UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018 2019
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
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Commission file number 0-21220 | | |
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ALAMO GROUP INC. | | |
(Exact name of registrant as specified in its charter) | | |
| | |
DELAWARE
Delaware | | 74-1621248 |
(State or other jurisdiction of incorporation or organization) | | 74-1621248
(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)
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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 |
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT
Indicate by check mark whether the registrant (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTIONhas filed all reports required to be filed by Section 13 ORor 15(d) OF SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934 DURING THE PRECEDINGduring the preceding 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS)months (or for such shorter period that the registrant was required to file such reports), ANDand (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENT FOR THE PASThas been subject to such filing requirements for the past 90 DAYS.
YESdays. Yes ☒ NONo ☐
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED PURSUANT TO RULEIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 OF REGULATIONof Regulation S-T (§232.405 OF THIS CHAPTER) DURING THE PRECEDINGof this chapter) during the preceding 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT SUCH FILES)months (or for such shorter period that the registrant was required to submit such files). YESYes ☒ NONo ☐
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,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,“accelerated filer,” “SMALLER REPORTING COMPANY,“smaller reporting company,” AND “EMERGING GROWTH COMPANY” IN RULEand “emerging growth company” in Rule 12b-2 OF THE EXCHANGE ACT.of the Exchange Act.
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LARGE ACCELERATED FILER ☒
| ACCELERATED FILER ¨
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NON-ACCELERATED FILER ¨ Large accelerated filer | SMALLER REPORTING COMPANY ☒¨
| Accelerated filer | ☐ |
Non-accelerated filer | EMERGING GROWTH COMPANY ¨ ☐ | 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 13a OF THE EXCHANGE ACT.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 RULEIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 OF THE EXCHANGE ACT)of the Exchange Act). YESYes ☐ NONo ☒
AT OCTOBER 26, 2018, 11,735,274 SHARES OF COMMON STOCK,At October 25, 2019, 11,826,104 shares of common stock, $.10 PAR VALUE, OF THE REGISTRANT WERE OUTSTANDING.par value, of the registrant were outstanding.
Alamo Group Inc. and Subsidiaries
INDEX
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PART I. | FINANCIAL INFORMATION | | PAGE |
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Item 1. | Interim Condensed Consolidated Financial Statements (Unaudited) | | |
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| | September 30, 20182019 and December 31, 2017 2018 | |
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| | Three and Nine Months Ended September 30, 20182019 and September 30, 2017 2018 | |
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| | Three and Nine Months Ended September 30, 20182019 and September 30, 2017 2018 | |
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| | Three and Nine Months Ended September 30, 2019 and September 30, 2018 | |
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| | Nine Months Ended September 30, 20182019 and September 30, 2017 2018 | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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PART II. | | | |
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Item 1. | Legal Proceedings | | |
Item 1A. | Risk Factors | | |
Item 2. | NoneUnregistered Sales of Equity Securities and Use of Proceeds | | |
Item 3. | NoneDefaults Upon Senior Securities | | |
Item 4. | NoneMine Safety Disclosures | | |
Item 5. | Other Information | | |
Item 6. | Exhibits | | |
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Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(Unaudited)
| (in thousands, except share amounts) | (in thousands, except share amounts) | September 30, 2018 | | December 31, 2017 | | (in thousands, except share amounts) | September 30, 2019 | | December 31, 2018 | |
ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 48,880 | | $ | 25,373 | | Cash and cash equivalents | | $ | 60,279 | | | $ | 34,043 | | |
Accounts receivable, net | Accounts receivable, net | | 227,828 | | 205,767 | | Accounts receivable, net | | 243,296 | | | 228,098 | | |
Inventories, net | Inventories, net | | 184,018 | | 155,568 | | Inventories, net | | 206,516 | | | 176,630 | | |
| Prepaid expenses | | 6,122 | | 5,336 | | |
Prepaid expenses and other current assets | | Prepaid expenses and other current assets | | 7,771 | | | 5,327 | | |
Income tax receivable | Income tax receivable | | 4,460 | | 483 | | Income tax receivable | | 6,615 | | | 8,745 | | |
Total current assets | Total current assets | | 471,308 | | 392,527 | | Total current assets | | 524,477 | | | 452,843 | | |
| Rental equipment, net | Rental equipment, net | | 40,461 | | 28,493 | | Rental equipment, net | | 56,177 | | | 43,978 | | |
| Property, plant and equipment | Property, plant and equipment | | 214,175 | | 202,293 | | Property, plant and equipment | | 243,777 | | | 219,135 | | |
Less: Accumulated depreciation | Less: Accumulated depreciation | | (130,606) | | (125,629) | | Less: Accumulated depreciation | | (136,838) | | | (131,905) | | |
| 83,569 | | 76,664 | | |
Total property, plant and equipment, net | | Total property, plant and equipment, net | | 106,939 | | | 87,230 | | |
| Goodwill | Goodwill | | 83,716 | | 84,761 | | Goodwill | | 93,468 | | | 83,243 | | |
Intangible assets, net | Intangible assets, net | | 49,763 | | 52,872 | | Intangible assets, net | | 59,205 | | | 48,857 | | |
Deferred income taxes | Deferred income taxes | | 1,553 | | 992 | | Deferred income taxes | | 1,060 | | | 1,783 | | |
Other assets | | 4,403 | | 3,362 | | |
Other non-current assets | | Other non-current assets | | 15,067 | | | 3,699 | | |
| Total assets | Total assets | | $ | 734,773 | | $ | 639,671 | | Total assets | | $ | 856,393 | | | $ | 721,633 | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Trade accounts payable | Trade accounts payable | | $ | 71,944 | | $ | 55,825 | | Trade accounts payable | | $ | 69,009 | | | $ | 54,083 | | |
Income taxes payable | Income taxes payable | | — | | 5,002 | | Income taxes payable | | 2,516 | | | 2,865 | | |
Accrued liabilities | Accrued liabilities | | 38,297 | | 40,454 | | Accrued liabilities | | 48,525 | | | 43,785 | | |
Current maturities of long-term debt and capital lease obligations | | 189 | | 82 | | |
Current maturities of long-term debt and finance lease obligations | | Current maturities of long-term debt and finance lease obligations | | 113 | | | 119 | | |
| Total current liabilities | Total current liabilities | | 110,430 | | 101,363 | | Total current liabilities | | 120,163 | | | 100,852 | | |
| Long-term debt and capital lease obligations, net of current maturities | | 101,000 | | 60,000 | | |
Long-term debt and finance lease obligations, net of current maturities | | Long-term debt and finance lease obligations, net of current maturities | | 150,192 | | | 85,179 | | |
Long-term tax liability | Long-term tax liability | | 7,347 | | 12,316 | | Long-term tax liability | | 6,710 | | | 6,120 | | |
Deferred pension liability | Deferred pension liability | | 706 | | 1,225 | | Deferred pension liability | | 1,606 | | | 1,944 | | |
Other long-term liabilities | Other long-term liabilities | | 7,474 | | 7,291 | | Other long-term liabilities | | 14,190 | | | 8,436 | | |
Deferred income taxes | Deferred income taxes | | 10,924 | | 8,368 | | Deferred income taxes | | 12,480 | | | 11,731 | | |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Common stock, $.10 par value, 20,000,000 shares authorized; 11,660,933 and 11,577,048 outstanding at September 30, 2018 and December 31, 2017, respectively | | 1,166 | | 1,158 | | |
Common stock, $0.10 par value, 20,000,000 shares authorized; 11,747,829 and 11,662,688 outstanding at September 30, 2019 and December 31, 2018, respectively | | Common stock, $0.10 par value, 20,000,000 shares authorized; 11,747,829 and 11,662,688 outstanding at September 30, 2019 and December 31, 2018, respectively | | 1,175 | | | 1,166 | | |
Additional paid-in-capital | Additional paid-in-capital | | 107,737 | | 103,864 | | Additional paid-in-capital | | 112,629 | | | 108,422 | | |
Treasury stock, at cost; 42,600 shares at September 30, 2018 and December 31, 2017 | | (426) | | (426) | | |
Treasury stock, at cost; 82,600 and 42,600 shares at September 30, 2019 and December 31, 2018, respectively | | Treasury stock, at cost; 82,600 and 42,600 shares at September 30, 2019 and December 31, 2018, respectively | | (4,566) | | | (426) | | |
Retained earnings | Retained earnings | | 427,737 | | 374,678 | | Retained earnings | | 492,161 | | | 443,040 | | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (39,322) | | (30,166) | | Accumulated other comprehensive loss | | (50,347) | | | (44,831) | | |
Total stockholders’ equity | Total stockholders’ equity | | 496,892 | | 449,108 | | Total stockholders’ equity | | 551,052 | | | 507,371 | | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 734,773 | | $ | 639,671 | | Total liabilities and stockholders’ equity | | $ | 856,393 | | | $ | 721,633 | | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(Unaudited)
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | 2018 | | 2017 | | 2018 | | 2017 | (in thousands, except per share amounts) | 2019 | | 2018 | | 2019 | | 2018 |
| Net sales: | Net sales: | | Net sales: | |
Industrial | Industrial | $ | 156,721 | | $ | 132,388 | | $ | 438,919 | | $ | 375,546 | Industrial | $ | 158,499 | | | $ | 156,721 | | | $ | 484,924 | | | $ | 438,919 | |
Agricultural | Agricultural | 61,464 | | 64,923 | | 179,182 | | 170,921 | Agricultural | 59,797 | | | 61,464 | | | 168,129 | | | 179,182 | |
European | European | 39,387 | | 43,144 | | 134,683 | | 122,653 | European | 53,533 | | | 39,387 | | | 165,896 | | | 134,683 | |
Total net sales | Total net sales | 257,572 | | 240,455 | | 752,784 | | 669,120 | Total net sales | 271,829 | | | 257,572 | | | 818,949 | | | 752,784 | |
Cost of sales | Cost of sales | 190,800 | | 175,516 | | 559,301 | | 495,338 | Cost of sales | 203,119 | | | 190,800 | | | 613,798 | | | 559,301 | |
Gross profit | Gross profit | 66,772 | | 64,939 | | 193,483 | | 173,782 | Gross profit | 68,710 | | | 66,772 | | | 205,151 | | | 193,483 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 38,523 | | 37,178 | | 117,087 | | 105,463 | Selling, general and administrative expenses | 44,255 | | | 38,523 | | | 128,741 | | | 117,087 | |
Income from operations | Income from operations | 28,249 | | 27,761 | | 76,396 | | 68,319 | Income from operations | 24,455 | | | 28,249 | | | 76,410 | | | 76,396 | |
| Interest expense | Interest expense | (1,399) | | (1,414) | | (4,233) | | (4,241) | Interest expense | (1,837) | | | (1,399) | | | (5,222) | | | (4,233) | |
Interest income | Interest income | 100 | | 100 | | 309 | | 257 | Interest income | 359 | | | 100 | | | 862 | | | 309 | |
Other income (expense) | (265) | | (1,561) | | (491) | | (2,734) | |
Other income (expense), net | | Other income (expense), net | 242 | | | (265) | | | (442) | | | (491) | |
Income before income taxes | Income before income taxes | 26,685 | | 24,886 | | 71,981 | | 61,601 | Income before income taxes | 23,219 | | | 26,685 | | | 71,608 | | | 71,981 | |
Provision for income taxes | Provision for income taxes | 3,142 | | 8,294 | | 15,084 | | 20,526 | Provision for income taxes | 5,801 | | | 3,142 | | | 18,270 | | | 15,084 | |
Net Income | Net Income | $ | 23,543 | | $ | 16,592 | | $ | 56,897 | | $ | 41,075 | Net Income | $ | 17,418 | | | $ | 23,543 | | | $ | 53,338 | | | $ | 56,897 | |
| Net income per common share: | Net income per common share: | | Net income per common share: | |
Basic | Basic | $ | 2.01 | | $ | 1.43 | | $ | 4.88 | | $ | 3.56 | Basic | $ | 1.48 | | | $ | 2.01 | | | $ | 4.55 | | | $ | 4.88 | |
Diluted | Diluted | $ | 2.00 | | $ | 1.42 | | $ | 4.84 | | $ | 3.52 | Diluted | $ | 1.47 | | | $ | 2.00 | | | $ | 4.52 | | | $ | 4.84 | |
Average common shares: | Average common shares: | | Average common shares: | |
Basic | Basic | 11,689 | | 11,586 | | 11,649 | | 11,535 | Basic | 11,748 | | | 11,689 | | | 11,724 | | | 11,649 | |
Diluted | Diluted | 11,777 | | 11,708 | | 11,758 | | 11,666 | Diluted | 11,813 | | | 11,777 | | | 11,796 | | | 11,758 | |
| Dividends declared | Dividends declared | $ | 0.11 | | $ | 0.10 | | $ | 0.33 | | $ | 0.30 | Dividends declared | $ | 0.12 | | | $ | 0.11 | | | $ | 0.36 | | | $ | 0.33 | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
Net Income | $ | 23,543 | | $ | 16,592 | | $ | 56,897 | | $ | 41,075 |
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | (924) | | 7,452 | | (9,657) | | 17,596 |
Net gain on pension and other postretirement benefits | 211 | | 218 | | 634 | | 652 |
Other comprehensive income (loss) before income tax expense | (713) | | 7,670 | | (9,023) | | 18,248 |
