ALAMO GROUP INC - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number 0-21220
ALAMO GROUP INC. | ||||||||
(Exact name of registrant as specified in its charter) | ||||||||
Delaware | 74-1621248 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
1627 East Walnut, Seguin, Texas 78155
(Address of principal executive offices, including zip code)
830-379-1480
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | |||||||||||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||||||||
Common Stock, par value $.10 per share | ALG | New York Stock Exchange | |||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At July 29, 2022, 11,966,177 shares of common stock, $.10 par value, of the registrant were outstanding.
1
Alamo Group Inc. and Subsidiaries
INDEX
PART I. | FINANCIAL INFORMATION | PAGE | |||||||||
Item 1. | Interim Condensed Consolidated Financial Statements (Unaudited) | ||||||||||
| June 30, 2022 and December 31, 2021 | |||||||||||
| Three and Six Months Ended June 30, 2022 and June 30, 2021 | |||||||||||
| Three and Six Months Ended June 30, 2022 and June 30, 2021 | |||||||||||
| Three and Six Months Ended June 30, 2022 and June 30, 2021 | |||||||||||
| Six Months Ended June 30, 2022 and June 30, 2021 | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
PART II. | |||||||||||
Item 1. | Legal Proceedings | ||||||||||
Item 1A. | Risk Factors | ||||||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||||
Item 3. | Defaults Upon Senior Securities | ||||||||||
Item 4. | Mine Safety Disclosures | ||||||||||
Item 5. | Other Information | ||||||||||
Item 6. | Exhibits | ||||||||||
2
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share amounts) | June 30, 2022 | December 31, 2021 | ||||||||||||||||||
| ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 75,894 | $ | 42,115 | ||||||||||||||||
Accounts receivable, net | 306,967 | 237,970 | ||||||||||||||||||
Inventories, net | 352,915 | 320,917 | ||||||||||||||||||
Prepaid expenses and other current assets | 11,095 | 9,500 | ||||||||||||||||||
Income tax receivable | 1,432 | 1,666 | ||||||||||||||||||
Total current assets | 748,303 | 612,168 | ||||||||||||||||||
Rental equipment, net | 31,168 | 32,514 | ||||||||||||||||||
Property, plant and equipment | 325,911 | 321,863 | ||||||||||||||||||
Less: Accumulated depreciation | (172,004) | (169,372) | ||||||||||||||||||
Total property, plant and equipment, net | 153,907 | 152,491 | ||||||||||||||||||
Goodwill | 196,068 | 202,406 | ||||||||||||||||||
Intangible assets, net | 178,781 | 183,466 | ||||||||||||||||||
Deferred income taxes | 1,006 | 1,110 | ||||||||||||||||||
Other non-current assets | 23,143 | 21,587 | ||||||||||||||||||
Total assets | $ | 1,332,376 | $ | 1,205,742 | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Trade accounts payable | $ | 107,003 | $ | 101,396 | ||||||||||||||||
Income taxes payable | 1,498 | 2,613 | ||||||||||||||||||
Accrued liabilities | 66,100 | 73,523 | ||||||||||||||||||
Current maturities of long-term debt and finance lease obligations | 15,015 | 15,032 | ||||||||||||||||||
Total current liabilities | 189,616 | 192,564 | ||||||||||||||||||
Long-term debt and finance lease obligations, net of current maturities | 356,149 | 254,522 | ||||||||||||||||||
Long-term tax liability | 2,444 | 4,416 | ||||||||||||||||||
Other long-term liabilities | 24,642 | 27,119 | ||||||||||||||||||
Deferred income taxes | 23,083 | 21,458 | ||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,909,064 and 11,874,178 outstanding at June 30, 2022 and December 31, 2021, respectively | 1,191 | 1,187 | ||||||||||||||||||
Additional paid-in-capital | 127,180 | 124,228 | ||||||||||||||||||
Treasury stock, at cost; 82,600 shares at June 30, 2022 and December 31, 2021, respectively | (4,566) | (4,566) | ||||||||||||||||||
Retained earnings | 676,474 | 633,804 | ||||||||||||||||||
Accumulated other comprehensive loss | (63,837) | (48,990) | ||||||||||||||||||
Total stockholders’ equity | 736,442 | 705,663 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,332,376 | $ | 1,205,742 | ||||||||||||||||
See accompanying notes.
