______________________________________________________________________________
______________________________________________________________________________
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-21220
ALAMO GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1621248
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1502 E. WALNUT, SEGUIN, TEXAS 78155
(Address of principal executive offices)
830-379-1480
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENT FOR THE PAST 90 DAYS.
YES X NO ___
At November 1, 1999, 9,735,809 shares of common stock, $.10 par value, of
the Registrant were outstanding.
Alamo Group Inc. and Subsidiaries
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Interim Condensed Consolidated Statements of Income
Three months and Nine months ended September 30, 1999 and
September 30, 1998 3
Interim Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 (Audited) 4
Interim Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and September 30, 1998 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 15
PART II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net sales:
U.S.
Agricultural.. $ 18,889 $ 23,486 $ 58,183 $ 78,930
Industrial.... 13,514 16,502 46,116 48,698
European...... 11,533 11,036 32,900 32,515
-------- -------- -------- --------
Total net sales 43,936 51,024 137,199 160,143
Cost of sales 35,668 37,393 105,508 118,964
-------- -------- -------- --------
Gross profit 8,268 13,631 31,691 41,179
Selling, general
and administrative
expense 7,867 10,266 21,890 26,087
-------- -------- -------- --------
Inc. from
operations 401 3,365 9,801 15,092
Interest expense (265) (636) (1,355) (2,090)
Interest income 187 180 394 496
Other income
(expense), net (258) 80 (591) (139)
--------- -------- -------- --------
Income before
income taxes 65 2,989 8,249 13,359
Provision for
income taxes (66) 928 2,890 4,900
-------- -------- -------- --------
Net income $ 131 $ 2,061 $ 5,359 $ 8,459
======== ======== ======== ========
Net income per common share:
Basic $ 0.01 $ 0.21 $ 0.55 $ 0.87
Diluted $ 0.01 $ 0.21 $ 0.55 $ 0.87
Average common shares:
Basic 9,736 9,736 9,736 9,707
Diluted 9,743 9,747 9,738 9,727
Dividends declared $ 0.06 $ 0.11 $ 0.28 $ 0.32
See accompanying notes.
3
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,889 $ 2,748
Accounts receivable 41,687 49,834
Inventories 48,706 64,578
Deferred income taxes 5,087 5,087
Prepaid expenses 1,497 1,067
------------- ------------
Total current assets 102,866 123,314
Property, plant and equipment 56,239 55,893
Less: Accumulated depreciation (34,807) (32,989)
------------- ------------
21,432 22,904
Goodwill 10,350 11,411
Other assets 2,692 4,009
------------- ------------
Total assets $ 137,340 $ 161,638
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 12,360 9,461
Income taxes payable 1,487 478
Accrued liabilities 7,651 6,996
Current maturities of
long-term debt 498 487
------------- ------------
Total current liabilities 21,996 17,422
Long-term debt, net of current
maturities 5,736 35,858
Deferred income taxes 1,451 1,452
Stockholders' equity:
Common stock, $.10 par value,
20,000,000 shares authorized;
9,735,809 and 9,735,759 issued
and outstanding at September 30,
1999 and December 31, 1998,
respectively 974 973
Additional paid-in capital 50,454 50,507
Treasury stock, at cost;
40,600 shares at September 30, 1999 (400) -
Retained earnings 57,408 54,775
Accumulated other comprehensive income (279) 651
------------- ------------
Total stockholders' equity 108,157 106,906
------------- ------------
Total liabilities and
stockholders' equity $ 137,340 $ 161,638
============= ============
See accompanying notes.
4
Alamo Group Inc. and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
-----------------------------------
September 30, September 30,
1999 1998
------------- -------------
Operating Activities
Net income $ 5,359 $ 8,459
Adjustment to reconcile net income
to net cash
provided (used) by operating activities:
Provision for doubtful accounts 219 593
Depreciation 2,990 2,897
Amortization 898 1,041
Provision for deferred income tax benefit (4) (492)
(Gain) loss on sale of equipment (219) (20)
Changes in operating assets and liabilities:
Accounts receivable 7,667 (10,109)
Inventories 15,418 (5,810)
Prepaid expenses and other assets 1,149 948
Trade accounts payable and accrued liabilities 3,777 3,210
Income taxes payable 1,025 613
------------ ------------
Net cash provided (used) by
operating activities 38,279 1,330
Investing Activities
Purchase of property, plant and equipment (1,914) (3,069)
Proceeds from sale of property,
plant and equipment 216 178
Purchase of long-term investment (500) (500)
Sale of long-term investment - 3,200
------------ ------------
Net cash (used) by investing activities (2,198) (191)
Financing Activities
Net change in bank revolving credit facility (29,600) 2,300
Principal payments on long-term debt
and capital leases (340) (609)
Dividends paid (2,726) (3,105)
Proceeds from sale of common stock - 113
Cost of common stock repurchased (400) -
------------ ------------
Net cash provided (used) by
financing activities (33,066) (1,301)
Effect of exchange rate changes on cash 126 142
------------ ------------
Net change in cash and cash equivalents 3,141 (20)
Cash and cash equivalents at beginning
of the period 2,748 789
------------ ------------
Cash and cash equivalents at end
of the period $ 5,889 $ 769
============ ============
Cash paid during the period for:
Interest $ 1,584 $ 1,968
Income taxes $ 1,841 $ 5,031
See accompanying notes.