Income tax expense related to items of other comprehensive loss | (44) | | (80) | | (133) | | (239) |
Other comprehensive income (loss) | (757) | | 7,590 | | (9,156) | | 18,009 |
Comprehensive Income | $ | 22,786 | | $ | 24,182 | | $ | 47,741 | | $ | 59,084 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 17,418 | | | $ | 23,543 | | | $ | 53,338 | | | $ | 56,897 | |
Other comprehensive loss: | | | | | | | |
Foreign currency translation adjustments | (9,791) | | | (924) | | | (7,877) | | | (9,657) | |
Net gain on pension and other post-retirement benefits | 215 | | | 211 | | | 645 | | | 634 | |
Unrealized gain during the period related to derivatives | 1,864 | | | — | | | 1,852 | | | — | |
Other comprehensive loss before income tax expense | (7,712) | | | (713) | | | (5,380) | | | (9,023) | |
Income tax expense related to items of other comprehensive income | (46) | | | (44) | | | (136) | | | (133) | |
Other comprehensive loss | (7,758) | | | (757) | | | (5,516) | | | (9,156) | |
Comprehensive income | $ | 9,660 | | | $ | 22,786 | | | $ | 47,822 | | | $ | 47,741 | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2017 | 11,534 | $ | 1,158 | $ | 103,864 | $ | (426) | $ | 374,678 | $ | (30,166) | $ | 449,108 |
Net income | — | — | — | — | 56,897 | — | 56,897 |
| | | | | | | |
Translation adjustment | — | — | — | — | — | (9,657) | (9,657) |
| | | | | | | |
Net actuarial gain arising during period, net of taxes | — | — | — | — | — | 501 | 501 |
| | | | | | | |
Stock-based compensation | — | — | 1,810 | — | — | — | 1,810 |
Exercise of stock options | 84 | 8 | 2,063 | — | — | — | 2,071 |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.33 per share) | — | — | — | — | (3,838) | — | (3,838) |
Balance at September 30, 2018 | 11,618 | $ | 1,166 | $ | 107,737 | $ | (426) | $ | 427,737 | $ | (39,322) | $ | 496,892 |
| | | | | | | | | | | | | | | | | | | | | | | |
For nine months ended September 30, 2019 | | | | | | | |
| | | | | | | |
| 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, 2018 | 11,620 | | $ | 1,166 | | $ | 108,422 | | $ | (426) | | $ | 443,040 | | $ | (44,831) | | $ | 507,371 | |
Net income | — | | — | | — | | — | | 15,253 | | — | | 15,253 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | 720 | | 720 | |
| | | | | | | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 170 | | 170 | |
| | | | | | | |
Stock-based compensation | — | | — | | 627 | | — | | — | | — | | 627 | |
Common stock repurchase | (15) | | — | | — | | (1,490) | | — | | — | | (1,490) | |
Exercise of stock options | 11 | | 1 | | 236 | | — | | — | | — | | 237 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,404) | | — | | (1,404) | |
Balance at March 31, 2019 | 11,616 | | $ | 1,167 | | $ | 109,285 | | $ | (1,916) | | $ | 456,889 | | $ | (43,941) | | $ | 521,484 | |
Net income | — | | — | | — | | — | | 20,667 | | — | | 20,667 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | 1,194 | | 1,194 | |
Unrealized derivative loss, net of taxes | — | | — | | — | | — | | — | | (12) | | (12) | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 170 | | 170 | |
| | | | | | | |
Stock-based compensation | — | | — | | 948 | | — | | — | | — | | 948 | |
Common stock repurchase | (15) | | — | | (590) | | (1,465) | | — | | — | | (2,055) | |
Exercise of stock options | 64 | | 7 | | 1,833 | | — | | — | | — | | 1,840 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,404) | | — | | (1,404) | |
Balance at June 30, 2019 | 11,665 | | $ | 1,174 | | $ | 111,476 | | $ | (3,381) | | $ | 476,152 | | $ | (42,589) | | $ | 542,832 | |
Net income | — | | — | | — | | — | | 17,418 | | — | | 17,418 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | (9,791) | | (9,791) | |
Unrealized derivative gain, net of taxes | — | | — | | — | | — | | — | | 1,864 | | 1,864 | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 169 | | 169 | |
| | | | | | | |
Stock-based compensation | — | | — | | 766 | | — | | — | | — | | 766 | |
Common stock repurchase | (10) | | — | | — | | (1,185) | | — | | — | | (1,185) | |
Exercise of stock options | 10 | | 1 | | 387 | | — | | — | | — | | 388 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.12 per share) | — | | — | | — | | — | | (1,409) | | — | | (1,409) | |
Balance at September 30, 2019 | 11,665 | | $ | 1,175 | | $ | 112,629 | | $ | (4,566) | | $ | 492,161 | | $ | (50,347) | | $ | 551,052 | |
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
For nine months ended September 30, 2018 | | | | | | | |
| | | | | | | |
| 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, 2017 | 11,534 | | $ | 1,158 | | $ | 103,864 | | $ | (426) | | $ | 374,678 | | $ | (30,166) | | $ | 449,108 | |
Net income | — | | — | | — | | — | | 14,583 | | — | | 14,583 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | 3,117 | | 3,117 | |
| | | | | | | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 126 | | 126 | |
| | | | | | | |
Stock-based compensation | — | | — | | 458 | | — | | — | | — | | 458 | |
| | | | | | | |
Exercise of stock options | 9 | | — | | 266 | | — | | — | | — | | 266 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.11 per share) | — | | — | | — | | — | | (1,276) | | — | | (1,276) | |
Balance at March 31, 2018 | 11,543 | | $ | 1,158 | | $ | 104,588 | | $ | (426) | | $ | 387,985 | | $ | (26,923) | | $ | 466,382 | |
Net income | — | | — | | — | | — | | 18,771 | | — | | 18,771 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | (11,850) | | (11,850) | |
| | | | | | | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 208 | | 208 | |
| | | | | | | |
Stock-based compensation | — | | — | | 730 | | — | | — | | — | | 730 | |
Common stock repurchase | — | | — | | (437) | | — | | — | | — | | (437) | |
Exercise of stock options | 67 | | 7 | | 1,913 | | — | | — | | — | | 1,920 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.11 per share) | — | | — | | — | | — | | (1,277) | | — | | (1,277) | |
Balance at June 30, 2018 | 11,610 | | $ | 1,165 | | $ | 106,794 | | $ | (426) | | $ | 405,479 | | $ | (38,565) | | $ | 474,447 | |
Net income | — | | — | | — | | — | | 23,543 | | — | | 23,543 | |
| | | | | | | |
Translation adjustment | — | | — | | — | | — | | — | | (924) | | (924) | |
| | | | | | | |
Net actuarial gain arising during period, net of taxes | — | | — | | — | | — | | — | | 167 | | 167 | |
| | | | | | | |
Stock-based compensation | — | | — | | 622 | | — | | — | | — | | 622 | |
Common stock repurchase | — | | — | | 1 | | — | | — | | — | | 1 | |
Exercise of stock options | 8 | | 1 | | 320 | | — | | — | | — | | 321 | |
| | | | | | | |
| | | | | | | |
Dividends paid ($0.11 per share) | — | | — | | — | | — | | (1,285) | | — | | (1,285) | |
Balance at September 30, 2018 | 11,618 | | $ | 1,166 | | $ | 107,737 | | $ | (426) | | $ | 427,737 | | $ | (39,322) | | $ | 496,892 | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands) | (in thousands) | 2018 | | 2017 | (in thousands) | 2019 | | 2018 |
Operating Activities | Operating Activities | | Operating Activities | |
Net income | Net income | $ | 56,897 | | $ | 41,075 | Net income | $ | 53,338 | | | $ | 56,897 | |
Adjustment to reconcile net income to net cash (used in) provided by operating activities: | | |
Adjustment to reconcile net income to net cash provided by operating activities: | | Adjustment to reconcile net income to net cash provided by operating activities: | |
Provision for doubtful accounts | Provision for doubtful accounts | (132) | | (2) | Provision for doubtful accounts | 280 | | | (132) | |
Depreciation - Property, plant and equipment | Depreciation - Property, plant and equipment | 9,388 | | 8,631 | Depreciation - Property, plant and equipment | 10,583 | | | 9,388 | |
Depreciation - Rental equipment | Depreciation - Rental equipment | 4,790 | | 4,253 | Depreciation - Rental equipment | 6,770 | | | 4,790 | |
Amortization of intangibles | Amortization of intangibles | 2,630 | | 2,445 | Amortization of intangibles | 3,081 | | | 2,630 | |
Amortization of debt issuance costs | Amortization of debt issuance costs | 166 | | 166 | Amortization of debt issuance costs | 166 | | | 166 | |
Stock-based compensation expense | Stock-based compensation expense | 1,810 | | 1,254 | Stock-based compensation expense | 2,341 | | | 1,810 | |
| Deferred income tax expense (benefit) | 1,160 | | (74) | |
Provision for deferred income tax (benefit) expense | | Provision for deferred income tax (benefit) expense | (2,549) | | | 1,160 | |
Gain on sale of property, plant and equipment | Gain on sale of property, plant and equipment | (298) | | (312) | Gain on sale of property, plant and equipment | (732) | | | (298) | |
Changes in operating assets and liabilities: | | |
Changes in operating assets and liabilities, net of acquisitions: | | Changes in operating assets and liabilities, net of acquisitions: | |
Accounts receivable | Accounts receivable | (24,916) | | (20,330) | Accounts receivable | (11,263) | | | (24,916) | |
Inventories | Inventories | (31,521) | | (4,075) | Inventories | (8,413) | | | (31,521) | |
Rental equipment | Rental equipment | (16,758) | | (4,327) | Rental equipment | (18,970) | | | (16,758) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (1,887) | | 2,828 | Prepaid expenses and other assets | (5,377) | | | (1,887) | |
Trade accounts payable and accrued liabilities | Trade accounts payable and accrued liabilities | 15,797 | | 10,811 | Trade accounts payable and accrued liabilities | 9,481 | | | 15,797 | |
Income taxes payable | Income taxes payable | (8,887) | | (665) | Income taxes payable | 1,738 | | | (8,887) | |
Long-term tax liability | (4,969) | | — | |
Long-term tax payable | | Long-term tax payable | 590 | | | (4,969) | |
Other assets and long-term liabilities | Other assets and long-term liabilities | 317 | | 204 | Other assets and long-term liabilities | 3,146 | | | 317 | |
Net cash provided by operating activities | Net cash provided by operating activities | 3,587 | | 41,882 | Net cash provided by operating activities | 44,210 | | | 3,587 | |
| Investing Activities | Investing Activities | | Investing Activities | |
Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | — | | (38,523) | Acquisitions, net of cash acquired | (58,531) | | | — | |
Purchase of property, plant and equipment | Purchase of property, plant and equipment | (18,781) | | (9,686) | Purchase of property, plant and equipment | (19,488) | | | (18,781) | |
Proceeds from sale of property, plant and equipment | Proceeds from sale of property, plant and equipment | 1,037 | | 555 | Proceeds from sale of property, plant and equipment | 1,987 | | | 1,037 | |
| Net cash used in investing activities | Net cash used in investing activities | (17,744) | | (47,654) | Net cash used in investing activities | (76,032) | | | (17,744) | |
| Financing Activities | Financing Activities | | Financing Activities | |
Borrowings on bank revolving credit facility | Borrowings on bank revolving credit facility | 126,000 | | 126,000 | Borrowings on bank revolving credit facility | 141,000 | | | 126,000 | |
Repayments on bank revolving credit facility | Repayments on bank revolving credit facility | (85,000) | | (70,000) | Repayments on bank revolving credit facility | (76,000) | | | (85,000) | |
Principal payments on long-term debt and capital leases | (82) | | (17) | |
| Principal payments on finance leases | | Principal payments on finance leases | (97) | | | (82) | |
Proceeds from issuance of long-term debt and finance leases | | Proceeds from issuance of long-term debt and finance leases | 2 | | | — | |
| Dividends paid | Dividends paid | (3,838) | | (3,455) | Dividends paid | (4,217) | | | (3,838) | |
Proceeds from sale of common stock | 2,507 | | 2,059 | |
| Redemptions of common stock to satisfy withholding taxes related to stock-based compensation | (436) | | (166) | |
Proceeds from exercise of stock options | | Proceeds from exercise of stock options | 2,465 | | | 2,507 | |
Purchase of common stock for treasury | | Purchase of common stock for treasury | (4,140) | | | — | |
Cost of common stock repurchased | | Cost of common stock repurchased | (590) | | | (436) | |
Net cash provided by financing activities | Net cash provided by financing activities | 39,151 | | 54,421 | Net cash provided by financing activities | 58,423 | | | 39,151 | |
| Effect of exchange rate changes on cash and cash equivalents | Effect of exchange rate changes on cash and cash equivalents | (1,487) | | 3,626 | Effect of exchange rate changes on cash and cash equivalents | (365) | | | (1,487) | |
Net change in cash and cash equivalents | Net change in cash and cash equivalents | 23,507 | | 52,275 | Net change in cash and cash equivalents | 26,236 | | | 23,507 | |
Cash and cash equivalents at beginning of the period | 25,373 | | 16,793 | |
Cash and cash equivalents at beginning of the year | | Cash and cash equivalents at beginning of the year | 34,043 | | | 25,373 | |
Cash and cash equivalents at end of the period | Cash and cash equivalents at end of the period | $ | 48,880 | | $ | 69,068 | Cash and cash equivalents at end of the period | $ | 60,279 | | | $ | 48,880 | |
| Cash paid during the period for: | Cash paid during the period for: | | Cash paid during the period for: | |
Interest | Interest | $ | 3,889 | | $ | 5,073 | Interest | $ | 5,327 | | | $ | 3,889 | |
Income taxes | Income taxes | 26,568 | | 20,699 | Income taxes | 18,431 | | | 26,568 | |
See accompanying notes.