3
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands, except per share amounts) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
Vegetation Management | $ | 255,003 | $ | 214,665 | $ | 476,009 | $ | 398,549 | |||||||||||||||
Industrial Equipment | 141,211 | 132,885 | 282,210 | 260,190 | |||||||||||||||||||
| Total net sales | 396,214 | 347,550 | 758,219 | 658,739 | |||||||||||||||||||
| Cost of sales | 296,497 | 259,410 | 571,861 | 494,173 | |||||||||||||||||||
| Gross profit | 99,717 | 88,140 | 186,358 | 164,566 | |||||||||||||||||||
| Selling, general and administrative expenses | 55,009 | 50,887 | 108,644 | 98,217 | |||||||||||||||||||
| Amortization expense | 3,792 | 3,663 | 7,679 | 7,321 | |||||||||||||||||||
Income from operations | 40,916 | 33,590 | 70,035 | 59,028 | |||||||||||||||||||
| Interest expense | (3,189) | (2,854) | (5,836) | (5,467) | |||||||||||||||||||
| Interest income | 57 | 293 | 129 | 581 | |||||||||||||||||||
| Other income (expense), net | (134) | 3,253 | (1,886) | 2,623 | |||||||||||||||||||
Income before income taxes | 37,650 | 34,282 | 62,442 | 56,765 | |||||||||||||||||||
| Provision for income taxes | 9,178 | 8,245 | 15,500 | 13,266 | |||||||||||||||||||
Net Income | $ | 28,472 | $ | 26,037 | $ | 46,942 | $ | 43,499 | |||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
Basic | $ | 2.39 | $ | 2.20 | $ | 3.95 | $ | 3.68 | |||||||||||||||
Diluted | $ | 2.39 | $ | 2.19 | $ | 3.94 | $ | 3.66 | |||||||||||||||
| Average common shares: | |||||||||||||||||||||||
Basic | 11,880 | 11,842 | 11,870 | 11,831 | |||||||||||||||||||
Diluted | 11,938 | 11,902 | 11,927 | 11,892 | |||||||||||||||||||
| Dividends declared | $ | 0.18 | $ | 0.14 | $ | 0.36 | $ | 0.28 | |||||||||||||||
See accompanying notes.
4
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income | $ | 28,472 | $ | 26,037 | $ | 46,942 | $ | 43,499 | |||||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
Foreign currency translation adjustments, net of tax expense of $(654) and zero, and $(904) and $(115), respectively | (19,822) | 4,566 | (18,155) | 556 | |||||||||||||||||||
Recognition of deferred pension and other post-retirement benefits, net of tax benefit and (expense) of $59 and $(67), and $314 and $(134), respectively | 205 | 252 | 411 | 503 | |||||||||||||||||||
Unrealized income on derivative instruments, net of tax expense of $(371) and $(23), and $(738) and $(601), respectively | 1,045 | 88 | 2,897 | 2,261 | |||||||||||||||||||
Other comprehensive (loss) income, net of tax | (18,572) | 4,906 | (14,847) | 3,320 | |||||||||||||||||||
| Comprehensive income | $ | 9,900 | $ | 30,943 | $ | 32,095 | $ | 46,819 | |||||||||||||||
See accompanying notes.