5
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 1999
1. Basis of Financial Statement Presentation
The accompanying unaudited interim condensed consolidated financial state-
ments of Alamo Group Inc. and its subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting princi-
ples 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, 1999. The balance sheet at
December 31, 1998, has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial state-
ments. For further information, refer to the consolidated financial state-
ments and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
2. Accounts Receivable
Accounts Receivable is shown less allowance for doubtful accounts of
$2,187,000 and $2,247,000 at September 30, 1999 and December 31, 1998,
respectively.
3. Inventories
Inventories valued at LIFO cost represented 80% and 87% of total inventory at
each of September 30, 1999 and December 31, 1998, respectively. The excess
of current costs over LIFO valued inventories were $3,981,000 at both Sep-
tember 30, 1999 and December 31, 1998, respectively. Inventory obsolescence
reserves were $8,443,000 at September 30, 1999 and $5,706,000 at December 31,
1998. During the third quarter of 1999, the Company changed its inventory
obsolescence policy to a more conservative one that incorporates excess slow
moving/discontinued inventory as well as excess current/active inventory.
Based on this new policy, the Company increased its obsolescence reserve by
$3,201,000 and took the charge against cost of sales. Net inventories
consist of the following (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Finished goods $ 40,481 $ 57,571
Work in process 4,471 2,840
Raw materials 3,754 4,167
------------ ------------
$ 48,706 $ 64,578
============ ============
An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO must necessarily be based on management's estimates
of expected year-end inventory levels and costs. Because these are subject
to many forces beyond management's control, interim results are subject to
the final year-end LIFO inventory valuation.
6
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 1999 - (Continued)
4. Common Stock and Dividends
Dividends declared and paid on a per share basis were as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Dividends declared $ 0.06 $ 0.11 $ 0.28 $ 0.32
Dividends paid 0.06 0.11 0.28 0.32
5. Earnings Per Share
The following table sets forth the reconciliation from basic to diluted aver-
age common shares and the calculations of net income per common share. Net
income for basic and diluted calculations do not differ. (In thousands, ex-
cept per share).
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net Income $ 131 $ 2,061 $ 5,359 $ 8,459
============= ============= ============= =============
Average Common Shares:
BASIC (weighted-average
outstanding shares) 9,736 9,736 9,736 9,707
Dilutive potential
common shares from stock
options and warrants 7 11 2 20
------------- ------------- ------------ -------------
Diluted (weighted
- -average outstanding
shares) 9,743 9,747 9,738 9,727
============= ============= ============ =============
Basic earnings
per share $ 0.01 $ 0.21 $ 0.55 $ 0.87
Diluted earnings
per share $ 0.01 $ 0.21 $ 0.55 $ 0.87
6. New Accounting Standards and Disclosures
Accounting for Derivative Instruments and Hedging Activities. In September
1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities". In
September 1999, the FASB agreed to defer the effective date of Statement
No. 133 for one year until June 15, 2000, citing concerns over interpreta-
tions on important implementation issues. The management of the Company,
because of its minimal use of derivatives, does not anticipate that the
adoption of the new Statement will have a significant effect on earnings
or the consolidated financial position of the Company.
7
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 1999 - (Continued)
7. Comprehensive Income
During the third quarter of 1999 and 1998, Comprehensive Income amounted to
$1,280,000 and $3,067,000 and for this nine months ended September 30, 1999
and 1998, it was $4,429,000 and $9,571,000 respectively.The components of
Comprehensive Income, net of related tax are as follows:
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
Net Income $ 131 $ 2,061 $ 5,359 $ 8,459
Unrealized gains
on securities - - - -
Foreign currency
translations
adjustment 1,149 1,006 (930) 1,112
------------- ------------- -------------- -------------
Comprehensive
Income $ 1,280 $ 3,067 $ 4,429 $ 9,571
============= ============= ============== =============
The components of Accumulated Other Comprehensive Income as shown on the
Balance Sheet are as follows (in thousands):
September 30, December 31,
1999 1998
-------------- -------------
Foreign currency translation $ (279) $ 651
-------------- -------------
Accumulated other compre-
hensive income $ (279) $ 651
============== =============
8. Contingent Matters
The Company is subject to various unresolved legal actions which arise in the
ordinary course of its business. The most prevalent of such actions relate
to product liability which are generally covered by insurance. While amounts
claimed may 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, but may be material to the
Company's operating results for any particular period, depending on the
level of income for such period.
