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 JUNE 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 EAST 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 [ ]
<PAGE>
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 Six months ended June 30, 1999 and June 30, 1998 3
Interim Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 (Audited) 4
Interim Condensed Consolidated Statements of Cash Flows Six months
ended June 30, 1999 and June 30, 1998 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
PART II. OTHER INFORMATION
Item 1. None
Item 2. None
Item 3. None
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales:
Domestic
Agricultural ......................................... $ 20,151 $ 29,495 $ 39,294 $ 55,444
Industrial ........................................... 19,244 18,866 32,602 32,196
European ................................................ 11,700 12,031 21,367 21,479
--------- --------- --------- ---------
Total net sales ............................................ 51,095 60,392 93,263 109,119
Cost of sales .............................................. 37,750 44,192 69,840 81,571
--------- --------- --------- ---------
Gross Profits .............................................. 13,345 16,200 23,423 27,548
Selling, general and administrative expense ................ 7,159 8,424 14,023 15,821
--------- --------- --------- ---------
Income from operations .................................. 6,186 7,776 9,400 11,727
Interest expense ........................................... (432) (742) (1,090) (1,454)
Interest income ............................................ 105 142 207 316
Other income (expense), net ................................ (201) 10 (333) (219)
--------- --------- --------- ---------
Income before income taxes .............................. 5,658 7,186 8,184 10,370
Provision for income taxes ................................. 2,050 2,714 2,956 3,972
--------- --------- --------- ---------
Net income .............................................. $ 3,608 $ 4,472 $ 5,228 $ 6,398
========= ========= ========= =========
Net income per common share:
Basic ................................................... $ 0.37 $ 0.46 $ 0.54 $ 0.66
========= ========= ========= =========
Diluted ................................................. $ 0.37 $ 0.46 $ 0.54 $ 0.66
========= ========= ========= =========
Average common shares:
Basic ................................................... 9,736 9,701 9,736 9,693
========= ========= ========= =========
Diluted ................................................. 9,736 9,720 9,736 9,718
========= ========= ========= =========
Dividends Declared ......................................... $ 0.11 $ 0.11 $ 0.22 $ 0.21
</TABLE>
See accompanying notes.
3
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 1,093 $ 2,748
Accounts receivable ...................................... 54,439 49,834
Inventories .............................................. 54,737 64,578
Deferred income taxes .................................... 5,087 5,087
Prepaid expenses ......................................... 1,147 1,067
------------- -------------
Total current assets ................................... 116,503 123,314
Property, plant and equipment ............................. 55,483 55,893
Less: Accumulated depreciation .......................... (33,977) (32,989)
------------- -------------
21,506 22,904
Goodwill .................................................... 10,415 11,411
Other assets .............................................. 3,256 4,009
------------- -------------
Total assets ........................................... $ 151,680 $ 161,638
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Trade accounts payable ................................... $ 10,932 $ 9,461
Income Taxes payable ..................................... 3,111 478
Accured liabilities ...................................... 8,160 6,996
Current maturities of long-term debt ..................... 476 487
------------- -------------
Total current liabilities .............................. 22,679 17,422
Long-term debt, net of current maturities ................. 19,673 35,858
Deferred income taxes ..................................... 1,466 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 June 30,
1999 and December 31, 1998, respectively ................. 973 973
Additional paid-in capital ................................ 50,456 50,507
Retained earnings ......................................... 57,861 54,775
Accumulated other comprehensive income .................... (1,428) 651
------------- -------------
Total stockholders'equity ................................ 107,862 106,906
------------- -------------
Total liabilities and stockholders' equity ............... $ 151,680 $ 161,638
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net Income ............................................. $ 5,228 $ 6,398
Adjustment to reconcile net income to net cash
provided (used) by operating activities:
Provision for doubtful accounts .................... 140 445
Depreciation ....................................... 2,007 1,917
Amortization ....................................... 598 689
Provision for deferred income tax benefit .......... 6 11
(Gain)loss on sale of equipment .................... (71) (4)
Changes in operating assets and liabilities:
Accounts receivable ................................ (5,515) (17,808)
Inventories ........................................ 9,013 (5,523)
Prepaid expenses and other assets .................. 457 909
Trade accounts payable and accrued liabilities ..... 3,180 3,204
Income taxes payable ............................... 2,736 3,686
-------- --------
Net cash provided (used) by operating activities ....... 17,779 (6,076)
INVESTING ACTIVITIES
Purchase of property, plant and equipment .............. (1,349) (2,482)
Proceeds from sale of property, plant and equipment .... 128 160
Purchase of long-term investment ....................... -- (500)
Sale of long-term investment ........................... -- 3,200
-------- --------
Net cash (used) by investing activities ................ (1,221) 378
FINANCING ACTIVITIES
Net change in bank revolving credit facility ........... (15,660) 7,600
Principal payments on long-term debt and capital leases (226) (494)
Dividends paid ......................................... (2,142) (2,034)
Proceeds from sale of common stock ..................... -- 116
-------- --------
Net cash provided (used) by financing activities ....... (17,968) 5,188
Effect of exchange rate changes on cash ................ (245) 14
Net change in cash and cash equivalents ................ (1,655) (496)
Cash and cash equivalents at beginning of the period ... 2,748 789
-------- --------
Cash and cash equivalents at end of the period ......... $ 1,093 $ 293
======== ========
Cash paid during the period for:
Interest ............................................ $ 979 $ 942
Income taxes ........................................ 107 266
See accompanying notes.