5
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| For six months ended June 30, 2022 | |||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stock- holders’ Equity | ||||||||||||||||||
(in thousands) | Shares | Amount | |||||||||||||||||||||
| Balance at December 31, 2021 | 11,791 | $ | 1,187 | $ | 124,228 | $ | (4,566) | $ | 633,804 | $ | (48,990) | $ | 705,663 | ||||||||||
Other comprehensive income | — | — | — | — | 18,470 | 3,725 | 22,195 | ||||||||||||||||
Stock-based compensation expense | — | — | 1,371 | — | — | — | 1,371 | ||||||||||||||||
Stock-based compensation transactions | 20 | 2 | 82 | — | — | — | 84 | ||||||||||||||||
Dividends paid ($0.18 per share) | — | — | — | — | (2,133) | — | (2,133) | ||||||||||||||||
| Balance at March 31, 2022 | 11,811 | $ | 1,189 | $ | 125,681 | $ | (4,566) | $ | 650,141 | $ | (45,265) | $ | 727,180 | ||||||||||
| Other comprehensive income | — | — | — | — | 28,472 | (18,572) | 9,900 | ||||||||||||||||
Stock-based compensation expense | — | — | 1,750 | — | — | — | 1,750 | ||||||||||||||||
Stock-based compensation transactions | 15 | 2 | (251) | — | — | — | (249) | ||||||||||||||||
Dividends paid ($0.18 per share) | — | — | — | — | (2,139) | — | (2,139) | ||||||||||||||||
| Balance at June 30, 2022 | 11,826 | $ | 1,191 | $ | 127,180 | $ | (4,566) | $ | 676,474 | $ | (63,837) | $ | 736,442 | ||||||||||
| For six months ended June 30, 2021 | |||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stock- holders’ Equity | ||||||||||||||||||
| (in thousands) | Shares | Amount | |||||||||||||||||||||
| Balance at December 31, 2020 | 11,727 | $ | 1,181 | $ | 118,528 | $ | (4,566) | $ | 560,186 | $ | (40,326) | $ | 635,003 | ||||||||||
Other comprehensive income | — | — | — | — | 17,462 | (1,586) | 15,876 | ||||||||||||||||
Stock-based compensation expense | — | — | 1,240 | — | — | — | 1,240 | ||||||||||||||||
Stock-based compensation transactions | 29 | 3 | 773 | — | — | — | 776 | ||||||||||||||||
Dividends paid ($0.14 per share) | — | — | — | — | (1,654) | — | (1,654) | ||||||||||||||||
| Balance at March 31, 2021 | 11,756 | $ | 1,184 | $ | 120,541 | $ | (4,566) | $ | 575,994 | $ | (41,912) | $ | 651,241 | ||||||||||
| Other comprehensive income | — | — | — | — | 26,037 | 4,906 | 30,943 | ||||||||||||||||
Stock-based compensation expense | — | — | 1,316 | — | — | — | 1,316 | ||||||||||||||||
Stock-based compensation transactions | 23 | 2 | (604) | — | — | — | (602) | ||||||||||||||||
Dividends paid ($0.14 per share) | — | — | — | — | (1,657) | — | (1,657) | ||||||||||||||||
| Balance at June 30, 2021 | 11,779 | $ | 1,186 | $ | 121,253 | $ | (4,566) | $ | 600,374 | $ | (37,006) | $ | 681,241 | ||||||||||
See accompanying notes.
6
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Operating Activities | |||||||||||
| Net income | $ | 46,942 | $ | 43,499 | |||||||
| Adjustment to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
Provision for doubtful accounts | 315 | 115 | |||||||||
Depreciation - Property, plant and equipment | 10,648 | 10,546 | |||||||||
Depreciation - Rental equipment | 3,765 | 4,418 | |||||||||
Amortization of intangibles | 7,679 | 7,321 | |||||||||
Amortization of debt issuance | 334 | 334 | |||||||||
Stock-based compensation expense | 3,121 | 2,556 | |||||||||
| Provision for deferred income tax (benefit) | 349 | 500 | |||||||||
Gain on sale of property, plant and equipment | (69) | (4,160) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (74,024) | (43,235) | |||||||||
Inventories | (37,185) | (34,621) | |||||||||
Rental equipment | (2,501) | (772) | |||||||||
Prepaid expenses and other assets | (2,992) | (13) | |||||||||
Trade accounts payable and accrued liabilities | 2,263 | 27,283 | |||||||||
Income taxes payable | (1,028) | (3,414) | |||||||||
| Long-term tax payable | (1,972) | 454 | |||||||||
Other assets and long-term liabilities, net | 966 | (1,415) | |||||||||
| Net cash (used in) provided by operating activities | (43,389) | 9,396 | |||||||||
| Investing Activities | |||||||||||
| Acquisitions, net of cash acquired | (2,000) | — | |||||||||
| Purchase of property, plant and equipment | (14,965) | (9,357) | |||||||||
| Proceeds from sale of property, plant and equipment | 181 | 9,312 | |||||||||
| Net cash used in investing activities | (16,784) | (45) | |||||||||
| Financing Activities | |||||||||||
| Borrowings on bank revolving credit facility | 162,000 | 103,000 | |||||||||
| Repayments on bank revolving credit facility | (53,000) | (66,000) | |||||||||
| Principal payments on long-term debt and finance leases | (7,521) | (7,537) | |||||||||
| Dividends paid | (4,272) | (3,311) | |||||||||
| Proceeds from exercise of stock options | 547 | 1,403 | |||||||||
| Common stock repurchased | (712) | (1,229) | |||||||||
| Net cash provided by financing activities | 97,042 | 26,326 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3,090) | (242) | |||||||||
| Net change in cash and cash equivalents | 33,779 | 35,435 | |||||||||
| Cash and cash equivalents at beginning of the year | 42,115 | 50,195 | |||||||||
| Cash and cash equivalents at end of the period | $ | 75,894 | $ | 85,630 | |||||||
| Cash paid during the period for: | |||||||||||
Interest | $ | 5,998 | $ | 5,207 | |||||||
Income taxes | 17,615 | 15,647 | |||||||||
See accompanying notes.
