ALAMO GROUP INC.
The following tables set forth, for the periods indicated, certain financial
data:
Three Months Ended Six Months Ended
As a June 30, June 30,
Percent of Net Sales 2022 2021 2022 2021
Vegetation Management 64.4 % 61.8 % 62.8 % 60.5 %
Industrial Equipment 35.6 % 38.2 % 37.2 % 39.5 %
Total sales, net 100.0 % 100.0 % 100.0 % 100.0 %
Three Months Ended Six Months Ended
Cost Trends and Profit Margin, as June 30,
Percentages of Net Sales 2022 2021 2022 2021 Gross profit 25.2 % 25.4 % 24.6 % 25.0 % Income from operations 10.3 % 9.7 % 9.2 % 9.0 % Income before income taxes 9.5 % 9.9 % 8.2 % 8.6 % Net income 7.2 % 7.5 % 6.2 % 6.6 % Overview This report contains forward-looking statements that are based onAlamo 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" meansAlamo Group Inc. We experienced continued strong demand for our products during the first six months of 2022 as was reflected in our top line growth. Margins improved due to the increase in shipments along with pricing actions we began in 2021 which helped mitigate inflation cost pressures. However, we continue to be constrained by higher material and inbound freight costs, ongoing supply chain disruptions and skilled labor shortages. For the first six months of 2022, the Company's net sales increased by 15%, and net income increased by 8% compared to the same period in 2021. The increase in both net sales and net income was primarily due to continued strong customer demand for our products compared to the prior year and solid cost and expense discipline. Offsetting the increase were disruptions in our supply chain, significant input cost inflation (including increased inbound freight and material costs), and logistics issues. The Company'sVegetation Management Division experienced a 19% increase in sales for the first six months of 2022 compared to the first six months of 2021 primarily as a result of increased customer demand as well as pricing actions. The Division's new orders and backlog improved in all product lines. The Division's income from operations for the first six months of 2022 was up 30% versus the same period in 2021, due to increased demand but offset by higher material and inbound freight costs and supply chain disruptions. The Company's Industrial Equipment Division sales increased in the first six months of 2022 by 8% as compared to the first six months of 2021. Industrial Equipment sales were strong in the excavator and vacuum truck product lines and were supported by modest increases in our street sweeper, debris collector and snow removal equipment lines. Negatively impacting this Division in the quarter were higher input costs and supply chain disruptions. These challenges had a negative effect on the Division's income from operations which led to a 4% decline for the first six months of 2022 compared to the first six months of 2021. Consolidated income from operations was$70.0 million in the first six months of 2022 compared to$59.0 million in the first six months of 2021, an increase of 19%. The Company's backlog increased 78% to$894.0 million at the end of the second quarter of 2022 versus a backlog of$503.6 million at the end of the second quarter of 2021. The increase in the Company's backlog was primarily attributable to strong customer demand for our products in both Divisions as outlined above. 16 -------------------------------------------------------------------------------- The effects of the COVID-19 pandemic continue to impact our business and operations. In general, we have seen a gradual decline in the number of COVID-19 cases in our facilities despite occasional localized outbreaks. However, new strains of the disease and/or a significant resurgence of cases could negatively impact us in the future by, among other things, reducing overall customer demand for our products or creating significant operational disruptions in our manufacturing facilities that could lead to delayed deliveries and/or production inefficiencies and higher costs. The indirect effects of the pandemic, including supply chain and logistics challenges, the unavailability of certain raw materials and key product components, input cost inflation and labor shortages, continue to negatively impact us and seem likely to persist in the near-term. While the direct and indirect consequences of the COVID-19 pandemic continue to pose significant challenges, the Company may also be negatively affected by several other factors such as increases in interest rates, changes in tariff regulations and the imposition of new tariffs, ongoing trade disputes, further supply chain issues, changes inU.S. fiscal policy such as changes in the federal tax rate, weakness in the overall world-wide economy, significant changes in currency exchange rates, negative economic impacts resulting from geopolitical events such as the war inUkraine , 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 in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K").
