profit margins through continuing production efficiencies and cost reductions;
repercussions from the pending exit by the U.K. from the European Union (EU);
acquisition integration issues; budget constraints or income shortfalls which
could affect the purchases of our type of equipment by governmental customers;
credit availability for both the Company and its customers, adverse weather
conditions such as droughts, floods, snowstorms, etc. which can affect buying
patterns of the Company's customers and related contractors; the price and
availability of critical raw materials, particularly steel and steel products;
energy cost; increased cost of new governmental regulations which effect
corporations including related fines and penalties (such as the new European
General Data Protection Regulation); the potential effects on the buying habits
of our customers due to animal disease outbreaks and other epidemics; the
Company's ability to develop and manufacture new and existing products
profitably; market acceptance of new and existing products; the Company's
ability to maintain good relations with its employees; the Company's ability to
successfully complete acquisitions and operate acquired businesses or assets;
the ability to hire and retain quality skilled employees; and cyber security
risks affecting information technology or data security breaches.

In addition, the Company is subject to risks and uncertainties facing the
industry in general, including changes in business and political conditions and
the economy in general in both domestic and international markets; weather
conditions affecting demand; slower growth in the Company's markets; financial
market changes including increases in interest rates and fluctuations in foreign
exchange rates; actions of competitors; the inability of the Company's
suppliers, customers, creditors, public utility providers and financial service
organizations to deliver or provide their products or services to the Company;
seasonal factors in the Company's industry; litigation; government actions
including budget levels, regulations and legislation, primarily relating to the
environment, commerce, infrastructure spending, health and safety; and
availability of materials.

The Company wishes to caution readers not to place undue reliance on any
forward-looking statements and to recognize that the statements are not
predictions of actual future results.  Actual results could differ materially
from those anticipated in the forward-looking statements and from historical
results, due to the risks and uncertainties described above, as well as others
not now anticipated.  The foregoing statements are not exclusive and further
information concerning the Company and its businesses, including factors that
could potentially materially affect the Company's financial results, may emerge
from time to time.  It is not possible for management to predict all risk
factors or to assess the impact of such risk factors on the Company's
businesses.

                                       24

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© Edgar Online, source Glimpses

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