7
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
June 30, 2022
1. Basis of Financial Statement Presentation
General
The accompanying unaudited interim condensed consolidated financial statements of Alamo Group Inc. and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 (the "2021 10-K").
Effective July 1, 2021, the Company changed its method of accounting for its U.S. inventories from last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. The Company applied this change retrospectively for all prior periods presented.
Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. This Topic provides accounting relief for the transition away from LIBOR and certain other reference rates. The amendments for this update are effective through December 31, 2022. The Company is evaluating the impact the adoption of this standard will have on our financial statements.
2. Business Combinations
On October 26, 2021, the Company acquired 100% of the issued and outstanding equity interests of Timberwolf Limited (“Timberwolf”). Timberwolf manufactures a broad range of commercial wood chippers, primarily serving markets in the U.K. and the European Union. The primary reason for the Timberwolf acquisition was to enhance the Company's forestry and tree care platform for growth by increasing both the Company's product portfolio and capabilities in the European market. The acquisition price was approximately $25.0 million. The Company completed its review of the valuation of the purchase price allocation for Timberwolf during the second quarter of 2022. The Company has included the operating results of Timberwolf in its consolidated financial statements since the date of acquisition, these results are considered immaterial.
3. Accounts Receivable
Accounts receivable is shown net of sales discounts and the allowance for credit losses.
At June 30, 2022 the Company had $17.2 million in reserves for sales discounts compared to $12.6 million at December 31, 2021 related to products shipped to our customers under various promotional programs.
8
4. Inventories
Inventories are stated at the lower of cost or net realizable value. Net inventories consist of the following:
(in thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||||||||
| Finished goods | $ | 310,497 | $ | 277,760 | ||||||||||||||||
| Work in process | 29,072 | 24,895 | ||||||||||||||||||
| Raw materials | 13,346 | 18,262 | ||||||||||||||||||
| Inventories, net | $ | 352,915 | $ | 320,917 | ||||||||||||||||
Inventory obsolescence reserves were $11.7 million at June 30, 2022 and $12.9 million at December 31, 2021.
5. Rental Equipment
Rental equipment is shown net of accumulated depreciation of $20.5 million and $20.1 million at June 30, 2022 and December 31, 2021, respectively. The Company recognized depreciation expense of $1.9 million and $2.2 million for the three months ended June 30, 2022 and 2021, respectively and $3.8 million and $4.4 million for the six months ended June 30, 2022 and 2021, respectively.
6. Fair Value Measurements
The carrying values of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, approximate their fair value because of the short-term nature of these items. The carrying value of our debt approximates the fair value as of June 30, 2022 and December 31, 2021, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.
7. Goodwill and Intangible Assets
The following is the summary of changes to the Company's Goodwill for the six months ended June 30, 2022:
| (in thousands) | Vegetation Management | Industrial Equipment | Consolidated | |||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 132,963 | $ | 69,443 | $ | 202,406 | ||||||||||||||||||||
| Translation adjustment | (1,876) | (943) | (2,819) | |||||||||||||||||||||||
| Goodwill adjustment | (3,519) | — | (3,519) | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | 127,568 | $ | 68,500 | $ | 196,068 | ||||||||||||||||||||
9
The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
(in thousands) | Estimated Useful Lives | June 30, 2022 | December 31, 2021 | |||||||||||||||||
Definite: | ||||||||||||||||||||
| Trade names and trademarks | 15-25 years | $ | 68,719 | $ | 68,321 | |||||||||||||||
| Customer and dealer relationships | 8-15 years | 129,539 | 126,104 | |||||||||||||||||
| Patents and drawings | 3-12 years | 28,223 | 29,338 | |||||||||||||||||
| Favorable leasehold interests | 7 years | 4,200 | 4,200 | |||||||||||||||||
| Total at cost | 230,681 | 227,963 | ||||||||||||||||||
| Less accumulated amortization | (57,400) | (49,997) | ||||||||||||||||||
| Total net | 173,281 | 177,966 | ||||||||||||||||||
| Indefinite: | ||||||||||||||||||||
| Trade names and trademarks | 5,500 | 5,500 | ||||||||||||||||||
| Total Intangible Assets | $ | 178,781 | $ | 183,466 | ||||||||||||||||
The Company recognized amortization expense of $3.8 million and $3.7 million for the three months ended June 30, 2022 and 2021, respectively, and $7.7 million and $7.3 million for the six months ended June 30, 2022 and 2021, respectively.