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 2018 2019
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, 2018.2019. The balance sheet at December 31, 20172018 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, 20172018 (the "2017"2018 10-K").
Reclassifications
Certain amounts reported for the three and nine months ended September 30, 2017 have been reclassified in order to conform to the 2018 presentation.
Accounting Pronouncements Adopted on January 1, 2018
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605. “Revenue Recognition,” and most industry-specific guidance. Effective January 1, 2018 the Company adopted the provisions of Topic 606 using the modified retrospective method of adoption. There was no impact to our financial position or results of operations as of and for the nine months ended September 30, 2018 as a result of adopting Topic 606. Therefore, there was no cumulative-effect adjustment to retained earnings as of January 1, 2018 for the impact of the adoption of Topic 606. See “Revenue Recognition” below for our accounting policy affected by our adoption of Topic 606.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715),” which requires employers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost (non-service cost components) to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU is to be applied retrospectively for income statement items and prospectively for any capitalized benefit costs. The adoption of this ASU effective January 1, 2018 did not affect our financial position or results of operations. Accordingly, for the three months ended September 30, 2018 and 2017, we reclassified the non-service cost components out of selling, general and administrative expenses of $62,000 and $150,000 respectively, and into other income (expense), net. For the nine months ended September 30, 2018 and 2017 we reclassified the non-service cost components out of selling, general and administrative expenses of $187,000 and $450,000 respectively, and into other income (expense), net.
Accounting Pronouncements Not Yet Adopted2019
In February 2016, the FASB issued ASU No. 2016-02, “Leases.”“Leases (Topic 842)". This update requires that a lessee recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Similar to current guidance, the update continues to differentiate between finance leases and operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in
the classification of lease payments in the statement of cash flows. The updated guidance leaves the accounting for leases by lessors largely unchanged from existing GAAP. Entities may elect the modified retrospective method of adoption or a cumulative transition adjustment on the effective date. The guidance will becomebecame effective for us on January 1, 20192019. As a lessee, this standard primarily impacted our accounting for long-term real estate and equipment leases, for which we have not yet electedrecognized right-of-use assets of $7,747,000 and a transition method. We are evaluating the impacts that adoptioncorresponding lease liability of the ASU is expected to have$7,868,000 on our consolidated financial statementsbalance sheet.
We adopted these provisions on January 1, 2019 using the optional transition method that permits us to apply the new disclosure requirements in 2019 and related disclosures.continue to present comparative period information as required under FASB ASC Topic 840, "Leases". We anticipate this standard willdid not have a material impact oncumulative-effect adjustment to the opening balance of retained earnings at the date of adoption. We elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to not account for lease and non-lease components separately for most of our financial position by increasing our assetsasset classes and liabilities by equal amounts throughto exclude leases with an initial term of 12 months or less from the recognition of right-of-use assets and lease liabilities for our operating leases. However, we do not expect adoption to have a materialliabilities. Adoption of the standards had no impact on our results of operations or liquidity. Additionally, we are evaluating the effect of the ASU on our internal control over financial reporting or other potential changes in business practices and processes including contract review and approval procedures.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,”Income", to allow reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). Upon adoption of the ASU, entities will be required to disclose a description of the accounting policy for releasing income tax effects from accumulated other comprehensive income. The standard is required to be adopted for periods beginning after December 15, 2018, with early adoption available for any set of financial statements that have yet to be issued or made available for issuance including retrospectively for any period in which the effect of the change is the U.S. corporate income tax rate in the TCJA is recognized. The Company hasadoption of this ASU did not yet determinedhave a material impact on the effect of the ASU.Company's consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)-Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118,” which amends certain SEC material in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of Tax Reform for the reporting period in which the Tax Reform was enacted. We are currently evaluating the effects of Tax Reform, and in the absence of clarifying guidance in the application of certain provisions of Tax Reform, we used reasonable estimates to determine our provisional tax amounts and are awaiting guidance for those items for which a reasonable estimate cannot be made.Pronouncements Not Yet Adopted
In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosures requirements on fair value measurements. Among other things, the amendments add disclosures for changes in unrealized gains and losses on Level 3 fair value measurements and requires additional disclosures on unobservable inputs associated with Level 3 assets. The guidance will become effective for us on January 1, 2020. The impacts that adoption of the ASU is expected to have on our financial disclosures is being evaluated.
In August 2018, the FASB issued Accounting Statement Update (ASU) No. 2018-14, “Compensation, Defined Benefit Plans,”Plans", which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The update removes certain disclosures that are no longer considered cost beneficial and adds disclosure requirements identified as relevant. The guidance will become effective for us on January 1, 2021 with early adoption permitted for any financial statements that have not been issued. The impacts that adoption of the ASU is expected to have on our financial disclosures is being evaluated.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” to improve information on credit losses for financial instruments. The ASU replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. The ASU is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted beginning in fiscal years beginning after December 15, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
2. Accounting Policies
Revenue RecognitionLeases
The following policy resulted from our adoption of the provisions of ASC Topic 606, “Revenue from Contracts with Customers,”842, “Leases", effective January 1, 2018,2019, as described above in “Accounting Pronouncements Adopted on January 1, 2018.”2019".
The majorityIf we determine that an arrangement is or contains a lease, we recognize a right-of-use (ROU) asset and lease liability at the commencement date of the Company's revenuelease. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized from product sales under contracts with customers. The Company presents three reportable operating segments within its financial statements; Industrial, Agricultural and European. Contract terms and performance obligations within each contractual agreement are generally consistent for all three divisions with small differences that do not haveon a significant impact onstraight-line basis over the revenue recognition considerations under Topic 606. Revenues are recognized when we satisfy our performance obligation to transfer
product to our customers, which typically occurs at a point in time upon shipment or delivery of the product, and for an amount that reflects the transaction price that is allocated to the performance obligation. Our contracts with customers state the final terms of sale, including the description, quantity and price for goods sold. In the normal course of business, we generally do not accept product returns.
The transaction price is the consideration that we expect to be entitled to in exchange for our products. Some of our contracts contain variable consideration in the form of sales incentives to our customers, such as discounts and rebates. For contracts that include variable consideration, we estimate the factors that determine the variable consideration in order to establish the transaction price.lease term.
We have elected that any taxes collected from customersto not account for the lease and remittednon-lease components separately for most of our asset classes with the exception of real-estate. We have also elected to government authorities (i.e. sales tax, use tax, etc.) are excludedexclude all lease agreements with an initial term of 12 months or less from the measurement of the transaction price and therefore are excluded from net sales in the consolidated statements of operations.lease recognition requirements.
There are instances where we provide shipping services in relation to the goods sold to our customers. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are included in cost of goods sold. We have elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities (i.e. an expense) rather than as a promised service.
3. Business Combinations
Santa Izabel Agro Industria Ltda.
On June 6, 2017, the Company completed the acquisition of Santa Izabel Agro Industria Ltda. ("Santa Izabel"). Santa Izabel designs, manufactures and markets a variety of agricultural implements and trailers sold throughout Brazil. The primary reason for the Santa Izabel acquisition was to broaden the Company's presence in the manufacturing and distribution of agricultural machinery in Brazil. The acquisition price was approximately $10 million.
Old Dominion Brush Company
On June 26, 2017, the Company completed the acquisition of Old Dominion Brush Company, Inc. ("Old Dominion"). Old Dominion manufactures and sells replacement brooms for street sweepers and leaf vacuum equipment. The acquisition price was approximately $18 million. The primary reason for the Old Dominion acquisition was to increase the Company's presence in the sweeper market and broaden our product offerings.
R.P.M. Tech Inc.
On August 8, 2017, the Company completed the acquisition of R.P.M. Tech Inc. ("R.P.M."). R.P.M. manufactures and sells heavy duty snow removal equipment. The primary reason for the R.P.M acquisition was to strengthen the Company's offering in industrial snowblowers. The acquisition price was approximately $13 million.
Consolidated Acquisitions
3. Business Combinations
On March 4, 2019, the Company acquired 100 percent of the issued and outstanding equity interests of Dutch Power Company B.V. ("Dutch Power"). Dutch Power designs, manufactures and sells a variety of landscape and vegetation management machines primarily in Europe. The primary reason for the Dutch Power acquisition was to enhance the Company's platform for growth by increasing both the Company's product portfolio and capabilities in the European market. The acquisition price was approximately $53 million.
The total purchase price has been allocated on a preliminary basis to assets acquired and liabilities assumed, including deferred taxes. During the third quarter of 2019, additional information was obtained and an adjustment was made to goodwill for approximately $2.0 million. Certain estimated values are not yet finalized and are subject to change. The Company will finalize the amounts once the necessary information is obtained and the analysis is complete.
In the period between the date of acquisition and September 30, 2019, Dutch Power generated approximately $27.7 million of net sales and $0.8 million of net income. The Company has included the operating results of Old Dominion, Santa Izabel, and R.P.M.Dutch Power in its consolidated financial statements since their acquisitions. The total purchase price has been allocated to assets acquired and liabilities assumed, including deferred taxes, based on their fair values asthe date of the completion of the acquisitions. acquisition.