The Company is involved in a lawsuit between Rhino International and certain
of its former dealers. This lawsuit involved claims against Rhino Inter-
national totaling $3,800,000. In April 1998, a judgment was entered
requiring the Company to pay $110,000, net of Rhino International's recovery.
The judgment is being appealed by all parties. While the ultimate outcome of
this matter cannot be determined at this time, the Company believes this
matter will not have a material adverse effect on the Company's consolidated
financial position.
8
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements - (Unaudited)
September 30, 1999 - (Continued)
The Company is involved in a lawsuit between Rhino International and another
of its former dealers. This lawsuit involves various claims in connection
with the Company's acquisition of Rhino International and its alleged actions
thereafter. The former dealer seeks unspecified damages and asserts
purported claims of fraud, misrepresentation and other causes of action.
The Company has been granted a final summary judgment on all claims filed
against the Company in this matter. The judgment is being appealed. While
the ultimate outcome of this matter cannot be determined at this time, the
Company believes this matter will not have a material adverse effect on the
Company's consolidated financial position.
The Company is involved in two separate lawsuits brought by users of a
certain mower distributed by the Company. The lawsuits involve claims that
the mower did not perform as advertised and several causes of action have been
asserted against the Company including fraud and misrepresentation. The
Company believes it has meritorious defenses against these matters and will
vigorously defend the pending claims and prosecute appropriate cross-claims.
While the ultimate outcome of these matters cannot be determined at this
time, the Company believes these matters will not have a material adverse
impact on the Company's consolidated financial position.
9. Other
The Company has entered into a Consulting and Non-Competition Agreement with
Oran F. Logan. The Agreement was executed on or about August 24, 1999, and
is effective from July 8, 1999, until January 7, 2002, unless terminated
prior to that date. Mr. Logan is the Company's former President and Chief
Operating Officer. A copy of the Agreement is attached to this Form 10-Q.
On September 13, 1999, the Company announced its decision to close its
manufacturing facility in LaGrange, Illinois, and move those operations to
other Company facilities located in the U.S. The plant closure is scheduled
to be completed by the end of the year. The decision is part of the Company's
strategy to improve overall manufacturing operations in the U.S. and to
reduce costs.
On September 18, 1999, Joseph C. Graf, a member of the Board of Directors of
the Company, announced his retirement effective December 31, 1999. Mr. Graf
has been a Board member since 1969.
The Company has reached an oral agreement which disposes of certain issues
between Oran F. Logan and the Company. As part of the agreement, Mr. Logan
will resign his position as a member of the Company's Board of Directors
effective November 8, 1999. It is anticipated that a final written agree-
ment reflecting the agreement reached by the parties will be completed by the
end of the year.
9
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Sales Data in Thousands
Domestic
Agricultural 43.0% 46.0% 42.4% 49.3%
Industrial 30.8% 32.4% 33.6% 30.4%
European 26.2% 21.6% 24.0% 20.3%
------------- ------------- ------------- -------------
Total sales, net 100.0% 100.0% 100.0% 100.0%
============= ============= ============= =============
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Cost Trends and Profit Margin, as
Percentage of Net Sales
Gross margin 18.8% 26.7% 23.1% 25.7%
Income from
operations 0.9% 6.6% 7.1% 9.4%
Income before
income taxes 1.0% 5.9% 6.0% 8.3%
Net income 3.0% 4.0% 3.9% 5.3%
Results of Operations
Three Months Ended September 30, 1999 vs. Three Months Ended
September 30, 1998
Net sales for the third quarter were $43,936,000, a decrease of $7,088,000
or 13.9% compared to $51,024,000 for the third quarter of 1998. The decrease
in sales was primarily attributable to the agricultural market as well as
smaller declines in the industrial sector. European sales increased slightly
due to higher shipments of McConnel products.
Net U.S. agricultural sales were $18,889,000 in 1999 compared to
$23,486,000 for the same period in 1998, a decrease of $4,597,000 or 19.6%.
The decrease in sales was primarily due to continued market softness from
cyclical declines in the agricultural industry. Products that were most
affected were M&W tillage and baler equipment as well as lower dollar
volume orders for Herschel-Adams replacements parts.
Net industrial sales declined for the third quarter by $2,988,000 or 18.1%
to $13,514,000 for 1999 compared to $16,502,000 during the same period in
1998. Adverse weather conditions hampered principal market areas with
drought affecting the northeast and excessive rain in certain key northwest
areas.
Net European sales for the third quarter of 1999 were $11,533,000, an in-
crease of 4.5% compared to $11,036,000 during the third quarter of 1998.
Stable economic and market conditions in the U.K. and France along with
increased McConnel shipments into France were the primary reasons for the
increase.