8. Leases
The Company leases office space and equipment under various operating and finance leases, which generally are expected to be renewed or replaced by other leases. The finance leases currently held are considered immaterial. The components of lease cost were as follows:
| Components of Lease Cost | ||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 6 | $ | 17 | $ | 19 | $ | 34 | ||||||||||||||||||
| Interest on lease liabilities | — | 1 | 1 | 2 | ||||||||||||||||||||||
| Operating lease cost | 1,434 | 1,288 | 2,931 | 2,521 | ||||||||||||||||||||||
| Short-term lease cost | 334 | 243 | 633 | 457 | ||||||||||||||||||||||
| Variable lease cost | 103 | 97 | 212 | 213 | ||||||||||||||||||||||
| Total lease cost | $ | 1,877 | $ | 1,646 | $ | 3,796 | $ | 3,227 | ||||||||||||||||||
Rent expense for the three and six months ended June 30, 2022 and 2021 was immaterial.
10
Maturities of operating lease liabilities were as follows:
| Future Minimum Lease Payments | |||||||||||||||||||||||
| (in thousands) | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||
| 2022 | $ | 2,524 | * | $ | 4,949 | ||||||||||||||||||
| 2023 | 4,175 | 3,793 | |||||||||||||||||||||
| 2024 | 3,117 | 2,683 | |||||||||||||||||||||
| 2025 | 2,451 | 2,036 | |||||||||||||||||||||
| 2026 | 2,072 | 1,652 | |||||||||||||||||||||
| Thereafter | 3,127 | 3,090 | |||||||||||||||||||||
| Total minimum lease payments | $ | 17,466 | $ | 18,203 | |||||||||||||||||||
| Less imputed interest | (1,251) | (1,311) | |||||||||||||||||||||
| Total operating lease liabilities | $ | 16,215 | $ | 16,892 | |||||||||||||||||||
*Period ended June 30, 2022 represents the remaining six months of 2022. | |||||||||||||||||||||||
Future Lease Commencements
As of June 30, 2022, there are additional operating leases, primarily for buildings, equipment, autos and forklifts, that have not yet commenced in the amount of $1.1 million. These operating leases will commence in fiscal year 2022 with lease terms of 2 to 5 years.
Supplemental balance sheet information related to leases was as follows:
| Operating Leases | |||||||||||||||||||||||
| (in thousands) | June 30, 2022 | December 31, 2021 | |||||||||||||||||||||
| $ | 16,075 | $ | 16,744 | ||||||||||||||||||||
| 4,287 | 4,655 | ||||||||||||||||||||||
| 11,928 | 12,237 | ||||||||||||||||||||||
| Total operating lease liabilities | $ | 16,215 | $ | 16,892 | |||||||||||||||||||
| Weighted Average Remaining Lease Term | 4.97 years | 5.14 years | |||||||||||||||||||||
| Weighted Average Discount Rate | 2.97 | % | 2.83 | % | |||||||||||||||||||
Supplemental Cash Flow information related to leases was as follows:
| Six Months Ended June 30, | ||||||||||||||
| (in thousands) | 2022 | 2021 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | 2,651 | $ | 2,287 | ||||||||||
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9. Debt
The components of long-term debt are as follows:
| (in thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||||||||
| Current Maturities: | ||||||||||||||||||||
| Finance lease obligations | $ | 15 | $ | 32 | ||||||||||||||||
| Term debt | 15,000 | 15,000 | ||||||||||||||||||
| 15,015 | 15,032 | |||||||||||||||||||
| Long-term debt: | ||||||||||||||||||||
Finance lease obligations | 18 | 24 | ||||||||||||||||||
| Term debt, net | 243,131 | 250,498 | ||||||||||||||||||
| Bank revolving credit facility | 113,000 | 4,000 | ||||||||||||||||||
| Total Long-term debt | 356,149 | 254,522 | ||||||||||||||||||
| Total debt | $ | 371,164 | $ | 269,554 | ||||||||||||||||
As of June 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.