5
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
JUNE 30, 1999
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
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 principles 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 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, 1998.
2. ACCOUNTS RECEIVABLE
Accounts Receivable has shown less allowance for doubtful accounts of $2,152,000
and $2,247,000 at June 30, 1999 and December 31, 1998, respectively.
3. INVENTORIES
Inventories valued at LIFO cost represented 82% and 87% of total inventory at
each of June 30, 1999 and December 31, 1998, respectively. The excess of current
costs over LIFO valued inventories were $3,981,000 at both June 30, 1999 and
December 31, 1998. Inventory obsolescence reserves were $5,243,000 at June 30,
1999 and $5,706,000 at December 31, 1998. Net inventories consist of the
following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
------- -------
Finished goods ............... $47,105 $57,571
Work in process .............. 3,592 2,840
Raw materials ................ 4,040 4,167
------- -------
$54,737 $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
<PAGE>
Alamo Group Inc. and Subsidiaries
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
JUNE 30, 1999 - (CONTINUED)
4. COMMON STOCK AND DIVIDENDS
Dividends declared and paid on a per share basis were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
Dividends declared ................. $ 0.11 $ 0.11 $ 0.22 $ .21
Dividends paid ..................... $ 0.11 $ 0.11 $ 0.22 $ .21
5. 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. (In thousands, except per
share).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income ...................................... $ 3,608 $ 4,472 $ 5,228 $ 6,398
======== ======== ======== ========
Average Common Shares:
BASIC (weighted-average outstanding shares) . 9,736 9,701 9,736 9,693
Dilutive potential common shares from stock
options and warrants ........................ -- 19 -- 25
-------- -------- -------- --------
DILUTED (weighted-average outstanding shares) 9,736 9,720 9,736 9,718
======== ======== ======== ========
Basic earnings per share ........................ $ 0.37 $ 0.46 $ 0.54 $ 0.66
======== ======== ======== ========
Diluted earnings per share ...................... $ 0.37 $ 0.46 $ 0.54 $ 0.66
======== ======== ======== ========
</TABLE>
6. NEW ACCOUNTING STANDARDS AND DISCLOSURES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. In June 1999, the
FASB agreed to defer the effective date of Statement No. 133 for one year until
June 15, 2000, citing concerns over interpretations 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
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
JUNE 30, 1999 - (CONTINUED)
7. COMPREHENSIVE INCOME
During the second quarter of 1999 and 1998, Comprehensive Income amounted to
$2,766,000and $4,605,000 and for the six months ended June 30, 1999 and 1998, it
was $3,149,000 and $6,504,000 respectively.
The components of COMPREHENSIVE INCOME, net of related tax are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income ............................ $ 3,608 $ 4,472 $ 5,228 $ 6,398
Unrealized gains on securities
Foreign currency translation adjustment (842) 133 (2,079) 106
-------- -------- -------- --------
Comprehensive Income .................. 2,766 4,605 3,149 6,504
======== ======== ======== ========
</TABLE>
The components of ACCUMULATED OTHER COMPREHENSIVE INCOME are as follows (in
thousands):
JUNE 30, JUNE 30,
1999 1998
-------- --------
Unrealized gains on securities
Foreign currency translation adjustments .............. $ (1,428) $ 651
-------- --------
Accumulated other comprehensive income ................ $ (1,428) $ 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.
8
<PAGE>
Alamo Group Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
JUNE 30, 1999 - (CONTINUED)
The Company is involved in a lawsuit between Rhino International and certain of
its dealers and former dealers. This lawsuit involved claims against Rhino
International totaling $3,800,000. In April 1998, a judgement was entered
requiring the Company to pay $110,000, net of Rhino International's recovery.