Results of Operations
Three Months Ended
Net sales for the second quarter of 2022 were$396.2 million , an increase of$48.6 million or 14% compared to$347.6 million for the second quarter of 2021. Net sales during the second quarter of 2022 improved due to strong customer demand for our products versus the second quarter of 2021. Negatively affecting the second quarter of 2022 were higher costs for materials and inbound freight, as well as supply chain disruptions which caused component shortages and related operational disruptions. Net Vegetation Management sales increased by$40.3 million or 19% to$255.0 million for the second quarter of 2022 compared to$214.7 million during the same period in 2021. The increase was due to strong performance in all product lines particularly agricultural, forestry and tree care and governmental mowing equipment in bothNorth America andEurope . Supply chain and logistics disruptions had an overall negative impact during the second quarter of 2022. Net Industrial Equipment sales were$141.2 million in the second quarter of 2022 compared to$132.9 million for the same period in 2021, an increase of$8.3 million or 6%. The increase was mainly due to continued solid results in our excavator and vacuum truck product lines with modest support from other product lines. This Division was also negatively impacted by ongoing supply chain disruptions and logistics issues in the second quarter of 2022, including delays in receiving truck chassis and component parts from supply chain partners. Gross profit for the second quarter of 2022 was$99.7 million (25% of net sales) compared to$88.1 million (25% of net sales) during the same period in 2021, an increase of$11.6 million . The increase in gross profit during the second quarter of 2022 compared to the second quarter of 2021 was primarily attributable to higher sales volume and positive pricing actions. Profitability in the quarter was negatively impacted by shortages of component parts along with higher costs of materials and inbound freight. These factors had a negative effect on the Company's gross margin percentage during the second quarter of 2022. Selling, general and administrative expenses ("SG&A") were$55.0 million (14% of net sales) during the second quarter of 2022 compared to$50.9 million (15% of net sales) during the same period of 2021, an increase of$4.1 million . The increase in SG&A expense in the second quarter of 2022 compared to the second quarter of 2021 was attributable to higher administrative, marketing and engineering expenses as the Company returned to pre-pandemic expense levels. Amortization expense in the second quarter of 2022 was$3.8 million compared to$3.7 million in the same period in 2021, an increase of$0.1 million .
Interest expense was
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Other income (expense), net was $0.1 million of expense for the second quarter
of 2022 compared to $3.3 million of income during the same period in 2021. The
income in 2021 was primarily from the sale of a facility in the Netherlands of
$3.4 million .
Provision for income taxes was $9.2 million (24% of income before income tax) in
the second quarter of 2022 compared to $8.2 million (24% of income before income
tax) during the same period in 2021.
The Company's net income after tax was $28.5 million or $2.39 per share on a
diluted basis for the second quarter of 2022 compared to $26.0 million or $2.19
per share on a diluted basis for the second quarter of 2021. The increase of
$2.5 million resulted from the factors described above.
Six Months Ended
Net sales for the first six months of 2022 were$758.2 million , an increase of$99.5 million or 15% compared to$658.7 million for the first six months of 2021. The increase in net sales was attributable to continued strong customer demand for our products in both the Vegetation Management and Industrial Equipment Divisions and improved pricing. Negatively impacting net sales were higher costs for materials, inbound freight and supply chain and logistical disruptions. Net Vegetation Management sales increased during the first six months by$77.5 million or 19% to$476.0 million for 2022 compared to$398.5 million during the same period in 2021. The increase was due to a strong performance in all product lines, particularly forestry and tree care and agricultural and governmental mowing equipment in bothNorth America andEurope . Supply chain disruptions, logistics issues and unfavorable input cost changes constrained this Division during the first six months of 2022. Net Industrial Equipment sales were$282.2 million during the first six months of 2022 compared to$260.2 million for the same period in 2021, an increase of$22.0 million or 8%. The increase in sales for the first six months of 2022 compared to the first six months of 2021 was mainly due to the continued solid results in excavator and vacuum truck product lines, with modest support from other product lines. Net sales in the first six months of 2022 were also negatively affected by supply chain disruptions and higher input costs in both material and inbound freight costs. Gross profit for the first six months of 2022 was$186.4 million (25% of net sales) compared to$164.6 million (25% of net sales) during the same period in 2021, an increase of$21.8 million . The increase in gross profit was mainly attributable to higher sales volume during the first six months of 2022 compared to the first six months of 2021 as well as improved pricing. Shortages of component parts along with higher costs of materials and inbound freight negatively impacted the first six months of 2022. SG&A expenses were$108.6 million (14% of net sales) during the first six months of 2022 compared to$98.2 million (15% of net sales) during the same period of 2021, an increase of$10.4 million . The increase in SG&A expense in the first six months of 2022 compared to the first six months of 2021 was attributable to higher administrative, marketing and engineering expenses as the Company returned to pre-pandemic expense levels. Amortization expense in the first six months of 2022 was$7.7 million compared to$7.3 million in the same period in 2021, an increase of$0.4 million .