The following representstable reflects the finalestimated fair value of the assets acquired and liabilities assumed for all acquisitions as of the acquisition datesdate (in thousands):
| | | | | |
Cash | $ | 2,54787 | |
Accounts receivable | 7,1116,278 | |
Inventory | 15,38717,731 | |
Prepaid expensesand other assets | 1341,901 | |
Property, plant &and equipment | 5,90213,439 | |
Intangible assets | 5,85514,095 |
Other assets | 1,057 |
Other liabilities assumed | (5,635) |
| |
Net assetsOther liabilities assumed | $ | 32,358(12,606) | |
| |
Goodwill | 8,741 Net assets assumed |
Acquisition Price | $ | 41,09940,925 | |
| |
Goodwill | 11,686 | |
Acquisition Price | $ | 52,611 | |
4. Accounts Receivable
Accounts receivable is shown net of sales discounts and the allowance for doubtful accounts.
At September 30, 20182019 the Company had $17,091,000$16,807,000 in reserves for sales discounts compared to $15,652,000$18,123,000 at December 31, 20172018 related to products shipped to our customers under various promotional programs. The increasedecrease was primarily due to additionalreduced discounts reserved related to increasedlower sales of the Company's agricultural products sold during the first nine months of 2018. 2019.
5. Inventories
Inventories valued at LIFO cost represented 60%56% and 62%60% of total inventory at September 30, 20182019 and December 31, 2017,2018, respectively. The excess of current cost over LIFO valued inventories was approximately $7,919,000$10,646,000 at September 30, 20182019 and December 31, 2017.2018. An actual valuation of inventory under the LIFO method is made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO must be based, to some extent, on management's estimates at each quarter end. Net inventories consist of the following:
| (in thousands) | (in thousands) | September 30, 2018 | | December 31, 2017 | | (in thousands) | September 30, 2019 | | December 31, 2018 | |
| Finished goods | Finished goods | | $ | 154,555 | | $ | 133,161 | | Finished goods | | $ | 173,994 | | | $ | 149,298 | | |
Work in process | Work in process | | 14,345 | | 10,243 | | Work in process | | 18,415 | | | 12,732 | | |
Raw materials | Raw materials | | 15,118 | | 12,164 | | Raw materials | | 14,107 | | | 14,600 | | |
Total inventory | | $ | 184,018 | | $ | 155,568 | | |
Inventories, net | | Inventories, net | | $ | 206,516 | | | $ | 176,630 | | |
Inventory obsolescence reserves were $7,106,000$6,991,000 at September 30, 20182019 and $6,932,000$7,194,000 at December 31, 2017.2018.
6. Rental Equipment
Rental equipment is shown net of accumulated depreciation of $11,247,000$13,359,000 and $9,413,000$11,145,000 at September 30, 20182019 and December 31, 2017,2018, respectively. The Company recognized depreciation expense of $1,808,000$2,447,000 and $1,449,000$1,808,000 for the three months ended September 30, 20182019 and September 30, 2017,2018, respectively and $4,790,000$6,770,000 and $4,253,000$4,790,000 for the nine months ended September 30, 20182019 and September 30, 2017,2018, respectively.
7. 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 September 30, 20182019 and December 31, 2017,2018, as the floating rates on our outstanding balances approximate current market rates. This conclusion was made based on Level 2 inputs.
8. Goodwill and Definite and Indefinite-lived Intangible Assets
The following is the summary of changes to the Company's Goodwill for the nine months ended September 30, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Industrial | | | Agricultural | | | European | | | Consolidated | |
(in thousands) | | | | | | | | | | | |
Balance at December 31, 2017 | | $ | 61,682 | | | $ | 6,357 | | | $ | 16,722 | | | $ | 84,761 |
Translation adjustment | | (220) | | | (1,122) | | | (561) | | | (1,903) |
Goodwill adjustment | | 84 | | | 774 | | | — | | | 858 |
Balance at September 30, 2018 | | $ | 61,546 | | | $ | 6,009 | | | $ | 16,161 | | | $ | 83,716 |
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| Industrial | | | Agricultural | | | European | | | Consolidated | | |
(in thousands) | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | 61,107 | | | | $ | 6,230 | | | | $ | 15,906 | | | | $ | 83,243 | | |
Translation adjustment | | 234 | | | | (397) | | | | (1,298) | | | | (1,461) | | |
Goodwill acquired | | — | | | | — | | | | 11,686 | | | | 11,686 | | |
Balance at September 30, 2019 | | $ | 61,341 | | | | $ | 5,833 | | | | $ | 26,294 | | | | $ | 93,468 | | |
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The following is a summary of the Company's definite and indefinite-lived intangible assets net of the accumulated amortization:
| (in thousands) | (in thousands) | Estimated Useful Lives | September 30, 2018 | | December 31, 2017 | | (in thousands) | Estimated Useful Lives | September 30, 2019 | | December 31, 2018 | |
Definite: | Definite: | | Definite: | |
Trade names and trademarks | Trade names and trademarks | 25 years | | $ | 23,966 | | $ | 24,276 | Trade names and trademarks | 25 years | | $ | 31,866 | | | $ | 23,938 | |
Customer and dealer relationships | Customer and dealer relationships | 10-14 years | | 32,435 | | 32,654 | Customer and dealer relationships | 10-14 years | | 34,150 | | | 32,260 | |
Patents and drawings | Patents and drawings | 3-12 years | | 1,971 | | 1,982 | Patents and drawings | 3-12 years | | 5,689 | | | 2,061 | |
Total at cost | Total at cost | | 58,372 | | 58,912 | Total at cost | | 71,705 | | | 58,259 | |
Less accumulated amortization | Less accumulated amortization | | (14,109) | | (11,540) | Less accumulated amortization | | (18,000) | | | (14,902) | |
Total net | Total net | | 44,263 | | 47,372 | Total net | | 53,705 | | | 43,357 | |
Indefinite: | Indefinite: | | Indefinite: | |
Trade names and trademarks | Trade names and trademarks | | 5,500 | | 5,500 | Trade names and trademarks | | 5,500 | | | 5,500 | |
Total Intangible Assets | Total Intangible Assets | | $ | 49,763 | | $ | 52,872 | Total Intangible Assets | | $ | 59,205 | | | $ | 48,857 | |
The Company recognized amortization expense of $874,000$1,112,000 and $891,000$874,000 for the three months ending September 30, 20182019 and 2017,2018, respectively, and $2,630,000$3,081,000 and $2,445,000$2,630,000 for the nine months ended September 30, 2019 and 2018, and 2017, respectively.
As of September 30, 2018,2019, the Company had $49,763,000$59,205,000 of intangible assets, which represents 7% of total assets.
9. Debt
The components of long-term debt are as follows:
| (in thousands) | (in thousands) | September 30, 2018 | | December 31, 2017 | | (in thousands) | September 30, 2019 | | December 31, 2018 | |
Current Maturities: | Current Maturities: | | Current Maturities: | | |
Finance lease obligations | | Finance lease obligations | | $ | 113 | | | $ | 119 | | |
| Other notes payable | | $ | 189 | | $ | 82 | | |
| | 189 | | 82 | | |
Long-term debt: | Long-term debt: | | Long-term debt: | | |
Bank revolving credit facility | Bank revolving credit facility | | 101,000 | | 60,000 | | Bank revolving credit facility | | 150,000 | | | 85,000 | | |
Finance lease obligations | | Finance lease obligations | | 192 | | | 179 | | |
| | 101,000 | | 60,000 | | |
Total Long-term debt | | Total Long-term debt | | 150,192 | | | 85,179 | | |
Total debt | Total debt | | $ | 101,189 | | $ | 60,082 | | Total debt | | $ | 150,305 | | | $ | 85,298 | | |
As of September 30, 2018, $1,325,0002019, $3,152,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts, resulting in $147,675,000$96,848,000 in available borrowings.
10. Common Stock and Dividends
Dividends declared and paid on a per share basis were as follows:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
| Dividends declared | Dividends declared | $ | 0.11 | | $ | 0.10 | | $ | 0.33 | | $ | 0.30 | Dividends declared | $ | 0.12 | | | $ | 0.11 | | | $ | 0.36 | | | $ | 0.33 | |
Dividends paid | Dividends paid | $ | 0.11 | | $ | 0.10 | | $ | 0.33 | | $ | 0.30 | Dividends paid | $ | 0.12 | | | $ | 0.11 | | | $ | 0.36 | | | $ | 0.33 | |
On October 1, 2018,2019, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.11$0.12 per share, which was paid on October 26, 2018,28, 2019, to shareholders of record at the close of business on October 15, 2018.2019.
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 September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(In thousands, except per share) | (In thousands, except per share) | 2018 | | 2017 | | 2018 | | 2017 | (In thousands, except per share) | 2019 | | 2018 | | 2019 | | 2018 |
Net Income | Net Income | $ | 23,543 | | $ | 16,592 | | $ | 56,897 | | $ | 41,075 | Net Income | $ | 17,418 | | | $ | 23,543 | | | $ | 53,338 | | | $ | 56,897 | |
Average Common Shares: | Average Common Shares: | | Average Common Shares: | |
Basic (weighted-average outstanding shares) | Basic (weighted-average outstanding shares) | 11,689 | | 11,586 | | 11,649 | | 11,535 | Basic (weighted-average outstanding shares) | 11,748 | | | 11,689 | | | 11,724 | | | 11,649 | |
Dilutive potential common shares from stock options | Dilutive potential common shares from stock options | 88 | | 122 | | 109 | | 131 | Dilutive potential common shares from stock options | 65 | | | 88 | | | 72 | | | 109 | |
Diluted (weighted-average outstanding shares) | Diluted (weighted-average outstanding shares) | 11,777 | | 11,708 | | 11,758 | | 11,666 | Diluted (weighted-average outstanding shares) | 11,813 | | | 11,777 | | | 11,796 | | | 11,758 | |
| Basic earnings per share | Basic earnings per share | $ | 2.01 | | $ | 1.43 | | $ | 4.88 | | $ | 3.56 | Basic earnings per share | $ | 1.48 | | | $ | 2.01 | | | $ | 4.55 | | | $ | 4.88 | |
Diluted earnings per share | Diluted earnings per share | $ | 2.00 | | $ | 1.42 | | $ | 4.84 | | $ | 3.52 | Diluted earnings per share | $ | 1.47 | | | $ | 2.00 | | | $ | 4.52 | | | $ | 4.84 | |
12. Income Taxes
Tax Reform
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act ("TCJA") that instituted fundamental changes to the U.S. Internal Revenue Code of 1986, as amended ("the Code").
We reflected an overall income tax liability for the year ended December 31, 2017 with respect to TCJA as a result of remeasuring our U.S. deferred tax assets and liabilities using the 21% rate and recognizing a one-time transition tax charge on the deemed repatriation of previously undistributed accumulated earnings and profits of our international subsidiaries. Due to the significant and complex changes to the Code from the TCJA, the SEC issued Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act," (SAB 118). SAB 118 provides measurement period for up to one year for adjustments to be made to account for the effects of the TCJA. The Company reflected the income tax effects of those aspects of TCJA for which the accounting was complete. To the extent the Company’s accounting for certain income tax effects of TCJA was incomplete but the Company was able to determine a reasonable estimate, the Company recorded a provisional estimate in the financial statements. For those items where a reasonable estimate could not be made, a provisional amount was not recorded and the Company continued to apply the provisions of the tax laws that were in effect immediately before the enactment of TCJA.
During the three months ended September 30, 2018, we revised our initial provisional amount recorded at December 31, 2017 for the transitional tax on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries and the impact of the federal tax rate change on the value of our deferred tax assets and liabilities. The transition tax liability on the deemed repatriation decreased $4.2 million, primarily as a result of additional analysis performed over our historical foreign earnings and foreign source income which provided increased ability to credit foreign taxes associated with the deemed repatriation. In addition, the impact of the rate the change on deferred increased by $1.2 million due to adjustments resulting from the filing of our 2017 federal income tax return. We continueThe net benefit to gather additional information regardingincome taxes reduced the state impacts of repatriation and will finalize our calculation ofCompany's effective income tax rate for the tax effects of the TCJA in the fourththird quarter of 2018.2018 to 11.8%, as well as reducing the effective income tax rate for the first nine months of 2018 to 21.0%.