The judgment is being appealed by both 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.
The Company has been named in a lawsuit between Rhino International and another
of its former dealers. This lawsuit involves claims that are unspecified. The
Company was very recently granted a summary judgement on all claims filed
against the Company in this lawsuit. The judgement is not final. 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
product distributed by the Company. The lawsuits involve claims that the product
did not perform as advertised. The Company believes it has meritorious defenses
against this matter 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. SUBSEQUENT EVENTS
On July 7, 1999, the Company announced that its Board of Directors had hired
Ronald A. Robinson as President and Chief Executive Officer (CEO). Mr. Robinson
succeeds Donald J. Douglass who resigned his position as CEO and Oran F. Logan
former President and Chief Operating Officer of the Company. Mr. Douglass will
continue to serve as Chairman of the Board of Directors. Mr. Logan will continue
as a member of the Board of Directors. Additionally, the Company has retained
Mr. Logan as a consultant to the Company (see attached agreement in Part II Item
6a).
The Company also anounced that its Board of Directors has reduced its quarterly
cash dividend from $0.11 per share to $0.06 per share payable August 10, 1999,
to shareholders of record as of July 22, 1999. The Company expects the new
annual dividend rate of $0.24 per share, will increase its ability to grow the
business internally and externally by acquisition.
The Company announced on July 30, 1999, that it has scheduled Special Meeting of
the Stockholders' to take place August 31, 1999, at which time the stockholders
will vote on proposed amendments to the Company's 1994 Incentive Stock Option
Plan as well as the Company's proposed 1999 Non-Qualitative Stock Option Plan.
The subject proxy statement was filed with the Securities and Exchange
Commission on Form DEF 14A on July 30, 1999.
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 SIX MONTHS ENDED
-------------------- --------------------
(SALES, AS PERCENT OF NET SALES) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
Domestic
Agricultural ............... 39.4% 48.9% 42.1% 50.8%
Industrial ................. 37.7% 31.2% 35.0% 29.5%
European ....................... 22.9% 19.9 % 22.9 % 19.7%
Total sales, net ........... 100.0% 100.0% 100.0% 100.0%
9
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(COST TRENDS AND PROFIT MARGIN, -------------------- --------------------
AS PERCENTAGES OF NET SALES) JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross Margin ....................... 26.1% 26.8% 25.1% 25.2%
Income from operations ............. 12.1% 12.9% 10.1% 10.7%
Income before income taxes ......... 11.1% 11.9% 8.8% 9.5%
Net income ......................... 7.1% 7.4% 5.6% 5.9%
</TABLE>
RESULTS OF OPERATIONS
THE FISCAL THREE MONTHS (SECOND QUARTER) AND SIX MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
Net sales for the second quarter were $51,095,000, a decrease of 9,297,000 or
15.4% compared to $60,392,000 for the second quarter 1998. Net sales were down
14.5% to $93,263,000 for the first six months of fiscal 1999 from $109,119,000
for the first six months of 1998. The sales decrease resulted primarily from the
continued cyclical decline in domestic agricultural sales. For the second
quarter, domestic agricultural sales were $20,151,000 in 1999 compared to
$29,495,000 in 1998, a 31.6% decrease. Net domestic agricultural sales were also
off for the first six months of the year by 29.1%, $39,294,000 for 1999 compared
to $55,444,000 in 1998. The Company expects a continued weakness in the
agricultural market for the remainder of 1999 with the anticipated decline to
remain around 30%. Domestic industrial sales rose for the second quarter by 2.0%
to $19,244,000 for 1999 compared to $18,866,000 in 1998. Net domestic industrial
sales for the first six months of 1999 were $32,602,000 compared to $32,196,000
for the same time in 1998, a 1.2% increase. Product mix for the domestic
industrial sales continued to improve with wholegoods and parts continuing to
increase while lower margin tractor sales declined. Delivery times for tractors
improved over the first quarter but shipments from major tractor suppliers for
the remainder of 1999 are expected to be slow. European sales for the second
quarter of 1999 were $11,700,000, a decrease of 2.8% compared to $12,031,000
during the second quarter of 1998. Net European sales declined less than 1% to
$21,367,000 for the first six months of 1999 from $21,479,000 during the first
six months of 1998. Negative market conditions relating to exchange rates
between the British pound and the French franc, weakened sales for the quarter
after showing signs of improvement during the first quarter of 1999.