Interest expense was
Other income (expense), net was$1.9 million of expense during the first six months of 2022 compared to$2.6 million of income in the first six months of 2021. The expense in 2022 is primarily from an excise tax audit and to a lesser extent, changes in exchange rates. The income in 2021 is primarily from changes in exchange rates and the sale of a facility inthe Netherlands for$3.4 million . Provision for income taxes was$15.5 million (25% of income before income taxes) in the first six months of 2022 compared to$13.3 million (23% of income before income taxes) during the same period in 2021. 18 --------------------------------------------------------------------------------
The Company's net income after tax was
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 accounts receivable, inventory and accounts payable levels, particularly in itsVegetation Management Division , build in the first quarter and early spring and, to a lesser extent, 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 pre-season sales and year-round sales programs. These sales, primarily in theVegetation Management Division , help balance the Company's production during the first and fourth quarters. As ofJune 30, 2022 , the Company had working capital of$558.7 million which represents an increase of$139.1 million from working capital of$419.6 million atDecember 31, 2021 . The increase in working capital was primarily a result of volume-driven and inflation-driven increases in accounts receivable as well as an increase in inventory to support the Company's higher backlog levels. Capital expenditures were$15.0 million for the first six months of 2022, compared to$9.4 million during the first six months of 2021. The Company expects to approve a normalized capital expenditure level of approximately$30.0 million for the full year of 2022. The Company will fund any future expenditures from operating cash flows or through our revolving credit facility, described below. Net cash used for investing activities was$16.8 million during the first six months of 2022 compared to $- million during the first six months of 2021. Net cash provided by financing activities was$97.0 million and$26.3 million during the six month periods endedJune 30, 2022 andJune 30, 2021 , respectively. Higher net cash provided by financing activities for the first six months of 2022 relates to increased borrowings on the Company's revolving credit facility used for increased working capital needs in support of elevated backlog levels. The Company had$70.9 million in cash and cash equivalents held by its foreign subsidiaries as ofJune 30, 2022 . The majority of these funds are at our European and Canadian facilities. The Company will continue to repatriate European and Canadian cash and cash equivalents in excess of amounts needed to fund operating and investing activities in these locations, and will monitor exchange rates to determine the appropriate timing of such repatriation given the current relative value of theU.S. dollar. 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. OnOctober 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) withBank 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$650.0 million and, subject to certain conditions, the Company has the option to request an increase in aggregate commitments of up to an additional$200.0 million . Pursuant to the Credit Agreement, the Company borrowed$300.0 million pursuant to a Term Facility repayable at a percentage of the initial principal amount of the Term Facility equal to 5.0% per year along with interest payable quarterly. The remaining principal amount is due in 2024. Up to$350.0 million is available under the Credit Agreement pursuant to a Revolver Facility. The Agreement requires the Company to maintain two financial covenants, a maximum consolidated leverage ratio and a minimum consolidated fixed charge 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 isOctober 24, 2024 . As ofJune 30, 2022 ,$371.8 million was outstanding under the Credit Agreement,$258.8 million on the Term Facility and$113.0 million on the Revolver Facility. OnJune 30, 2022 ,$2.1 million 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$185.7 million in available borrowings. The Company is in compliance with the covenants under the Agreement as ofJune 30, 2022 .
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
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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, particularly given the uncertainty created by the COVID-19 pandemic.
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 2021 Form 10-K, the policies relating to the business combinations involve 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 2021 Form 10-K.
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; the ongoing direct and indirect impacts of the COVID-19 pandemic; changes in tariff regulations and the imposition of new tariffs; a strongU.S. dollar; increased competition; negative economic impacts resulting from geopolitical events such as the war inUkraine or trade wars; 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 exit by theU.K. from theEuropean 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 raw materials and product components; energy cost; increased cost of governmental regulations which effect corporations including related fines and penalties (such as the European General Data Protection Regulation and the California Consumer Privacy Act); 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 20
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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; cyber security risks affecting information technology or data security breaches; and the possible effects of events beyond our control, such as political unrest, acts of terror, natural disasters and pandemics, on the Company or its customers, suppliers and the economy in general. The Company continues to experience the impacts of COVID-19 on its markets and operations including, most notably, supply chain disruptions, input cost inflation and skilled labor shortages. The full extent to which COVID-19 will continue to adversely impact the Company's business depends on future developments, which are highly uncertain and unpredictable. 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.
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