In addition to the changes described above, TCJA imposes a U.S. tax on Global Intangible Low Taxed Income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is still subject to interpretation and additional clarifying guidance is expected, but is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. We are still assessing impacts GILTI may have.
13. 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 September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net Sales | | | | | | | |
Wholegoods | $ | 207,461 | | | $ | 200,160 | | | $ | 644,042 | | | $ | 594,114 | |
Parts | 58,093 | | | 52,093 | | | 155,965 | | | 145,105 | |
Other | 6,275 | | | 5,319 | | | 18,942 | | | 13,565 | |
Consolidated | $ | 271,829 | | | $ | 257,572 | | | $ | 818,949 | | | $ | 752,784 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Product Type | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Net Sales | | | | | | | |
Wholegoods | $ | 204,349 | | $ | 187,696 | | $ | 604,073 | | $ | 528,807 |
Parts | 47,911 | | 48,302 | | 135,153 | | 128,927 |
Other | 5,312 | | 4,457 | | 13,558 | | 11,386 |
Consolidated | $ | 257,572 | | $ | 240,455 | | $ | 752,784 | | $ | 669,120 |
Other includes rental sales, extended warranty sales and service sales as it is considered immaterial.
| | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Geographical Location | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | |
Net Sales | | | | | | | |
United States | $ | 188,037 | | $ | 174,807 | | $ | 536,505 | | $ | 486,513 |
United Kingdom | 15,141 | | 13,319 | | 41,003 | | 35,745 |
France | 17,048 | | 21,660 | | 66,321 | | 62,563 |
Canada | 15,167 | | 13,064 | | 44,819 | | 35,242 |
Australia | 2,023 | | 2,203 | | 7,550 | | 10,093 |
Brazil | 3,050 | | 4,058 | | 13,368 | | 6,579 |
Other | 17,106 | | 11,344 | | 43,218 | | 32,385 |
Consolidated | $ | 257,572 | | $ | 240,455 | | $ | 752,784 | | $ | 669,120 |
| | | | | | | | | | | | | | | | | | | | | | | |
Revenue by Geographical Location | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | |
Net Sales | | | | | | | |
United States | $ | 187,320 | | | $ | 188,037 | | | $ | 561,285 | | | $ | 536,505 | |
France | 22,719 | | | 17,048 | | | 76,273 | | | 66,321 | |
Canada | 17,700 | | | 15,167 | | | 49,005 | | | 44,819 | |
United Kingdom | 14,327 | | | 15,141 | | | 42,207 | | | 41,003 | |
Brazil | 3,924 | | | 3,050 | | | 13,899 | | | 13,368 | |
Netherlands | 6,704 | | | 640 | | | 19,510 | | | 3,806 | |
China | 3,773 | | | 6,586 | | | 11,984 | | | 8,905 | |
Germany | 2,262 | | | 379 | | | 5,603 | | | 1,275 | |
Australia | 1,549 | | | 2,023 | | | 5,872 | | | 7,550 | |
Other | 11,551 | | | 9,501 | | | 33,311 | | | 29,232 | |
Consolidated | $ | 271,829 | | | $ | 257,572 | | | $ | 818,949 | | | $ | 752,784 | |
Net sales are attributed to countries based on the location of the customer.
Segment Information
The following includes a summary of the unaudited financial information by reporting segment at September 30, 2018:2019:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(in thousands) | (in thousands) | 2018 | | 2017 | | 2018 | | 2017 | (in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Net Sales | Net Sales | | Net Sales | |
Industrial | Industrial | $ | 156,721 | | $ | 132,388 | | $ | 438,919 | | $ | 375,546 | Industrial | $ | 158,499 | | | $ | 156,721 | | | $ | 484,924 | | | $ | 438,919 | |
Agricultural | Agricultural | 61,464 | | 64,923 | | 179,182 | | 170,921 | Agricultural | 59,797 | | | 61,464 | | | 168,129 | | | 179,182 | |
European | European | 39,387 | | 43,144 | | 134,683 | | 122,653 | European | 53,533 | | | 39,387 | | | 165,896 | | | 134,683 | |
Consolidated | Consolidated | $ | 257,572 | | $ | 240,455 | | $ | 752,784 | | $ | 669,120 | Consolidated | $ | 271,829 | | | $ | 257,572 | | | $ | 818,949 | | | $ | 752,784 | |
| Income from Operations | Income from Operations | | Income from Operations | |
Industrial | Industrial | $ | 18,351 | | $ | 14,941 | | $ | 46,316 | | $ | 38,563 | Industrial | $ | 14,350 | | | $ | 18,351 | | | $ | 50,994 | | | $ | 46,316 | |
Agricultural | Agricultural | 6,608 | | 8,598 | | 18,047 | | 19,315 | Agricultural | 6,140 | | | 6,608 | | | 12,546 | | | 18,047 | |
European | European | 3,290 | | 4,222 | | 12,033 | | 10,441 | European | 3,965 | | | 3,290 | | | 12,870 | | | 12,033 | |
Consolidated | Consolidated | $ | 28,249 | | $ | 27,761 | | $ | 76,396 | | $ | 68,319 | Consolidated | $ | 24,455 | | | $ | 28,249 | | | $ | 76,410 | | | $ | 76,396 | |
| (in thousands) | (in thousands) | September 30, 2018 | | December 31, 2017 | (in thousands) | September 30, 2019 | | December 31, 2018 |
Goodwill | Goodwill | | Goodwill | |
Industrial | Industrial | $ | 61,546 | | $ | 61,682 | Industrial | $ | 61,341 | | | $ | 61,107 | |
Agricultural | Agricultural | 6,009 | | 6,357 | Agricultural | 5,833 | | | 6,230 | |
European | European | 16,161 | | 16,722 | European | 26,294 | | | 15,906 | |
Consolidated | Consolidated | $ | 83,716 | | $ | 84,761 | Consolidated | $ | 93,468 | | | $ | 83,243 | |
| Total Identifiable Assets | Total Identifiable Assets | | Total Identifiable Assets | |
Industrial | Industrial | $ | 419,444 | | $ | 369,271 | Industrial | $ | 470,927 | | | $ | 421,539 | |
Agricultural | Agricultural | 167,851 | | 141,023 | Agricultural | 169,818 | | | 162,548 | |
European | European | 147,478 | | 129,377 | European | 215,648 | | | 137,546 | |
Consolidated | Consolidated | $ | 734,773 | | $ | 639,671 | Consolidated | $ | 856,393 | | | $ | 721,633 | |
14. Contingent Matters
The Company is subject to various legal actions which have arisen in the ordinary course of its business. The most prevalent of such actions relate to product liability, which is generally covered by insurance after various self-insured retention amounts. While amounts claimed might be substantial and the ultimate liability with respect to such litigation cannot be determined at this time, the Company believes that the ultimate outcome of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations; however, the ultimate resolution cannot be determined at this time.
Like other manufacturers, the Company is subject to a broad range of federal, state, local and foreign laws and requirements, including those concerning air emissions, discharges into waterways, and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, as well as the remediation of contamination associated with releases of hazardous substances at the Company’s facilities and off-site disposal locations, workplace safety and equal employment opportunities. These laws and regulations are constantly changing, and it is impossible to predict with accuracy the effect that changes to such laws and regulations may have on the Company in the future. Like other industrial concerns, the Company’s manufacturing operations entail the risk of noncompliance, and there can be no assurance that the Company will not incur material costs or other liabilities as a result thereof.
15. 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 components of lease cost were as follows:
| | | | | | | | | | | | | | | | | | |
Components of Lease Cost | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(in thousands) | | 2019 | | | | 2019 | | |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 33 | | | | | $ | 98 | | | |
Interest on lease liabilities | | 3 | | | | | 8 | | | |
Operating lease cost | | 1,095 | | | | | 3,207 | | | |
Short-term lease cost | | 79 | | | | | 311 | | | |
Variable lease cost | | 120 | | | | | 347 | | | |
| | | | | | | | |
Total lease cost | | $ | 1,330 | | | | | $ | 3,971 | | | |
Rent expense for the three and nine months ending September 30, 2018 was immaterial.
Maturities of lease liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Future Minimum Lease Payments | | | | | | | | |
| | September 30, 2019 | | | | December 31, 2018 | | |
(in thousands) | | Operating Leases | | Finance Leases | | Operating Leases | | Capital Leases |
2019 | | $ | 1,008 | | (a) | $ | 37 | | (a) | $ | 3,310 | | | $ | 125 | |
2020 | | 3,215 | | | 115 | | | 2,453 | | | 97 | |
2021 | | 1,900 | | | 79 | | | 1,308 | | | 62 | |
2022 | | 1,244 | | | 41 | | | 743 | | | 24 | |
2023 | | 713 | | | 17 | | | 419 | | | 1 | |
Thereafter | | 1,225 | | | 35 | | | 79 | | | — | |
Total minimum lease payments | | $ | 9,305 | | | $ | 324 | | | $ | 8,312 | | | $ | 309 | |
Less imputed interest | | (658) | | | (19) | | | — | | | (11) | |
Total lease liabilities | | $ | 8,647 | | | $ | 305 | | | $ | 8,312 | | | $ | 298 | |
(a) Amounts represent remaining three months of payments due for 2019. | | | | | | | | |
Future Lease Commencements
As of September 30, 2019, we have additional operating leases, that have not yet commenced in the amount of $321,000. These operating leases will commence in fiscal year 2019.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | |
Operating Leases | | | | |
(in thousands) | | September 30, 2019 | | |
Other non-current assets | | $ | 8,569 | | | |
| | | | |
Accrued liabilities | | 3,314 | | | |
Other long-term liabilities | | 5,333 | | | |
Total operating lease liabilities | | $ | 8,647 | | | |
| | | | |
Finance Leases | | | | |
(in thousands) | | September 30, 2019 | | |
Property, plant and equipment, gross | | $ | 629 | | | |
Accumulated Depreciation | | (324) | | | |
Property, plant and equipment, net | | $ | 305 | | | |
| | | | |
Current maturities of long-term debt and finance lease obligations | | $ | 113 | | | |
Long-term debt and finance lease obligations, net of current maturities | | 192 | | | |
Total finance lease liabilities | | $ | 305 | | | |
| | | | |
Weighted Average Remaining Lease Term | | | | |
Operating leases | | 4.07 years | | |
Finance leases | | 3.40 years | | |
Weighted Average Discount Rate | | | | |
Operating leases | | 3.40 | % | | |
Finance leases | | 3.34 | % | | |
Supplemental Cash Flow information related to leases was as follows:
| | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(in thousands) | | 2019 | | |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from finance leases | | $ | 11 | | | |
Operating cash flows from operating leases | | 3,146 | | | |
Financing cash flows from finance leases | | 97 | | | |
| | | | |
| | | | |
| | | | |
16. Retirement Benefit Plans
Defined Benefit Plan
The Company amortizes annual pension income or expense evenly over four quarters. Pension expense was $23,000 and pension income was $87,000 and $2,000 for the three months ended September 30, 20182019 and September 30, 2017,2018, respectively. Pension expense for the nine months ended September 30, 2019 was $68,000 and pension income for the nine months ended September 30, 2018 was $260,000 and pension income for the nine months ended September 30, 2017 was $5,000.$260,000. The Company is not required to contribute to the pension plans for the 20182019 plan year, but may do so.
Supplemental Retirement Plan
In May of 2015, the Board amended the SERP to allow the Board to modify the retirement benefit percentage either higher or lower than 20%. In May of 2016, the Board added additional key management to the plan. As of September 30, 2018,2019, the current retirement benefit (as defined in the plan) for the participants ranges from 10% to 20%.
The net period expense for the three months ended September 30, 2019 and 2018 was $214,000 and 2017 was $250,000 and, $202,000 respectively and $749,000$642,000 and $606,000$749,000 for the nine months ended September 30, 2019 and 2018, and 2017, respectively.
17. Subsequent Events
On October 24, 2019, the Company reported that it had completed the previously announced acquisition of 100% of the outstanding capital shares of Morbark, LLC (Morbark), a former portfolio company of Stellex Capital Management, for a total consideration of approximately $352 million, on a debt free basis and subject to certain post-closing adjustments.