10
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
Gross profit for the third quarter of 1999 was $8,268,000 (18.8% of net
sales) compared to $13,631,000 (26.7% of net sales) during the same period in
1998. The primary difference was a $3,201,000 charge against cost of sales
in 1999 to write down inventory due to a change in the Company's inventory
obsolescence policy. The Company adopted a more conservative approach in
dealing with excess slow moving/discontinued and excess current/active
inventory levels.
Selling, general and administrative expenses ("SG&A") were $7,867,000 (17.9%
of net sales) during the third quarter of 1999 compared to $10,266,000 (20.1%
of net sales) during the same period of 1998, a decrease of $2,399,000.
SG&A for the third quarter of 1998, included expenses from the settlement of
the Rhino International lawsuit along with expenses relating to the failed
Woods acquisition. Excluding these costs, SG&A in 1998 would reflect a more
comparable expense to the third quarter of 1999.
Interest expense was $265,000 for the third quarter of 1999 compared to
$636,000 during the same period in 1998, a 58.3% decrease. The Company
continued to reduce inventory levels which along with seasonal cash receipts
from receivables improved cash flows which allowed for debt reduction.
Other Income (Expense) was a $258,000 expense for the third quarter of 1999
compared to income of $80,000 during the third quarter of 1998. European
operations incurred exchange rate losses in relation to agreed prices in
French francs with French distributors. The Company was responsible for all
exchange rate differences.
Income taxes for the quarter ending 1999 continue to improve over 1998 due to
lower statutory rate in the United Kingdom (U.K.) from 33% in 1998 to 31.0%
in 1999.
Nine Months Ended September 30, 1999 vs.Nine Months Ended
September 30, 1998
Net sales were down 14.3% to $137,199,000 for the first nine months of 1999
compared to $160,143,000 for the first nine months of 1998. The decrease
resulted primarily from reduced sales in the Company's agricultural products.
Net agricultural sales were $58,183,000 for the first nine months of 1999
compared to $78,930,000 for the first nine months of 1998, representing a
decline of $20,747.00 or 26.3%. The continued weakness from the cyclical
decline in the agricultural market which began in late 1998, has continued
to affect all agricultural product lines within the Company. The Company
expects this trend to continue into the early part of 2000 with continued
expected declines to be around 30%.
Net industrial sales for the first nine months of 1999 were $46,116,000
compared to $48,698,000 for the same period in 1998, a 5.3% decrease.
Product mix between whole goods and parts continued to improve throughout
the year with tractor sales declining due to a slowdown in deliveries from
major tractor suppliers. Also affecting sales were drought conditions in
northeast areas in the U.S. as well as excessive wet conditions in certain
markets in the northwest.
Net European sales increased 1.2% to $32,900,000 for the first nine months
of 1999 from $32,515,000 during the first nine months of 1998. Market
conditions between the U.K. and France continued to affect sales. During
the first quarter of 1999 exchange rates between the British pound and the
French franc show signs of improvement as related to sales of the Company's
U.K. manufactured products but those signs disappeared during the third
quarter of 1999. The Company does not expect the exchange rate condition
to improve for the remainder of the year.
11
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
Gross profit for the first nine months of 1999 was $31,691,000 (23.1% of net
sales) compared to $41,179,000 (25.7% of net sales) for the first nine months
of 1998. Margin percentages have been negatively impacted by lower pro-
duction volumes for agricultural products as well as the inventory charge of
$3,201,000 relating to a change in the Company's obsolescence policy that
occurred in the third quarter of 1999.
Selling, general and administrative expenses ("SG&A") decreased $4,197,000 to
$21,890,000 (16.0% of net sales) for the first nine months of 1999 compared
to $26,087,000 (16.3% of net sales) during the first nine months of 1998.
During the third quarter of 1998 the Company incurred expenses relating to
the settlement of the Rhino International lawsuit as well as expenses
relating to the failed Woods Acquisition. The Company also continued to have
reduced marketing expenses for 1999 due to lower agricultural sales volumes.
The Company is continuing to focus its efforts on controlling costs and
will continue to take appropriate measures to maintain lower expense levels.
Interest expense was $1,355,000 for the nine months of 1999 compared to
$2,090,000 for the nine months of 1998. Increased cash flows from reducing
levels of inventory as well as continued seasonal cash receipts has reduced
the Company's bank credit facility. The Company expects to continue lowering
overall interest expense for the rest of 1999 with cash flow levels con-
tinuing to improve.
Other Income (Expense) was a $591,000 expense for the third quarter of 1999
compared to expense of $139,000 during the third quarter of 1998. European
operations incurred exchange rate losses in relation to agreed prices with
French distributors. The Company was responsible for all exchange rate dif-
ferences. The French franc to British pound exchange has deteriorated
throughout 1999.
