The following tables set forth, for the periods indicated, certain financial data: Three Months Ended Six Months Ended June 30, June 30, As a Percent of Net Sales 2020 2019 2020 2019 Industrial 67.8 % 68.1 % 70.7 % 67.2 % Agricultural 32.2 % 31.9 % 29.3 % 32.8 % Total sales, net 100.0 % 100.0 % 100.0 % 100.0 % Three Months Ended Six Months Ended June 30, June 30, Cost Trends and Profit Margin, as Percentages of Net Sales 2020 2019 2020 2019 Gross profit 25.2 % 25.6 % 25.2 % 24.9 % Income from operations 8.4 % 10.3 % 8.0 % 9.5 % Income before income taxes 6.6 % 9.6 % 6.6 % 8.8 % Net income 4.8 % 7.2 % 4.9 % 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. InMarch 2020 , theWorld Health Organization categorized the current coronavirus disease ("COVID-19") as a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. The outbreak, which is continuing to spread worldwide, has adversely affected our operations, customers, suppliers, and the economies in which we operate. Thus far, we have continued to focus on the health and safety of our employees and have taken steps to ensure their continued well-being while we work on meeting the demands of our customers. Some of our facilities were forced to closed for varying periods of time due to government orders and other pandemic related reasons, but many of our products and/or operations fall within the "essential" designation which has allowed us to continue operations, albeit at a reduced capacity. Currently, all of our manufacturing plants are open and functioning at various levels of operation based on demand. While shelter-in-place or stay-at-home orders have been relaxed or eliminated in many locations, recent case surges could lead to new restrictions or lockdowns, which may limit our operational capabilities. This is dependent on future developments relating to the pandemic which are highly uncertain and unpredictable. As a result of the pandemic, both of our divisions have also experienced some softness in customer demand and we expect this trend to continue in the near term or even longer, should the pandemic continue unabated. For the first six months of 2020, the Company's net sales increased by 6.6% but net income decreased by 20.6% when compared to the same period in 2019. The increase in net sales was due to the acquisitions ofMorbark andDutch Power . The decrease in net income was attributable to the COVID-19 pandemic which began to materially affect our operations in March of this year and continued to negatively impact the Company's overall financial performance during the first six months of 2020. The Company's Industrial Division experienced a 12.1% increase in sales for the first six months of 2020 compared to the first six months of 2019 all due to the acquisitions ofMorbark andDutch Power . Without factoring in contributions fromMorbark andDutch Power , sales across all legacy Industrial product groups (with the exception of vegetation control, which was slightly up) were down during the first six months of 2020 compared to the same period in 2019, primarily as a result of adverse impacts from the COVID-19 pandemic which included 17 --------------------------------------------------------------------------------
temporary plant closures in the
The Company's Agricultural Division sales were down in the first six months of 2020 by 4.7% compared to the first six months of 2019. Agricultural sales were negatively affected by the COVID-19 pandemic which began to hurt Agricultural sales as well as operations in late March of this year. During the second quarter of 2020, North American sales and profitability showed some improvement and held up better than the Division's operations in theUK andFrance which experienced temporary plant closures during the months of March and April. Consolidated income from operations was$46.5 million in the first six months of 2020 which included$2.7 million of non-cash inventory step-up expense related to theMorbark acquisition. This was a 10.5% decline when compared to the first six months of 2019. The Company's backlog decreased 6.9% to$216.6 million at the end of the second quarter of 2020 versus the backlog of$228.8 million at the end of the second quarter of 2019. The decrease in the Company's backlog was primarily attributable to negative effects from the COVID-19 pandemic. We believe the COVID-19 pandemic will continue to adversely impact our business for the remainder of 2020. At this time, however, it is not clear how significant these impacts will be given the current level of uncertainty. The impacts will depend on numerous evolving factors which cannot be predicted, including the duration and scope of the pandemic, the effectiveness of containment and treatment efforts, and the immediate and longer term economic consequences felt by our dealers and government customers, which could result in budgetary tightening and weaker demand for our products. In light of the current situation and outlook, we have taken various steps to contain costs, improve cash flow and reduce overall debt, which include, among other things, rolling back pay increases for salaried employees in theU.S. and most of our international operations, restricting travel, reducing inventory levels to match current demand, limiting capital expenditures, temporarily suspending the Company's share repurchase program and delaying other discretionary spending. We will continue to focus on improving our financial stability while ensuring the continued health and safety of our employees. We feel confident there will be a continuing need for products such as ours that are critical for agricultural operations and infrastructure maintenance, and believe that our current focus on employee well-being and financial stability will allow us to be well positioned for long term growth after the pandemic situation eases. However, since we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, we cannot predict the ultimate impact it will have on our business, results of operations, and financial condition. While the direct and indirect consequences of the COVID-19 pandemic will certainly pose the greatest risk for the Company during 2020, the Company may also be negatively affected by several other factors such as an increase in tariff rates, ongoing trade disputes, 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, 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "2019 Form 10-K").