10. Common Stock and Dividends
Dividends declared and paid on a per share basis were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Dividends declared | $ | 0.18 | $ | 0.14 | $ | 0.36 | $ | 0.28 | |||||||||||||||
| Dividends paid | $ | 0.18 | $ | 0.14 | $ | 0.36 | $ | 0.28 | |||||||||||||||
On July 1, 2022, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.18 per share, which was paid on August 1, 2022, to shareholders of record at the close of business on July 18, 2022.
11. Earnings Per Share
The following table sets forth the reconciliation from basic to diluted average common shares and the calculations of net income per common share. Net income for basic and diluted calculations do not differ.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
(In thousands, except per share) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Income | $ | 28,472 | $ | 26,037 | $ | 46,942 | $ | 43,499 | |||||||||||||||
| Average Common Shares: | |||||||||||||||||||||||
Basic (weighted-average outstanding shares) | 11,880 | 11,842 | 11,870 | 11,831 | |||||||||||||||||||
Dilutive potential common shares from stock options | 58 | 60 | 57 | 61 | |||||||||||||||||||
Diluted (weighted-average outstanding shares) | 11,938 | 11,902 | 11,927 | 11,892 | |||||||||||||||||||
| Basic earnings per share | $ | 2.39 | $ | 2.20 | $ | 3.95 | $ | 3.68 | |||||||||||||||
| Diluted earnings per share | $ | 2.39 | $ | 2.19 | $ | 3.94 | $ | 3.66 | |||||||||||||||
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12. Revenue and Segment Information
Revenues from Contracts with Customers
Disaggregation of revenue is presented in the tables below by product type and by geographical location. Management has determined that this level of disaggregation would be beneficial to users of the financial statements.
| Revenue by Product Type | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
Wholegoods | $ | 313,884 | $ | 270,665 | $ | 594,827 | $ | 509,963 | |||||||||||||||
Parts | 70,825 | 67,067 | 138,797 | 127,592 | |||||||||||||||||||
Other | 11,505 | 9,818 | 24,595 | 21,184 | |||||||||||||||||||
| Consolidated | $ | 396,214 | $ | 347,550 | $ | 758,219 | $ | 658,739 | |||||||||||||||
Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.
| Revenue by Geographical Location | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
United States | $ | 283,102 | $ | 242,361 | $ | 538,289 | $ | 461,790 | |||||||||||||||
France | 23,671 | 23,064 | 46,717 | 48,016 | |||||||||||||||||||
Canada | 23,276 | 25,675 | 43,729 | 44,884 | |||||||||||||||||||
United Kingdom | 17,395 | 15,817 | 35,069 | 28,316 | |||||||||||||||||||
| Netherlands | 3,862 | 8,680 | 7,342 | 16,165 | |||||||||||||||||||
Brazil | 14,109 | 8,303 | 27,203 | 14,184 | |||||||||||||||||||
Australia | 5,785 | 4,796 | 12,941 | 9,589 | |||||||||||||||||||
| Germany | 1,427 | 1,893 | 1,758 | 3,832 | |||||||||||||||||||
Other | 23,587 | 16,961 | 45,171 | 31,963 | |||||||||||||||||||
| Consolidated | $ | 396,214 | $ | 347,550 | $ | 758,219 | $ | 658,739 | |||||||||||||||
Net sales are attributed to countries based on the location of the customer.