The Company's tax rate has been reduced for 1999 compared to 1998 due to im-
proved state planning as well as a statutory reduction in the U.K. tax rate
from 33.0% to in 1998 to 31.0% in 1998.
Liquidity and Capital Resources
In addition to normal operating expenses, the Company has on going cash re-
quirements which are necessary to expand the Company's business including
inventory purchases and capital expenditures. The Company's inventory and
accounts payable levels typically build in the first three quarters of the
year and partly in the forth 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 and out of season sales.
These sales enhance the Company's production during the off season. During
the latter part of 1998, an inventory reduction plan was put in place to re-
duce excess and obsolete inventory levels that had continued to hamper
liquidity. Since the end of 1998, tighter requirements on inventory pur-
chases as well as just in time inventory procedures for raw materials have
aided in reducing inventory by approximately $15,872,000.
As of September 30, 1999, the Company had working capital of $80,870,000
which represents a decrease of $25,022,000 from working capital of
$105,892,000 as of December 31, 1998. The decrease in working capital was
primarily due to lower inventory levels.
Capital expenditures were $1,914,000 for the first nine months of 1999,
compared to $3,069,000 during the first nine months of 1998. Capital ex-
penditures for all of 1999 are expected to be approximately $3,500,000 which
is slightly below historical levels. The Company expects to fund expen-
ditures from operating cash flows or through its revolving credit facility,
described below.
12
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
The Company has been authorized by its Board of Directors to repurchase up
to 1,000,000 shares of the Company's common stock to be funded through
working capital and credit facility borrowings. In 1997 the Company re-
purchased 79,840 shares. No shares were repurchased in 1998. In 1999, the
Company repurchased 40,600 shares in the third quarter.
Net cash used by financing activities was $33,066,000 during the nine month
period ending September 30, 1999 compared to $1,301,000 net cash used by
financing activities for the same period in 1998. The change in activities
primarily resulted from payment against debt on the bank revolving credit
facility due to seasonal cash receipts from accounts receivable balances.
The Company has a $45,000,000 contractually committed, unsecured, long-term
bank revolving credit facility under which the Company can borrow and repay
until December 31, 2002, with interest at variable rate options based upon
prime or euro currency rates, with such rates wither floating on a daily
basis or fixed for periods up to 180 days. Proceeds may be used for general
corporate purposes or, subject to certain limitations, acquisition activi-
ties. The loan agreement contains certain financial covenants which are
customary in credit facilities of this nature including minimum financial
ratio requirements and limitations on dividends, indebtedness, liens and
investments. The Company is in compliance with all such covenants as of
September 30, 1999. As of September 30, 1999, no money was borrowed under
the revolving credit. At September 30, 1999, $1,049,000 of the revolver
capacity was committed to irrevocable standby letters of credit issued in the
ordinary course of business as required by certain vendors contracts. The
Company's borrowing levels for working capital are seasonal with the greatest
utilization generally occurring in the first quarter and early spring.
Management believes that the bank credit facility 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.
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit
format. If not addressed, such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business dis-
ruptions in the U.S. and internationally (the "Year 2000" issue). The po-
tential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature of
the industry in which a company operates. Additionally, companies must
coordinate with other entities with which they electronically interact.
Both U.S. and international companies that do not address the Year 2000
issue could experience business disruptions such as system failures or
miscalculations that could cause disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities.
State of Readiness
To date, the Company has fully completed its assessment of all its in-
formation systems that could be significantly affected by the Year 2000.
The completed assessment indicated that most of the Company's significant
information technology systems in its domestic operations would not be
affected. This is due to the fact that the Company's primary operating
system does not utilize a two-digit date format. The Company presently
believes that any required modifications have been made in the ordinary
course of business and it expects no significant issues to occur.
The Company's systems utilized in its European operations are an older
version of the U.S. operating system and are not 100% Year 2000 compliant.
The Company is in the process of testing and updating its European programs
which are not compliant. This process is expected to be completed in the
early fourth quarter of 1999 and such modifications will be made in the
ordinary course of business.
13
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
The Company has substantially completed the assessment of its software and
hardware (embedded chips) used in production and manufacturing systems and
does not anticipate any significant required modifications.
The Company's products are generally not dependent on computer chips, and
accordingly, the Company does not believe that the Year 2000 presents a
material exposure as it relates to its products.
In addition, the Company has gathered information about the Year 2000 com-
pliance status of its significant suppliers and subcontractors ("external
agents") and continues to monitor their compliance. To date, the Company is
not aware of any external agent with a Year 2000 issue that would materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The effect of non-compliance by external agents is not de-
terminable. However, the inability of external agents to complete their
Year 2000 resolution process in a timely fashion may materially impact the
Company.
Costs
The Company will primarily utilize internal resources to test, reprogram, or
replace, and implement software and operating equipment for Year 2000 modi-
fications. The total cost of the Year 2000 project is not expected to exceed
$100,000 and is being expensed as incurred.