Morbark is a leading manufacturer of equipment and aftermarket parts for the forestry tree maintenance, biomass, land management and recycling markets. Their products include a broad range of tree chippers, grinders, flails, debarkers, stump grinders, mulchers and brush cutters, plus related aftermarket spare and wear parts. This includes the products sold under the Morbark, Rayco, Denis Cimaf and Boxer brand names. Morbark products are sold through a network of independent dealers with about 300 sales locations. Their products complement our core business and they've grown steadily in a sector which has performed well. We intend to maintain the Morbark brands in the market place. Morbark, with approximately 720 employees, is based in Winn, Michigan, with subsidiary operations in Wooster, Ohio and Roxton Falls, Quebec.
In connection with this acquisition, the Company expanded its credit facility from $250 million to $650 million to accommodate this event and the ongoing needs of the combined entities. The new credit facility has a five-year duration and consists of a $300 million term loan (used to finance the acquisition) and a $350 million revolving line of credit.
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:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
As a Percent of Net Sales | As a Percent of Net Sales | 2018 | | 2017 | | 2018 | | 2017 | As a Percent of Net Sales | 2019 | | 2018 | | 2019 | | 2018 |
| Industrial | Industrial | 60.8 | % | | 55.1 | % | | 58.3 | % | | 56.1 | % | Industrial | 58.3 | % | | 60.8 | % | | 59.2 | % | | 58.3 | % |
Agricultural | Agricultural | 23.9 | % | | 27.0 | % | | 23.8 | % | | 25.6 | % | Agricultural | 22.0 | % | | 23.9 | % | | 20.5 | % | | 23.8 | % |
European | European | 15.3 | % | | 17.9 | % | | 17.9 | % | | 18.3 | % | European | 19.7 | % | | 15.3 | % | | 20.3 | % | | 17.9 | % |
Total sales, net | Total sales, net | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total sales, net | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
Cost Trends and Profit Margin, as Percentages of Net Sales | Cost Trends and Profit Margin, as Percentages of Net Sales | 2018 | | 2017 | | 2018 | | 2017 | Cost Trends and Profit Margin, as Percentages of Net Sales | 2019 | | 2018 | | 2019 | | 2018 |
| Gross profit | Gross profit | 25.9 | % | | 27.0 | % | | 25.7 | % | | 26.0 | % | Gross profit | 25.3 | % | | 25.9 | % | | 25.1 | % | | 25.7 | % |
Income from operations | Income from operations | 11.0 | % | | 11.5 | % | | 10.1 | % | | 10.2 | % | Income from operations | 9.0 | % | | 11.0 | % | | 9.3 | % | | 10.1 | % |
Income before income taxes | Income before income taxes | 10.4 | % | | 10.3 | % | | 9.6 | % | | 9.2 | % | Income before income taxes | 8.5 | % | | 10.4 | % | | 8.7 | % | | 9.6 | % |
Net income | Net income | 9.1 | % | | 6.9 | % | | 7.6 | % | | 6.1 | % | Net income | 6.4 | % | | 9.1 | % | | 6.5 | % | | 7.6 | % |
Overview
This report contains forward-looking statements that are based on Alamo Group’s current expectations. Actual results in future periods may differ materially from those expressed or implied because of a number of risks and uncertainties which are discussed below and in the Forward-Looking Information section. Unless the context otherwise requires, the terms the "Company", "we", "our" and "us" means Alamo Group Inc.
For the first nine months of 2018,2019, the Company's net income increaseddecreased by approximately 38.5%6.3% when compared to the same period in 2017.2018. This increasedecrease was primarily the result of improved sales growth ina favorable one-time adjustment to our prior year tax provision related to new tax legislation. Negatively affecting the Company's Industrial and European Divisions, the acquisitions of Santa Izabel and Old Dominion completed in June of 2017
and the acquisition of R.P.M., which was completed in August of 2017 and ongoing operational improvements. Also contributing to the increase in net income for 2018, was the TCJA, which lowered the Company's U.S. effective tax rate to 21% forperformance during the first nine months of 2018 compared 35% for2019 was the same period in 2017 and a $3.0 million net tax benefit relating to an adjustment to the provisional tax reform expense recordedcontinued soft market conditions in the fourthagricultural market, which impacted our North American agricultural sales. Also, while higher material costs hurt profitability during the first quarter of 2017. 2019, steel costs have dropped during the second and third quarters, although this positive effect on our margins has been more than offset by unfavorable sales mix and lower production in our Agricultural Division.
The Company's Industrial Division experienced a 16.9%10.5% increase in sales for the first nine months of 20182019 compared to the first nine months of 2018. Sales across all Industrial product groups, with the exception of mowing equipment which includes $28.0 million in net sales from Old Dominion and R.P.M. Sales of vacuum trucks, excavators, mowers, snow removal products and sweeping equipmentwas down, outperformed during the first nine months of 20182019 compared to the same period in 2018. Agricultural sales were down in the first nine months of 2019 by 6.2% compared to the first nine months of 2017. Agricultural sales were up in the first nine months of 2018 by 4.8% compared to the first nine months of 2017 as a result of stablecontinued weak demand for our products despitedue to soft agricultural market conditions. Sales from the Santa Izabel business contributed $9.7 million to our Agricultural Division forconditions and declining farm incomes. Also negatively impacting results was a shutdown during the first nine monthsquarter of 2018 compared2019 of the Division's largest manufacturing facility for several days to $.6 million forinstall an upgrade to its paint system and heavy rains and flooding throughout the first nine monthsmid-west part of 2017.the U.S. that occurred during the second quarter. European sales for the first nine months of 20182019 were up in U.S. dollars by 9.8%23.2% compared to the same period in 2017 primarily as a result2018, mainly due to the acquisition of increased demand for productsDutch Power. Excluding Dutch Power, sales were up during the first nine months of 2019 compared to the same time in this Division.2018 due to improved performance at our Rivard vacuum truck facility, despite being negatively affected by changes due to currency translation. Consolidated income from operations was $76.4 million in the first nine months of 20182019 which was relatively flat compared to $68.3 million for the first nine months of 2017. The2018, but the Company's backlog wasdecreased 14.3% to $215.3 million at the end of the third quarter of 2019 versus the backlog of $251.2 million at the end of the third quarter of 2018, which is an increase of 38.8% versus the backlog of $181.0 million at the end of the third quarter of 2017.2018. The increasedecrease in the Company's backlog was primarily attributable to greater demandsofter new order bookings for our products specifically in the Company'sAgricultural and Industrial and Agricultural Divisions. Excluding the acquisition of Dutch Power, increased orders in the European Division partially offset these lower new orders for the quarter.
The Company is optimistic about its outlookincurred several challenges during the quarter and expect those to likely continue for at least the remainderbalance of 2018, but we continuethe year although customer inquiry levels across the Company remain reasonable. Softer economic conditions in North America are beginning to face several ongoing challenges. We have seen increases in raw material, freight, tariff surcharges and other input costs including labor, at rates above those experienced in recent years and we expect that inflationary pressures will persistan affect in the near term. Stronger overall demand has ledmanufacturing sector and consequently have dampened our sales. Also, the Company continues to longer lead times for certain key components of our products, such as truck chassis. We have beenbe impacted by a tighteningtight labor market and difficulties in hiring and retaining skilled workers. Additional tariffs,tariff costs, future changes in tariff regulations and ongoing trade disputes could further impact ourthe business by increasing the cost of items we useused in the manufacturing of our products and by softening sales of our products to certain of our customers who may be impacted directly or indirectly by increasing tariffs and other negative effects resulting from trade disputes. In response to our strong backlog position, we have increased personnel and outsourcing to address short term demand and in the long term we are increasing our capital expenditure levels to continue production efficiency gains while expanding our production capacity. WeThe Company may also be negatively affected by several other unanticipated factors such as aadditional weakness in the overall economy; significant changes in currency exchange rates; negative economic impacts resulting from geopolitical events a tightening labor market,such as the unresolved Brexit situation, changes in trade policy, increased levels of government regulations; weakness in the agricultural sector; acquisition integration issues; budget constraints or revenue shortfalls in governmental entities; and other risks and uncertainties as described in “Risk FactorsFactors" section of ourthe Company's Annual Report on Form 10-K for the year ended December 31, 20172018 (the "2017"2018 Form 10-K").”
On October 24, 2019, the Company completed the previously announced acquisition of 100% of the outstanding capital shares of Morbark, LLC (Morbark), a former portfolio company of Stellex Capital Management, for a total consideration of approximately $352 million, on a debt free basis and subject to certain post-closing adjustments.
Results of Operations
Three Months Ended September 30, 20182019 vs. Three Months Ended September 30, 2017 2018
Net sales for the third quarter of 20182019 were $257,572,000$271,829,000, an increase of $17,117,000$14,257,000 or 7.1%5.5% compared to $240,455,000$257,572,000 for the third quarter of 2017.2018. The increase in sales was mainly attributable to strong$10,031,000 of net sales from the acquisition of Dutch Power and to a lesser extent, increased demand for our products in the Company's European and Industrial Division as well as $8,211,000 of net sales from the acquisition of R.P.M.Division.
Net Industrial sales increased by $24,333,000$1,778,000 or 18.4%1.1% to $156,721,000$158,499,000 for the third quarter of 20182019 compared to $132,388,000$156,721,000 during the same period in 2017.2018. The increase was primarily attributable to increasedhigher sales in most product groups specifically sweeper, vacuum truck and snow product lines which were helped by stable municipal demand offset by lower sales of vacuum truck, mowing excavator, snow removalequipment and sweeping equipment. Also, the acquisitionexcavators reflecting softer demand from some of R.P.M. added $8,211,000 of net sales during the quarter.our industrial and state-level governmental customers.
Net Agricultural sales were $61,464,000$59,797,000 in the third quarter of 20182019 compared to $64,923,000$61,464,000 for the same period in 20172018, a decrease of $3,459,000$1,667,000 or 5.3%2.7%. The decrease was primarily the result of weak market conditions which limited sales growth in both equipment and replacement parts and lowerwholegoods as farm incomes which have beenremained challenged. Also, an unfavorable product mix of less high margin mowers sales negatively impacted by high crop yields as well as tariffs on specific commodities such as soybeans.affected both sales and profitability in this division.
Net European sales for the third quarter of 20182019 were $39,387,000 a decrease$53,533,000, an increase of $3,757,000$14,146,000 or 8.7%35.9% compared to $43,144,000$39,387,000 during the third quarter of 2017.2018. The decreaseincrease was primarily driven by missed shipments at the Company's Rivard facilitymostly due to the timingacquisition of some customer order deliveries and certain. DelaysDutch Power which added $10,031,000 of critical inventory componentsnet sales during the quarter. Excluding Dutch Power, sales in the European Division were up mainly due to increased sales levels from certain suppliers also contributed to this shortfall. Rivard which more than offset unfavorable currency translation.
Gross profit for the third quarter of 20182019 was $66,772,000 (25.9%$68,710,000 (25.3% of net sales) compared to $64,939,000 (27.0%$66,772,000 (25.9% of net sales) during the same period in 2017,2018, an increase of $1,833,000.$1,938,000. The increase in gross profit during the third quarter of 20182019 was primarily due to the acquisition of R.P.M. Negatively affecting bothDutch Power. Excluding Dutch Power, gross profit was essentially flat, but lower as a percent of sales due to lower production and gross margin percentage for the quarter were higher commodity costs, specifically raw materials such as steel. Thisunfavorable sales mix which more than offset gains in productivity improvements, pricing actions, and purchasing initiatives.lower material costs.
Selling, general and administrative expenses (“SG&A”) were $38,523,000 (15.0%$44,255,000 (16.3% of net sales) during the third quarter of 20182019 compared to $37,178,000 (15.5%$38,523,000 (15.0% of net sales) during the same period of 2017,2018, an increase of $1,345,000.$5,732,000. The increase primarily came from higher commissionsthe acquisition of Dutch Power in the amount of $2,472,000. Also,
attributing to the increase was $843,000 in acquisition expenses along with increased bonus accrual and other selling expenses due to increased sales and increased spending on research and development projects.projects during the third quarter of 2019.