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Segment Information
The following includes a summary of the unaudited financial information by reporting segment at June 30, 2022:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
Vegetation Management | $ | 255,003 | $ | 214,665 | $ | 476,009 | $ | 398,549 | |||||||||||||||
Industrial Equipment | 141,211 | 132,885 | 282,210 | 260,190 | |||||||||||||||||||
| Consolidated | $ | 396,214 | $ | 347,550 | $ | 758,219 | $ | 658,739 | |||||||||||||||
| Income from Operations | |||||||||||||||||||||||
Vegetation Management | $ | 32,796 | $ | 22,664 | $ | 51,130 | $ | 39,414 | |||||||||||||||
Industrial Equipment | 8,120 | 10,926 | 18,905 | 19,614 | |||||||||||||||||||
| Consolidated | $ | 40,916 | $ | 33,590 | $ | 70,035 | $ | 59,028 | |||||||||||||||
(in thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Goodwill | |||||||||||
Vegetation Management | $ | 127,568 | $ | 132,963 | |||||||
Industrial Equipment | 68,500 | 69,443 | |||||||||
| Consolidated | $ | 196,068 | $ | 202,406 | |||||||
| Total Identifiable Assets | |||||||||||
Vegetation Management | $ | 889,067 | $ | 789,838 | |||||||
Industrial Equipment | 443,309 | 415,904 | |||||||||
| Consolidated | $ | 1,332,376 | $ | 1,205,742 | |||||||
13. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows:
| Three Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gaines (Losses) on Cash Flow Hedges | Total | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gaines (Losses) on Cash Flow Hedges | Total | |||||||||||||||||||||
| Balance as of beginning of period | $ | (40,730) | $ | (4,811) | $ | 276 | $ | (45,265) | $ | (30,607) | $ | (6,604) | $ | (4,701) | $ | (41,912) | |||||||||||||
| Other comprehensive income (loss) before reclassifications | (19,822) | — | 1,380 | (18,442) | 4,566 | — | 757 | 5,323 | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 205 | (335) | (130) | — | 252 | (669) | (417) | |||||||||||||||||||||
| Other comprehensive income (loss) | (19,822) | 205 | 1,045 | (18,572) | 4,566 | 252 | 88 | 4,906 | |||||||||||||||||||||
| Balance as of end of period | $ | (60,552) | $ | (4,606) | $ | 1,321 | $ | (63,837) | $ | (26,041) | $ | (6,352) | $ | (4,613) | $ | (37,006) | |||||||||||||
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| Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||
| (in thousands) | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gaines (Losses) on Cash Flow Hedges | Total | Foreign Currency Translation Adjustment | Defined Benefit Plans Items | Gaines (Losses) on Cash Flow Hedges | Total | |||||||||||||||||||||
| Balance as of beginning of period | $ | (42,397) | $ | (5,017) | $ | (1,576) | $ | (48,990) | $ | (26,597) | $ | (6,855) | $ | (6,874) | $ | (40,326) | |||||||||||||
| Other comprehensive income (loss) before reclassifications | (18,155) | — | 3,876 | (14,279) | 556 | — | 3,580 | 4,136 | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 411 | (979) | (568) | — | 503 | (1,319) | (816) | |||||||||||||||||||||
| Other comprehensive income (loss) | (18,155) | 411 | 2,897 | (14,847) | 556 | 503 | 2,261 | 3,320 | |||||||||||||||||||||
| Balance as of end of period | $ | (60,552) | $ | (4,606) | $ | 1,321 | $ | (63,837) | $ | (26,041) | $ | (6,352) | $ | (4,613) | $ | (37,006) | |||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following tables set forth, for the periods indicated, certain financial data:
As a Percent of Net Sales | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 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 | % | |||||||||||||||
Cost Trends and Profit Margin, as Percentages of Net Sales | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| 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 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.
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's Vegetation 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.
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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 in U.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 in Ukraine, 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 ended December 31, 2021 (the "2021 Form 10-K").
Results of Operations
Three Months Ended June 30, 2022 vs. Three Months Ended June 30, 2021
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 both North America and Europe. 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 $3.2 million for the second quarter of 2022 compared to $2.9 million during the same period in 2021.
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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 June 30, 2022 vs. Six Months Ended June 30, 2021
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 both North America and Europe. 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 $5.8 million for the first six months of 2022 compared to $5.5 million during the same period in 2021, an increase of $0.3 million.
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 in the 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.
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The Company's net income after tax was $46.9 million or $3.94 per share on a diluted basis for the first six months of 2022 compared to $43.5 million or $3.66 per share on a diluted basis for the first six months of 2021. The increase of $3.4 million 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 accounts receivable, inventory and accounts payable levels, particularly in its Vegetation 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 the Vegetation Management Division, help balance the Company’s production during the first and fourth quarters.
As of June 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 at December 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 ended June 30, 2022 and June 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 of June 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 the U.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.
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 $650.0 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 is October 24, 2024. As of June 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. On June 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 of June 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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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, 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 strong U.S. dollar; increased competition; negative economic impacts resulting from geopolitical events such as the war in Ukraine 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 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 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
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to various market risks. Market risks are the potential losses arising from adverse changes in market prices and rates. The Company does not enter into derivative or other financial instruments for trading or speculative purposes.