Risks and Worst Case Scenario
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program.
Although no assurances can be given as to the Company's compliance, par-
ticularly as it relates to third parties, including governmental entities,
based upon the progress to date, the Company does not expect that the future
costs of modifications or the consequences of any unsuccessful modifications
will have a material adverse impact on the Company's financial position or
results of operations. Accordingly, the Company believes the most likely
worst case Year 2000 scenario would not have a material adverse impact on the
Company's financial position or results of operations. However, there can
be no assurance that the Company will not experience unanticipated costs
and/or business interruptions due to Year 2000 problems in its internal
systems or its supply chain, or that such costs and/or interruptions will
not have a material adverse effect on the Company's consolidated results of
operations.
Contingency Plan
The Company currently has no contingency plan in place in the event it does
not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion during the third quarter of 1999 and
determine whether such a plan is necessary.
Euro Conversion
On January 1, 1999, the European Economic and Monetary Union (EMU) entered a
three-year transition phase during which a new common currency, the "euro",
was introduced in participating countries which established fixed conversion
rates through the European Central Bank (ECB) between existing local cur-
rencies and the euro. From that date, the euro is traded on currency
exchanges.
Following introduction of the euro, local currencies will remain legal tender
until December 31, 2001. During this transition period, goods and services
may be paid for with the euro or the local currency under the EMU's "no
compulsion, no prohibition" principle.
14
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
Based on its evaluation to date, management believes that the introduction of
the euro did not have a material adverse impact on the Company's financial
position, results of operations or cash flows. However, uncertainty exists
as to the effects the euro will have on the marketplace, and there is no
guarantee that all issues will be foreseen and corrected or that other third
parties will address the conversion successfully.
The Company has reviewed its information systems software and identified
modifications necessary to ensure business transactions can be conducted
consistent with the requirements of the conversion to the euro. Certain of
these modifications have been implemented, and others will be implemented
during the course of the transition period. The Company expects that
modifications not yet implemented will be made on a timely basis and expects
the incremental cost of the euro conversion to be immaterial. Any costs
associated with implementing changes to comply with the euro conversion are
expensed as incurred.
The euro introduction is not expected to have a material impact on the
Company's overall currency risk. The Company anticipates the euro will
simplify financial issues related to cross-border trade in the EMU and reduce
the transaction costs and administrative time necessary to manage this trade
and related risks. However, the Company believes that the associated savings
will not be material to corporate results.
Cessation of Rhino International's Operation
On December 31, 1998, Rhino International, a subsidiary of the Company,
advised its customers and suppliers that it would cease operations as a
distributor of imported Chinese tractors and other related equipment and
would commence winding up its operations immediately. Rhino International,
which was acquired in 1995, is not related to the Company's core business.
Disposal of the assets of the Rhino International operation is under way,
and the Company anticipates that these activities should be concluded by
year end 1999. The Company does not expect these activities to have a
material impact on the Company's 1999 operating results.
Forward-Looking Information
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 3. "Quantitative and Qualitative Disclosures
About Market Risks" contained in this Quarterly Report on Form 10-Q contain
forward-looking statements within the meaning of Section 27A of the Se-
curities 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", "believe",
"intend" and similar expressions generally identify forward-looking statements
made by or on behalf of the Company.
Forward-looking statements involve risks and uncertainties. These uncer-
tainties 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 at the present include
continued deterioration in the Company's United States agricultural market
and softening in its international markets; increased competition in the
Company's businesses from competitors that may have greater financial
resources; the impact of the strong dollar and British pound which increase
the cost of the Company's products in foreign markets; competitive implica-
tions and price transparencies related to the euro conversion; the Company's
ability to develop and manufacture new and existing products profitably;
market acceptance of existing and new products; the Company's ability to
maintain good relations with its employees; and the ability to retain and
hire quality employees.
15
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
In addition, the Company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions
and the economy in general in both foreign and domestic markets; weather
conditions affecting demand; slower growth in the Company's markets;
financial market changes including increases in interests rates and fluctua-
tions in foreign currency exchange rates; unanticipated problems or costs
associated with the transition of European currencies to the euro currency;
actions of competitors; unanticipated problems or costs associated with
accommodations of the Year 2000 in computer applications or products; the
inability of the Company's supplier, customers, creditors, government
agencies, public utility providers and financial service organizations to
implement computer applications accommodating the Year 2000; seasonal factors
that could materially affect the Company's industry; unforeseen litigation;
government actions including budget levels, regulations and legislation,
primarily legislation 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 statement 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 potentially could materially affect the Company's financial
results may emerge from time to time. It is not possible for management to
predict all risk factors for 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 markets risks. Market risk is the
potential loss 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
As a Result of Foreign Sales
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products
in the United States, U.K. and France. The Company sells its products pri-
marily within the markets where the products are produced, but certain of the
Company's sales from its U.K. operations are denominated in other European
currencies. As a result, the Company's financial results could be affected
by factors such as changes in foreign currency exchange rates or weak
economic conditions in the other European markets in which its U.K.
subsidiaries 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 regularly hedges
by entering into foreign exchange forward contracts to hedge approximately
80% of its future net foreign currency sales over a period of nine months.