Interest expense was $1,399,000$1,837,000 for the third quarter of 20182019 compared to $1,414,000$1,399,000 during the same period in 2017, a decrease2018, an increase of $15,000. $438,000. The increase during the third quarter of 2019 came from increased borrowings due to the Dutch Power acquisition.
Other income (expense), net was $(265,000)$242,000 of expenseincome for the third quarter of 20182019 compared to $(1,561,000)$265,000 of expense during the same period in 2017.2018. The expensesincome in 2019 was primarily due to the the sale of property for $350,000 and the expense in 2018 and 2017 werewas primarily the result of changes in currency exchange rates.
Provision for income taxes after the impacts of TCJA, was $3,142,000 (11.8%$5,801,000 (25.0% of income before income tax) in the third quarter of 20182019 compared to $8,294,000 (33.3%$3,142,000 (11.8% of income before income tax) during the same period in 2017.2018. During the third quarter of 2018, the Company recorded a net benefit to income taxes of $2,995,000 relating to the adjustment in the provisional amounts recorded in the fourth quarter of 2017 upon enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA"), as more fully described in Note 12 of the Interim Condensed Consolidated Financial Statements. The net benefit to income taxes reduced the Company's effective income tax rate for the third quarter of 2018 to 11.8%.
The Company’s net income after tax was $17,418,000 or $1.47 per share on a diluted basis for the third quarter of 2019 compared to $23,543,000 or $2.00 per share on a diluted basis for the third quarter of 2018. The decrease of $6,125,000 resulted from the factors described above.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
Net sales for the first nine months of 2019 were $818,949,000, an increase of $66,165,000 or 8.8% compared to $752,784,000 for the first nine months of 2018. The increase was primarily attributable to increased demand for our products in the Company's Industrial Division. Our recent acquisition of Dutch Power also contributed to the increase in net sales in the amount of $27,679,000. Negatively affecting sales during the first nine months of 2019, were weak agricultural market conditions as well as unfavorable currency translation effects primarily in our European Division.
Net Industrial sales increased during the first nine months by $46,005,000 or 10.5% to $484,924,000 for 2019 compared to $438,919,000 during the same period in 2018. The increase came from higher sales of all product lines, with the exception of mowing equipment which was down compared to the same time in 2018 due to soft market conditions and adverse weather conditions experienced during the second quarter of 2019.
Net Agricultural sales were $168,129,000 during the first nine months of 2019 compared to $179,182,000 for the same period in 2018, a decrease of $11,053,000 or 6.2%. The decrease in sales for the effective tax ratefirst nine months of 2019 compared to the first nine months of 2018 was a result of weak market conditions and lower farm incomes which have been impacted by lower commodity prices as well as trade disputes. A first quarter 2019 shutdown in the Division's largest manufacturing facility to install an upgrade to its paint system in addition to heavy rains and flooding throughout the mid-west part of the U.S. during the second quarter of 2019 also negatively hampered sales.
Net European sales for the first nine months of 2019 were $165,896,000, an increase of $31,213,000 or 23.2% compared to $134,683,000 during the same period of 2018. The increase in 2019 was mainly due to the acquisition of Dutch Power in the amount of $27,679,000 and to a lesser extent increased sales of Rivard equipment. Excluding Dutch Power, sales in local currency were up during the first nine months of 2019 compared to the same time in 2018 due to improved Rivard vacuum truck sales, despite being partially offset by unfavorable currency translation.
Gross profit for the first nine months of 2019 was $205,151,000 (25.1% of net sales) compared to $193,483,000 (25.7% of net sales) during the same period in 2018, an increase of $11,668,000. The increase in gross profit for the first nine months of 2019 came from the acquisition of Dutch Power and higher equipment sales in the Company's Industrial Division. Negatively affecting both gross margin and margin percentage for the first nine months of 2019 were the effects of lower production and unfavorable product mix, partially offset by lower material costs and improvements in the Rivard vacuum truck business.
SG&A expenses were $128,741,000 (15.7% of net sales) during the first nine months of 2019 compared to $117,087,000 (15.6% of net sales) during the same period of 2018, an increase of $11,654,000. The increase primarily came from increased spending on research and development projects, higher selling expenses due to increased sales, as well as acquisition expenses in the amount of $1,240,000. Our recent enactmentacquisition of Dutch Power added $5,421,000 in SG&A expenses.
Interest expense was $5,222,000 for the TCJA that loweredfirst nine months of 2019 compared to $4,233,000 during the U.S. statutorysame period in 2018, an increase of $989,000. The increase during the first nine months of 2019 came from increased borrowings due to the Dutch Power acquisition.
Other income tax rate from 35%(expense), net was $442,000 of expense during the first nine months of 2019 compared to 21%$491,000 of expense in the first nine months of 2018. The expenses in 2019 and 2018 were primarily the result of changes in exchange rates.
Provision for income taxes was $18,270,000 (25.5% of income before income taxes) in the first nine months of 2019 compared to $15,084,000 (21.0% of income before income taxes) during the same period in 2018. In addition duringDuring the third quarter of 2018, the Company recorded a net benefit to income taxes of $2,995,000 relating to the adjustment in the provisional amounts recorded in the fourth quarter of 2017 upon enactment of TCJA, as more fully described in Note 12 of the Interim Condensed Consolidated Financial Statements. The combination of these two factors reduced the Company's effective income tax rate for the third quarter of 2018 to 11.8%.
The Company’s net income after tax was $23,543,000 or $2.00 per share on a diluted basis for the third quarter of 2018 compared to $16,592,000 or $1.42 per share on a diluted basis for the third quarter of 2017. The increase of $6,951,000 resulted from the factors described above.
Nine Months Ended September 30, 2018 vs. Nine Months Ended September 30, 2017
Net sales for the first nine months of 2018 were $752,784,000, an increase of $83,664,000 or 12.5% compared to $669,120,000 for the first nine months of 2017. The increase was primarily attributable to increased demand for our products in the Company's Industrial and European Divisions. Our recent acquisitions of Santa Izabel, Old Dominion and R.P.M. also added to the increase in net sales in the amount of $37,062,000. Further contributing to the increase in sales were favorable currency translation effects primarily on our European sales during the first nine months of 2018.
Net Industrial sales increased during the first nine months by $63,373,000 or 16.9% to $438,919,000 for 2018 compared to $375,546,000 during the same period in 2017. Most of the increase came from higher sales of vacuum trucks, mowers, excavators and snow removal equipment. The acquisitions of Old Dominion and R.P.M. together added $28,041,000 in net sales during the the first nine months of 2018.
Net Agricultural sales were $179,182,000 during the first nine months of 2018 compared to $170,921,000 for the same period in 2017, an increase of $8,261,000 or 4.8%. The increase in sales for the first nine months of 2018 compared to the first nine months of 2017 was a result of the acquisition of Santa Izabel which accounted for $9,021,000 in net sales.
Net European sales for the first nine months of 2018 were $134,683,000, an increase of $12,030,000 or 9.8% compared to $122,653,000 during the same period of 2017. The increase in 2018 was due to
improved sales in both the U.K. and French agricultural markets as well as Rivard vacuum trucks. Also contributing to sales in 2018 were the effects of currency translation rates.
Gross profit for the first nine months of 2018 was $193,483,000 (25.7% of net sales) compared to $173,782,000 (26.0% of net sales) during the same period in 2017, an increase of $19,701,000. The increase in gross profit for the first nine months of 2018 came from higher equipment sales in the Company's Industrial and European Divisions and, to a lesser extent, the acquisitions of Santa Izabel, Old Dominion and R.P.M. Negatively affecting both gross margin and margin percentage for the first nine months of 2018 were higher steel, freight and other input costs which more than offset gains in productivity improvements, pricing actions, and purchasing initiatives.
SG&A expenses were $117,087,000 (15.6% of net sales) during the first nine months of 2018 compared to $105,463,000 (15.8% of net sales) during the same period of 2017, an increase of $11,624,000. The increase primarily came from our recently acquired Santa Izabel, Old Dominion and R.P.M. businesses in the net amount of $5,446,000 and to a lesser extent, commissions, other selling expenses and higher spending on research and development projects.
Interest expense was $4,233,000 for the first nine months of 2018 compared to $4,241,000 during the same period in 2017, a decrease of $8,000.
Other income (expense), net was $(491,000) of expense during the first nine months of 2018 compared to $(2,734,000) of expense in the first nine months of 2017. The expenses in 2018 and 2017 were primarily the result of changes in exchange rates.
Provision for income taxes, after the impacts of TCJA, was $15,084,000 (21.0% of income before income taxes) in the first nine months of 2018 compared to $20,526,000 (33.3% of income before income taxes) during the same period in 2017. The decrease in both income taxes and the effective tax rate was due to the recent enactment of the TCJA that lowered the U.S. statutory income tax rate from 35% to 21% for 2018. In addition, the Company recorded during the third quarter of 2018, a net benefit to income taxes of $2,995,000 relating to the adjustment in the provisional amounts recorded in the fourth quarter of 2017 upon enactment of TCJA, as more fully described in Note 12 of the Interim Condensed Consolidated Financial Statements. The combination of these two factors reduced the Company's effective income tax rate for the first nine months of 2018 to 21.0%.
The Company's net income after tax was $53,338,000 or $4.52 per share on a diluted basis for the first nine months of 2019 compared to $56,897,000 or $4.84 per share on a diluted basis for the first nine months of 2018 compared to $41,075,000 or $3.52 per share on a diluted basis for the first nine months2018. The decrease of 2017. The increase of $15,822,000$3,559,000 resulted from the factors described above.
Liquidity and Capital Resources
In addition to normal operating expenses, the Company has ongoing cash requirements which are necessary to operate the Company’s business, including inventory purchases and capital expenditures. The Company’s inventory and accounts payable levels typically build in the first half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts receivable historically build in the first and fourth quarters of each year as a result of fall preseason sales programs and out of season sales, particularly in our Agricultural Division. Preseason sales, primarily in the Agricultural Division, help level the Company’s production during the off season.
As of September 30, 2018,2019, the Company had working capital of $360,878,000$404,314,000 which represents an increase of $69,714,000$52,323,000 from working capital of $291,164,000$351,991,000 at December 31, 2017.2018. The increase in working capital was primarily due to seasonality and increased demand for our products reflected in the Company's higher backlog.acquisition of Dutch Power.
Capital expenditures were $18,781,000$19,488,000 for the first nine months of 2018,2019, compared to $9,686,000$18,781,000 during the first nine months of 2017.2018. The Company expects higher capital expenditures in 20182019 in order to increaseconsolidate production capacity, support improvementimprovements in operational efficiencies, invest in technology and for the previously announced construction of a new manufacturing facility for its Super Products vacuum truck operation in Wisconsin, as well as possibly acquiring new manufacturing locations or purchasing currently leased facilities. Wethe expansion of our Tenco facility in Canada. The Company will fund future expenditures from operating cash flows or through our revolving credit facility, described below.
Net cash used for acquisitions was $58,531,000 during the first nine months of 2019. The amount used to acquire Dutch Power was approximately $52,611,000 with the remaining balance used for the Dixie Chopper acquisition.
Net cash provided by financing activities was $39,151,000$58,423,000 and $54,421,000$39,151,000 during the nine month periods ended September 30, 20182019 and September 30, 2017,2018, respectively. The majority of the decreaseincrease in net cash
provided by financing activities in 20182019 as compared to the prior year, was mainly due to repaymentborrowings to finance the acquisition of debt and a decrease in borrowings under our bank credit facility as a result of repatriating excess funds from our European operations.Dutch Power, partially offset by the repurchase activity related to the Company's common stock.
The Company had $46,178,000$51,888,000 in cash and cash equivalents held by its foreign subsidiaries as of September 30, 2018.2019. The majority of these funds are at our European and Canadian facilities. As a result of the
fundamental changes to the taxation of multinational corporations created by TCJA,Tax Cuts and Jobs Act, we no longer intend to permanently reinvest all of the undistributed earnings of our European foreign affiliates. While the Company intends to use some of these funds for working capital and capital expenditures outside the U.S., recent changes in the U.S. tax laws have substantially mitigated the cost of repatriation. During the second quarter of 2018, the Company repatriated excess cash from its European operations of approximately $24,000,000. The Company will continue to repatriate foreign cash and cash equivalents in excess of amounts needed to fund foreign operating and investing activities. Repatriated funds will initially be used to reduce funded debt levels under the Company's current credit facility and subsequently used to fund working capital, capital investments and acquisitions company-wide.