Foreign Currency Risk
International Sales
A portion of the Company’s operations consists of manufacturing and sales activities in international jurisdictions. The Company primarily manufactures its products in the U.S., U.K., France, Canada, Brazil, Australia and the Netherlands. The Company sells its products primarily in the functional currency within the markets where the products are produced, but certain sales from the Company's U.K. and Canadian operations are denominated in other foreign currencies. As a result, the Company’s financials, specifically the value of its foreign assets, could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the other markets in which the subsidiaries of the Company distribute their products. Foreign exchange rates and economic conditions in these foreign markets may be further impacted by the effects of the COVID-19 pandemic.
Exposure to Exchange Rates
The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the balance sheet date. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated other comprehensive income within the statement of stockholders’ equity. The total foreign currency translation adjustment for the current quarter decreased stockholders’ equity by $19.8 million.
The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in Europe and Canada, as a result of the sales of its products in international markets. Forward currency contracts are used to hedge against the earnings effects of such fluctuations. The result of a uniform 10% strengthening or 10% decrease in the value of the dollar relative to the currencies in which the
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Company’s sales are denominated would result in a change in gross profit of $5.5 million for the six month period ended June 30, 2022. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which include a changed dollar value of the resulting sales, changes in exchange rates may also affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. The Company’s sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.
Interest Rate Risk
The Company’s long-term debt bears interest at variable rates. Accordingly, the Company’s net income is affected by changes in interest rates. Assuming the current level of borrowings at variable rates and a two percentage point change for the second quarter 2022 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $1.9 million. In the event of an adverse change in interest rates, management could take actions to mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.
In January 2020, the Company entered into an interest rate swap agreement with three of its total lenders that hedge future cash flows related to its outstanding debt obligations. As of June 30, 2022, the Company had $371.8 million outstanding under the Credit Agreement of which $200.0 million was hedged in a three year interest rate swap contract with a fixed LIBOR base rate of 1.43%.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of Alamo’s management, including our President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer) and Vice President, Controller and Treasurer, (Principal Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon the evaluation, the President and Chief Executive Officer, Executive Vice President and Chief Financial Officer (Principal Financial Officer) and Vice President, Controller and Treasurer, (Principal Accounting Officer) concluded that the Company’s design and operation of these disclosure controls and procedures were effective at the end of the period covered by this report.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 (the "2021 10-K").
Item 1A. Risk Factors
There have not been any material changes from the risk factors previously disclosed in the 2021 Form 10-K for the year ended December 31, 2021.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides a summary of the Company's repurchase activity for its common stock during the three months ended June 30, 2022:
| Issuer Purchases of Equity Securities | ||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (a) | ||||||||||
| April 1-30, 2022 | — | — | — | $25,861,222 | ||||||||||
| May 1-31, 2022 | — | — | — | $25,861,222 | ||||||||||
| June 1-30, 2022 | — | — | — | $25,861,222 | ||||||||||
| (a) On December 13, 2018, the Board authorized a stock repurchase program of up to $30.0 million of the Company's common stock. The program has a term of five (5) years, terminating on December 12, 2023. | ||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
(a) Reports on Form 8-K
None.
(b) Other Information
None.
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Item 6. Exhibits
(a) Exhibits
| Exhibits | Exhibit Title | Incorporated by Reference From the Following Documents | ||||||||||||
| 31.1 | — | Filed Herewith | ||||||||||||
| 31.2 | — | Filed Herewith | ||||||||||||
| 32.1 | — | Filed Herewith | ||||||||||||
| 32.2 | — | Filed Herewith | ||||||||||||
| 101.INS | — | XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document | Filed Herewith | |||||||||||
| 101.SCH | — | XBRL Taxonomy Extension Schema Document | Filed Herewith | |||||||||||
| 101.CAL | — | XBRL Taxonomy Extension Calculation Linkbase Document | Filed Herewith | |||||||||||
| 101.DEF | — | XBRL Taxonomy Extension Definition Linkbase Document | Filed Herewith | |||||||||||
| 101.LAB | — | XBRL Taxonomy Extension Label Linkbase Document | Filed Herewith | |||||||||||
| 101.PRE | — | XBRL Taxonomy Extension Presentation Linkbase Document | Filed Herewith | |||||||||||
| 104 | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed Herewith | |||||||||||
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Alamo Group Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| August 3, 2022 | Alamo Group Inc. | ||||
(Registrant) | |||||
| /s/ Jeffery A. Leonard | |||||
| Jeffery A. Leonard | |||||
President & Chief Executive Officer | |||||
/s/ Richard J. Wehrle | |||||
Richard J. Wehrle | |||||
Executive Vice President & Chief Financial Officer | |||||
(Principal Financial Officer) | |||||
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