As September 30, 1999, the Company had no outstanding forward exchange
contracts. A 15% fluctuation in foreign currency exchange rates for these
currencies could change the market value of any future contracts. However,
since these future contracts hedge foreign currency denominated transactions,
any change in the market value of the contracts would be offset by changes
in the underlying value of the transaction being hedged.
16
Alamo Group Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)
As a Result of Foreign Translation
The Company's earnings and financial position are affected by foreign
currency exchange rate fluctuations related to its wholly-owned subsidiaries
in the U.K. and France as the British pound and French franc are the
functional currencies of these subsidiaries. Changes in the foreign
currency exchange rate between the U.S. dollar and the British pound or
French franc can impact the Company's results of operations and financial
position. The impact of a hypothetical change in the foreign currency
exchange rate of 5% between the U.S. dollar and the British pound or French
franc would change the market value to an approximate range between $500,000
and $2,000,000. Any percentage greater than 5% could not be justified in
this hypothetical calculation due to historical information not supporting
a larger percent change. The translation adjustment during the third quarter
of 1999 was a loss of $930,000 which was primarily caused due to the
weakening of the British pound to the U.S. dollar. On September 30, 1999, the
British pound closed at 0.6071 relative to 1.00 U.S. dollar, and the French
Franc closed at 0.0986 relative to 1.00 British pound. By comparison, on
September 30, 1998, the British pound closed at 0.5882 relative 1.00 U.S.
dollar, and the French franc closed at 0.1050 relative to 1.00 British pound.
No assurance can be given as to future valuation of the British pound or
French franc or how further movements in those currencies could affect
future earnings or the financial position of the Company.
Interest Rate Risk
At September 30, 1999, the Company's long-term debt bears interest at
variable rates. Accordingly, the Company's net income is affected by changes
in interest rates. 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.
17
Alamo Group Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
(10.2) Consulting & Non-Competion Ageement between
Alamo Group Inc. and Oran F. Logan
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
None
18
Alamo Group Inc. and Subsidiaries
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.
Alamo Group Inc.
(Registrant)
/s/_______________________
Ronald A. Robinson
President and CEO
19
Exhibit 10.2
CONSULTING AND NON-COMPETITION AGREEMENT
This Consulting and Non-Competition Agreement (the "Agreement") is made and
entered into on this 8th day of July, 1999, by ALAMO GROUP INC., a Delaware
corporation (the "Company") and Oran F. Logan ('Consultant").
W I T N E S E T H:
WHEREAS,
the Company and its subsidiaries operate a business engaged in the
manufacture of tractor-mounted or tractor-pulled mowing and other vegetation
maintenance equipment and replacement parts for governmental, industrial and
agricultural end-users (the "Business"); and
WHEREAS, Consultant has knowledge and experience in operating and managing
the Business; and
WHEREAS, the Company desires to utilize Consultant's knowledge and
experience with regard to the Business; and
NOW, THEREFORE, for the mutual consideration herein expressed and subject
to the terms and on the conditions herein stated, the parties hereto agree
as follows;
1. Consulting Services. The Consultant shall advise and consult with the
Company regarding: (1) all aspects of the management and operation of the
Company and (2) on such other matters as shall be reasonably requested by
the Company. In the performance of his duties hereunder, the Consultant
shall report directly to the Board of Directors of the Company or to any
officer designated by the Board of Directors of the Company. Consultant
shall make himself available to the Company on an as needed basis in the
reasonable judgment of the Company, to provide the services herein described.
2. Term and Termination of Consulting Services. The term of Consultant's
obligation to perform consulting services hereunder shall be for a period of
thirty (30) months from the date hereof.
3. Consulting Fee. For all services rendered by Consultant during the
term of this Agreement, commencing July 8, 1999 and ending January 7, 2002,
the Company shall pay Consultant a consulting fee (the "Consulting Fee").
The Consulting Fee during the first six (6) months of the term shall be One
Hundred Thousand Dollars ($100,000), payable in six (6) equal monthly
installments on the 7th day of each month commencing August 7, 1999. The
Consulting Fee during the following twenty-four (24) months of the term
shall be Three Hundred Thousand Dollars ($300,000) payable in quarter-annual
installments of Thirty Seven Thousand Five Hundred Dollars ($37,500),
beginning on April 7, 2000 and thereafter on the 7th day of each July,
September, January and April until the balance of the Consulting Fee is paid.