TheOn October 24, 2019, the Company, maintains an unsecured revolving credit facility with certain lenders underas Borrower, and each of its domestic subsidiaries as guarantors, entered into a Second Amended and Restated Revolving Credit Agreement ("(the Credit Agreement) with Bank of America, N.A., as Administrative Agent. The Credit Agreement provides the Agreement"). TheCompany with the ability to request loans and other financial obligations in an aggregate commitments from lenders underamount of up to $650,000,000. Pursuant to the Credit Agreement, is $250,000,000 and, subject to certain conditions and bank approval, the Company has borrowed $300,000,000 pursuant to a Term Facility repayable with interest quarterly at a percentage of the optioninitial principal amount of the Term Facility of 5.0% per year with the remaining principal due in 5 years. Up to request an increase$350,000,000 is available under the Credit Agreement pursuant to a Revolver Facility which terminates in aggregate commitments of up to an additional $50,000,000.5 years. The Agreement requires the Company to maintain varioustwo financial covenants, including a minimum earnings before interest and tax to interest expense ratio, a maximum leverage ratio and a minimum asset coverage ratio. The Agreement also contains various covenants relating to limitations on indebtedness, limitations on investments and acquisitions, limitations on sale of properties and limitations on liens and capital expenditures. The Agreement also contains other customary covenants, representations and events of defaults. Effective December 20, 2016, the Company amended its revolving credit facility to extend the termination date, reduce LIBOR interest margin and to modify certain financial and other covenants in order to meet the ongoing needs of the Company's business and to allow for greater flexibility in relation to future acquisitions. The expiration date of the revolving credit facilityTerm Facility and the Revolver Facility is December 20, 2021.October 24, 2024. As of SeptemberOctober 30, 2018, $101,000,0002019, $510,000,000 was outstanding under the Agreement. On SeptemberOctober 30, 2018, $1,325,0002019, $4,152,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendors' contracts resulting in $147,675,000$133,964,000 in available borrowings. As of September 30, 2018, theThe Company wasis in compliance with the covenants under the Agreement.
Management believes the Agreement and the Company’s ability to internally generate funds from operations should be sufficient to meet the Company’s cash requirements for the foreseeable future. However, future challenges affecting the banking industry and credit markets in general could potentially cause changes to credit availability, which creates a level of uncertainty.
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical Accounting Policies
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes that of the Company's significant accounting policies, which are set forth in Note 1 of the Notes to Consolidated Financial Statements in the 20172018 Form 10-K, the policies relating to the business combinations, allowance for doubtful accounts, sales discounts, inventories-obsolete and slow moving, warranty, 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 20172018 Form 10-K.
The enactment of the TCJA on December 22, 2017 made broad and complex changes to the U.S. tax code, including a new tax law that may subject the Company to a tax on global intangible low-taxed income (“GILTI”) beginning in 2018. GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. We are still assessing impacts GILTI may have.
As of September 30, 2018, the Company revised our initial provisional amount for the federal tax impact on the deemed repatriation of the accumulated earnings and profits of our international subsidiaries and the impact of the federal tax rate change on the value of our deferred tax assets and liabilities. The federal tax expense on the deemed repatriation decreased $4,231,000 and impact of rate change on deferred taxes increased by $1,236,000. The Company continues to gather additional information regarding the state impacts of repatriation and will finalize the calculation of the tax effects of the TCJA in the fourth quarter of 2018.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are likely to have a current or future material effect on our financial condition.
Forward-Looking Information
Part I of this Quarterly Report on Form 10-Q and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2 of this Quarterly Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company.
Statements that are not historical are forward-looking. When used by or on behalf of the Company, the words “estimate,” "anticipate," "expect," “believe,” “intend”, "will", "would", "should", "could" and similar expressions generally identify forward-looking statements made by or on behalf of the Company.
Forward-looking statements involve risks and uncertainties. These uncertainties include factors that affect all businesses operating in a global market, as well as matters specific to the Company and the markets it serves. Particular risks and uncertainties facing the Company include changes in market conditions; ongoing weakness in the agricultural sector; changes in tariff regulations and the imposition of new tariffs; a strong U.S. dollar; increased competition; trade wars or other negative economic impacts resulting from geopolitical events; decreases in the prices of agricultural commodities, which could affect our customers' income levels; increase in input costs; our inability to increase profit margins through continuing production efficiencies and cost reductions; repercussions from the pending exit by the U.K. from the European Union (EU); acquisition integration issues; budget constraints or income shortfalls which could affect the purchases of our type of equipment by governmental customers; credit availability for both the Company and its customers, adverse weather conditions such as droughts, floods, snowstorms, etc. which can affect buying patterns of the Company’s customers and related contractors; the price and availability of critical raw materials, particularly steel and steel products; energy cost; increased cost of new governmental regulations which effect corporations including related fines and penalties (such as the new European General Data Protection Regulation); the potential effects on the buying habits of our customers due to animal disease outbreaks and other epidemics; the Company’s ability to develop and manufacture new and existing products profitably; market acceptance of new and existing products; the Company’s ability to maintain good relations with its employees; the Company's ability to successfully complete acquisitions and operate acquired businesses or assets; the ability to hire and retain quality skilled employees; and cyber security risks affecting information technology or data security breaches.
In addition, the Company is subject to risks and uncertainties facing the industry in general, including changes in business and political conditions and the economy in general in both domestic and international markets; weather conditions affecting demand; slower growth in the Company’s markets; financial market changes including increases in interest rates and fluctuations in foreign exchange rates; actions of competitors; the inability of the
Company’s suppliers, customers, creditors, public utility providers and financial service organizations to deliver or provide their products or services to the Company; seasonal factors in the Company’s industry; litigation; government actions including budget levels, regulations and legislation, primarily relating to the environment, commerce, infrastructure spending, health and safety; and availability of materials.
The Company wishes to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning the Company and its businesses, including factors that could potentially materially affect the Company’s financial results, may emerge from time to time. It is not possible for management to predict all risk factors or to assess the impact of such risk factors on the Company’s businesses.
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 Australia.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.
To mitigate the short-term effect of changes in currency exchange rates on the Company’s functional currency-based sales, the Company’s U.K. subsidiaries regularly enter into foreign exchange forward contracts to hedge approximately 90% of its future net foreign currency collections over a period of six months. As of September 30, 2018,2019, the Company had $994,000$903,000 outstanding in forward exchange contracts related to accounts receivable. A 15% fluctuation in exchange rates for these currencies would change the fair value of these contracts by approximately $149,000.$135,000. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts should be offset by changes in the underlying value of the transaction being hedged.
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 $924,000.$9,791,000.
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 Company’s sales are denominated would result in a change in gross profit of $5,586,000$6,558,000 for the nine month period ending September 30, 2018.2019. 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.
In March 2019, the Company entered into fixed-to-fixed cross-currency swaps and designated these swaps to hedge a portion of its net investment in a euro functional currency denominated subsidiary against foreign currency fluctuations. These contracts involve the exchange of fixed U.S. dollars with fixed euro interest payments periodically over the life of the contracts and an exchange of the notional amounts at maturity. The fixed-to-fixed cross-currency swaps include €40 million ($45 million) maturing December 2021.
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 third quarter 20182019 average interest rate under these borrowings, the Company’s interest expense would have changed by approximately $505,000.$750,000. 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.
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-PresidentVice President, Controller and Corporate Controller,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, CorporateVice 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, see Note 14 Contingent Matters to our interim condensed consolidated financial statements.
Item 1A. - Risk Factors
The Trump Administration continuesWe may not be able to make potentially significant changesrealize the potential or strategic benefits of the acquisitions we complete, or we may not successfully address problems encountered in U.S. trade policy and has taken certain actions that have adversely impacted U.S. trade and relationshipsconnection with China and other trading partners, including imposing tariffs on certain goods imported into the U.S. Any changes in U.S. trade policy could trigger, and certain actions already taken have triggered, additional retaliatory actions by affected countries, resulting in "trade wars." Trade wars may lead to reduced economic activity, increased costs, reduced demand and changes in purchasing behaviors for some or allacquisitions.
Acquisitions are an important part of our products, or other potentially adverse economic outcomes. These or other consequences from any trade wars couldgrowth strategy and we have completed a material adversenumber of acquisitions over the past several years. To date in 2019, we completed three acquisitions, namely, Dutch Power, Dixie Chopper, and Morbark, with Morbark being the most recently completed and most significant. Acquisitions can be difficult, time-consuming, and pose a number of risks, including:
•Potential negative impact on our sales volumes, pricesearnings per share;
•Failure of acquired products to achieve projected sales;
•Problems in integrating the acquired products with our existing and/or new products;
•Potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs and other expenses associated with adding and supporting new products;
•Difficulties in retaining and integrating key employees;
•Failure to realize expected synergies including anticipated revenue benefits and/or cost savings ;
•Disruption of ongoing business operations, including diversion of management’s attention and uncertainty for employees and customers, particularly during the post-acquisition integration process; and
•Potential negative impact on our consolidatedrelationships with customers, distributors and vendors.
If we do not manage these risks, the acquisitions that we complete may have an adverse effect on our business, our results of operations or financial results.condition.
Other than as set forth under this Item 1A, there have not been any material changes from the risk factors previously disclosed in the 20172018 Form 10-K for the year ended December 31, 2017.2018.
Item 2. - NoneUnregistered 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 September 30, 2019:
| | | | | | | | | | | | | | |
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) |
July 2019 | — | | — | | — | | — | |
August 2019 | — | | — | | — | | — | |
September 2019 | 10,000 | | $118.51 | 10,000 | | $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 shall have a term of five (5) years, terminating on December 12, 2023. | | | | |
Item 3. - NoneDefaults Upon Senior Securities
Item 4. - NoneNone.
Item 4. - Mine Safety Disclosures
Not Applicable
Item 5. - Other Information
(a) Reports on Form 8-K
NoneNone.
(b) Other Information
NoneNone.
Item 6. - Exhibits
(a) Exhibits
| | | | | | | | | | | | | | |
31.1 Exhibits | | Exhibit Title | | Incorporated by Reference From the Following Documents |
10.1 | — | Securities Purchase Agreement, dated as of September 11, 2019, by and among Alamo Acquisition Corporation, a Delaware corporation, Alamo Group Inc., a Delaware corporation, Stellex Capital Partners, LP, a Delaware limited partnership, and in its capacity as the initial representative of the other Sellers and Morbark Holdings Group, LLC, a Delaware limited liability company. | | Incorporated by Reference |
10.2 | — | First Amendment to Securities Purchase Agreement, dated as of October 22, 2019, by and among Alamo Acquisition Corporation, a Delaware corporation, Alamo Group Inc., a Delaware corporation, Stellex Capital Partners, LP, a Delaware limited partnership, and in its capacity as the initial representative of the other Sellers pursuant to Section 10.6 of the Securities Purchase Agreement. | | Filed Herewith |
10.3 | — | | | Incorporated by Reference |
31.1 | — | | | Filed Herewith |
31.2 | — | | | Filed Herewith |
31.3 | — | | | Filed Herewith |
32.1 | — | | | Filed Herewith |
32.2 | — | | | Filed Herewith |
32.3 | — | | | Filed Herewith |
101.INS32.4 | — | | | Incorporated by Reference |
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 |
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.
| | | | | |
October 31, 201830, 2019 | Alamo Group Inc. |
| (Registrant) |
| |
| /s/ Ronald A. Robinson |
| Ronald A. Robinson |
| President & Chief Executive Officer |
| | | | | |
| /s/ Dan E. Malone |
| Dan E. Malone |
| Executive Vice President & Chief Financial Officer |
| (Principal Financial Officer) |
| | | | | |
| /s/ Richard J. Wehrle |
| Richard J. Wehrle |
| Vice President, Controller & Corporate ControllerTreasurer |
| (Principal Accounting Officer) |