Results of Operations
Three Months Ended
Net sales for the second quarter of 2020 were$268.6 million , a decrease of$16.6 million or 5.8% compared to$285.2 million for the second quarter of 2019. Net sales during the second quarter of 2020 were negatively affected by the ongoing COVID-19 pandemic which began to impact the business in the latter part of the first quarter. The acquisition ofMorbark contributed$46.5 million in net sales for the second quarter of 2020.Net Industrial sales decreased by$12.0 million or 6.2% to$182.3 million for the second quarter of 2020 compared to$194.3 million during the same period in 2019. The impact from COVID-19 issues materially affected the Division beginning at the end of the first quarter of 2020. This included the temporary suspension of manufacturing in two of its North American locations and one inFrance which have since reopened. The acquisition ofMorbark added$46.5 million of net sales during the second quarter of 2020.
Net Agricultural sales were
18 --------------------------------------------------------------------------------
COVID-19 pandemic. North American operations experienced modest growth over the prior years second quarter and benefited from the contributions of Dixie Chopper but the division was hurt by both theU.K. and French Agricultural businesses as they experienced temporary plant closures during the quarter. Gross profit for the second quarter of 2020 was$67.8 million (25.2% of net sales) compared to$73.1 million (25.6% of net sales) during the same period in 2019, a decrease of$5.3 million . The decrease in gross profit during the second quarter of 2020 was primarily from lower net sales due to the COVID-19 pandemic. Negatively affecting the gross margin and gross margin percentage during the second quarter of 2020 was$0.7 million of inventory step-up charge related to theMorbark acquisition. Selling, general and administrative expenses ("SG&A") were$41.6 million (15.5% of net sales) during the second quarter of 2020 compared to$42.7 million (15.0% of net sales) during the same period of 2019, a decrease of$1.1 million . The second quarter of 2020 includes$6.2 million of additional expense related to the acquisition ofMorbark . Amortization expense in the second quarter of 2020 was$3.6 million compared to$1.1 million in the same period in 2019, an increase of$2.5 million . The increased amortization expense was primarily attributable to theMorbark acquisition. Interest expense was$3.9 million for the second quarter of 2020 compared to$1.9 million during the same period in 2019, an increase of$2.0 million . The increase during the second quarter of 2020 resulted from increased borrowings due to theMorbark acquisition which was completed in October of 2019.
Other income (expense), net was
The
expense in 2020 was primarily the result of changes in currency exchange rates offset slightly by the gain from the sale of the RPM building.
Provision for income taxes was$4.7 million (26.8% of income before income tax) in the second quarter of 2020 compared to$6.8 million (24.7% of income before income tax) during the same period in 2019. The Company's net income after tax was$13.0 million or$1.10 per share on a diluted basis for the second quarter of 2020 compared to$20.7 million or$1.75 per share on a diluted basis for the second quarter of 2019. The decrease of$7.7 million resulted from the factors described above.
Six Months Ended
Net sales for the first six months of 2020 were$583.1 million , an increase of$36.0 million or 6.6% compared to$547.1 million for the first six months of 2019. The increase was attributable to the acquisitions ofMorbark andDutch Power which contributed net sales of$106.9 million . Negatively affecting sales during the first six months of 2020, was the outbreak of the COVID-19 virus which began to affect the Company's operations late in the first quarter.Net Industrial sales increased during the first six months by$44.4 million or 12.1% to$412.2 million for 2020 compared to$367.8 million during the same period in 2019. The increase came from the acquisitions ofMorbark andDutch Power mentioned above. Impacts from the COVID-19 pandemic began to materially affect the Division late in the first quarter of 2020. This included temporary plant closures in theU.S. ,France andCanada along and other operational disruptions throughout the countries we sell in mainly from health concerns and governmental directives, governmental spending and customer delivery restrictions. Net Agricultural sales were$170.9 million during the first six months of 2020 compared to$179.3 million for the same period in 2019, a decrease of$8.4 million or 4.7%. The decrease in sales for the first six months of 2020 compared to the first six months of 2019 was a result of the COVID-19 pandemic. Before the impact of the virus affected the Division, sales during the first two and a half months of 2020 had begun to show signs of improvement from the soft agricultural market conditions that have negatively impacted this Division for the last several years. This Division's North American operations did reasonably well and benefited from the contributions of Dixie Chopper but the ongoing pandemic affected both sales and operations in late first quarter of 2020 and specifically hurt both theU.K. and French Agricultural business as they experienced temporary plant closures. 19 --------------------------------------------------------------------------------
Gross profit for the first six months of 2020 was$146.8 million (25.2% of net sales) compared to$136.4 million (24.9% of net sales) during the same period in 2019, an increase of$10.4 million . The increase in gross profit for the first six months of 2020 came from the acquisitions ofMorbark andDutch Power . Negatively affecting the gross margin and gross margin percentage during the first six months of 2020 were$2.7 million of inventory step-up charge related to theMorbark acquisition. SG&A expenses were$92.8 million (15.9% of net sales) during the first six months of 2020 compared to$82.5 million (15.1% of net sales) during the same period of 2019, an increase of$10.3 million . The acquisitions ofMorbark andDutch Power accounted for$15.4 million of net additional expense during the first six months of 2020. Amortization expense in the first six months of 2020 was$7.4 million compared to$2.0 million in the same period in 2019, an increase of$5.4 million . The increased amortization expense was primarily from the acquisitions ofDutch Power andMorbark . Interest expense was$9.5 million for the first six months of 2020 compared to$3.4 million during the same period in 2019, an increase of$6.1 million . The increase during the first six months of 2020 came from increased borrowings due to theMorbark acquisition in October of 2019. Other income (expense), net was$1.1 million of income during the first six months of 2020 compared to$0.7 million of expense in the first six months of 2019. The income in 2020 and expense in 2019 were primarily the result of changes in exchange rates. To a lessor extent, gains from the sale of the Super Products and RPM buildings are included in the 2020 income.