4. Management Duties. Although Consultant is not resigning his position as
a member of the Board of Directors of the Company, effective upon the
execution of this Agreement, Consultant hereby resigns as an officer of the
Company. Further, Consultant hereby resigns as an officer and director of
each of the Company's direct or indirect subsidiaries.
5. Non-Competition. For the Restrictive Period (as hereinafter defined),
Consultant shall not, directly, or indirectly through one of more other
Persons (as hereinafter defined), (i) engage in any Competitive Activities
(as hereinafter defined) anywhere in the United States or Europe, or (ii)
acquire or have any ownership, financial or other interests or serve in any
position or capacity (whether as a principal, partner, member, joint venture,
shareholder, director, officer, agent, employee, consultant, lender or
otherwise) in or with any Person engaged in Competitive Activities other
than on behalf of the Company, (iii) provide any assistance (financial,
advisory or other) to any Person or Persons, that engages or proposes to
engage in any Competitive Activities, (iv) request any customers of any
business conducted by the Company to curtail or cancel their business with
the Company, (v) disclose to any Person, any trade, technical or tech-
nological secrets, any details or organization or business affairs, any
names of past or present customers of the Company or any other information
relating to the business of the Company, (vi) solicit canvass or accept any
business or transaction for any other Person in competition with the business
of the Company, or (vii) induce, or attempt to influence, any employee of
the Company to terminate employment with the Company or to enter into any
employment or other business relationship with any other Person. In the
event of a breach of this paragraph 5, the Company's obligation to make any
further payments of Consulting Fees shall terminate, and the terms of the
Restrictive Period will be extended by the period of the duration of such
breach.
(A) The term "Competitive Activities" shall mean(i) the conduct or
operation of, or involvement in, any business or business activity involving
the Business, (ii) the sale or distribution of tractor-mounted or
tractor-pulled mowing and other vegetation maintenance equipment, for
industrial and agricultural end-users, and/or (iii) the sale or distribution
of replacement parts for the foregoing.
(B) For purposes of this paragraph 5, the term "Company" shall include
Alamo Group Inc. and its direct and indirect subsidiaries.
(C) The term "Person" shall mean any natural person, sole pro-
prietorship, firm, corporation, limited liability company, partnership,
joint venture or unincorporated association or any other business entity.
(D) The term "Restrictive Period" shall mean the period beginning on
the date hereof and ending thirty (30) months after the date of this
Agreement.
6. Remedies. It is agreed among the parties hereto that the Company, as
well as any subsidiary, affiliate, successor or assignee of the Company,
would be irreparably damaged by reason of any violation of the covenant set
forth in paragraph 5 hereof, and that any remedy at law for a breach of such
provision would be inadequate. Therefore, the Company, as well as any
subsidiary, affiliate, successor or assignee of the Company, shall be
entitled to seek and obtain injunctive or other equitable relief (including,
without limitation, a temporary restraining order, a temporary injunction
or permanent injunction) for a breach or threatened breach of such provisions
and without the necessity of proving actual monetary loss. It is expressly
understood between the parties that this injunctive or other equitable relief
shall not be the exclusive remedy of the Company, or of any subsidiary,
affiliate, successor or assignee of the Company, for any breach of this
Agreement, and the Company, or any subsidiary, affiliate, successor or
assignee of the Company, shall be entitled to seek any other relief or
remedy which it may have by contract, statue, law or otherwise for any breach
hereof. The parties hereto also agree that if an injunction is sought by the
Company, or any subsidiary, affiliate, successor or assignee of the Company,
then such party need not show proof of actual damage, and the Consultant
hereby waives any requirement that such party post any bond.
7. Judicial Modification. In the event the scope of any of the restric-
tions contained herein are too broad to permit the enforcement of such re-
strictions to their fullest extent, then such restrictions shall be enforced
to the maximum extent permitted by law. The Consultant hereby agrees and
consents that such scope may be judicially modified accordingly, in any
proceeding brought to enforce such restrictions.
8. Independent Contractor. At all times pertinent to this Agreement,
Consultant shall have the status of independent contractor. Consultant
shall have exclusive control over the methods used to perform the services
and duties required under this Agreement. Nothing contained in this Agreement
shall be construed to constitute Consultant as an officer, director, employee
or agent of the Company. Consultant shall remain responsible for all taxes
assessed on fees paid to him hereunder.
9. Entire Agreement. This instrument contains the entire agreement
of the parties with respect to the matters contained herein.
10. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective successors and assigns.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND REGULATED UNDER
AND BY THE LAWS OF THE STATE OF TEXAS.
12. Modification. This Agreement may only be modified by written agreement
executed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the date first above written.
COMPANY:
ALAMO GROUP INC.
By ____________________________________
___________________ , its _____________
CONSULTANT:
__________________________________________
ORAN F. LOGAN
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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