Provision for income taxes was
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 inventory and accounts payable levels typically build in the first half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts receivable historically build in the first and fourth quarters of each year as a result of fall preseason sales programs and out of season sales, particularly in our Agricultural Division. Preseason sales, primarily in the Agricultural Division, help level the Company's production during the off season. As ofJune 30, 2020 , the Company had working capital of$438.4 million which represents an increase of$30.4 million from working capital of$408.0 million atDecember 31, 2019 . The increase in working capital was primarily from increase in cash and lower trade accounts payable due to reductions in inventory levels related to the COVID-19 virus. Capital expenditures were$12.5 million for the first six months of 2020, compared to$12.4 million during the first six months of 2019. The Company initially expected to continue capital expenditures at a rate consistent with the rate of spending for the entire year of 2019. In response to the COVID-19 pandemic, we began to limit new capital expenditures in the first quarter of 2020, however any previously approved projects and related spending have carried over. 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$9.4 million during the first six months of 2020 compared to$64.3 million during the first six months of 2019. The 2019 increase in the use of funds was to acquireDutch Power which was approximately$52.5 million . Net cash used in financing activities was$8.5 million and net cash provided by was$76.7 million during the six month periods endedJune 30, 2020 andJune 30, 2019 , respectively. Net cash used in financing activities for the first six months of 2020 relates to the increase repayments on the revolving credit facility and the principal payments 20 --------------------------------------------------------------------------------
on long-term debt and financing leases. The majority of the net cash provided by financing activities in 2019 was due to borrowings to finance the acquisition ofDutch Power . The Company had$78.7 million in cash and cash equivalents held by its foreign subsidiaries as ofJune 30, 2020 . 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, but will need to monitor exchange rates to determine the appropriate timing of such repatriation given the current relative strength 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 has borrowed$300.0 million pursuant to a Term Facility repayable with interest quarterly at a percentage of the initial principal amount of the Term Facility of 5.0% per year with the remaining principal due in 5 years. Up to$350.0 million is available under the Credit Agreement pursuant to a Revolver Facility which terminates in 5 years. The Agreement requires the Company to maintain two financial covenants, a maximum 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, 2020 ,$439.8 million was outstanding under the Credit Agreement,$288.8 million on the Term Facility and$151.0 million on the Revolver Facility. OnJune 30, 2020 ,$4.0 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$122.3 million in available borrowings. The Company is in compliance with the covenants under the Agreement as ofJune 30, 2020 . Management believes the Agreement and the Company's ability to internally generate funds from operations should be sufficient to meet the Company's cash requirements for the foreseeable future. However, future challenges affecting the banking industry and credit markets in general could potentially cause changes to credit availability, which creates a level of uncertainty.
Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, 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 2019 Form 10-K, the policies relating to the business combinations, sales discounts, and goodwill and other intangible assets involved a higher degree of judgment and complexity. There have been no material changes to the nature of estimates, assumptions and levels of subjectivity and judgment related to critical accounting estimates disclosed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2019 Form 10-K. 21 --------------------------------------------------------------------------------
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 impact of the current COVID-19 outbreak; ongoing weakness in the agricultural sector; changes in tariff regulations and the imposition of new tariffs; a strongU.S. dollar; increased competition; trade wars or other negative economic impacts resulting from geopolitical events; decreases in the prices of agricultural commodities, which could affect our customers' income levels; increase in input costs; our inability to increase profit margins through continuing production efficiencies and cost reductions; repercussions from the pending exit by 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 critical raw materials, particularly steel and steel products; 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 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 continued to experience the impacts of COVID-19 on its markets and operations including operational disruption and softening demand. The full extent to which COVID-19 will adversely impact the Company's business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While this situation will negatively impact the Company's results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the full financial impact cannot be reasonably estimated at this time. 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 22 --------------------------------------------------------------------------------
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.
© Edgar Online, source