Gross profit for the second quarter of 1999 was $13,345,000 (26.1% of net sales)
compared to $16,200,000 (26.8% of net sales) during the same period in 1998.
Gross profit for the first six months of 1999 was $23,423,000 (25.1% net of
sales) versus $27,548,000 (25.2% of net sales) for the first six months of 1998.
Margin percentages for both wholegoods and parts continued to improve over 1998
but were negatively impacted by lower production volumes for domestic
agricultural products.
Selling, general, and administrative expenses ("SG&A") were $7,159,000 (14.0%
net of sales) during the first quarter of 1999 compared to $8,424,000 (14.0% net
of sales) during the same period of 1998, a decrease of $1,265,000. SG&A
expenses decreased $1,798,000 to $14,023,000 (15.0% of net sales) for the first
six months of 1999 down from $15,821,000 (14.5% of net sales) during the first
half of 1998. During the second quarter of 1998 the Company began to experience
significant legal expenses relating to Rhino International which costs are not
present in 1999. The Company's overall marketing expense for 1999 continued to
decline compared to 1998 which related to lower domestic agricultural sales
volume. The Company continues to focus its efforts on controlling overall costs
and expects to take appropriate measures to maintain lower expense levels.
Interest expense was $423,000 for the second quarter of 1999 versus $742,000
during the same period in 1998, a 41.8% decrease. This same decrease was
attriutable to the total decline in interest expense for the first six months of
1999 compared to the first half of 1998. Reductions in inventory levels as well
as increased cash receipts from accounts receivables for the two quarters
allowed the Company to reduce its debit.
10
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
The Company recorded an effective tax rate of 36.2% during the second quarter of
1999 compared to 37.7% during the same time in 1998. Overall, the first half of
the year the effective tax rate was 36.1% and 38.3% for 1999 and 1998
respectively. State tax planning has contributed to lowing the effective tax
rate for all of 1999, as well as, a reduction in the United Kingdom (U.K.)
tax rate from 33% in 1998 to 31% in 1999.
As a result of the foregoing factors, net income for the second quarter of 1999
was $3,608,000, or $0.37 per share versus $4,472,000 or $0.46 per share for the
same period in 1998. Net income for the first half of the year 1999 was
$5,228,000 or $0.54 per share compared to $6,398,000 or $0.66 per share for this
same six months in 1998.
LIQUIDITY AND CAPITAL RESOURCES
In addition to normal operating expenses, the Company has on going cash
requirements which are necessry 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 half of the year and partly
in the third quarter in anticipation of the spring and fall selling seasons.
Accounts Receivable will build in the first and fourth quarters of each year
mainly promoting fall and out of season sales. These sales are by and large sold
at reduced prices to enhance production during the off season. During the latter
part of 1998, an inventory reduction plan was put in place to reduce excess and
obsolete levels that had continued to hamper liquidity. Since the end of 1998,
tighter requirements on inventory purchases, as well as, just in time inventory
procedures for raw materials have aided in reducing inventory by approximately
$10,000,000.
As of June 30, 1999, the Company had working capital of $93,834,000 which
represents a decrease of $12,068,000 over working capital of $105,892,000 as of
December 31, 1998. The decrease in working capital was primarily due to the
above.
Capital expenditures were $1,349,000 for the six month period ending June 30,
1999, compared to $2,482,000 during the same period in 1998. Capital
expenditures for all of 1999 are expected to be approximately $3,500,000 which
are slightly below historical levels. The Company expects to fund such
expenditures from operating cash flows or through its revolving credit facility,
as is more particularly described below.
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 repurchased 79,840
shares. No shares were repurchased during 1998 or in the first two quarters of
1999.
Net cash provided by financing activities was $17,968,000 during the six month
period ending June 30, 1999 compared to $5,188,000 net cash used by financing
activities for the same period in 1998. The increase primarily resulted from
payment against debt on the bank revolving credit facility due to seasonal cash
receipts from accounts receivable balances. As of June 30, 1999, 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 calculated or fixed for periods up to 180 days. Proceeds
may be used for general corporate purposes or, subject to some limitations,
acquisition activities. 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 June
30, 1999. As of June 30, 1999, $14,000,000 had been borrowed under the revolving
credit facility at an interest rate of 6.8%. At June 30, 1999, $1,085,000 of the
revolver capacity was committed to irrevocable standby letters of credit issued
in the ordinary course of business as required by certain vendor 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 are sufficient to meet the Company's
cash requirements for the foreseeable future.
11
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
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 disruptions in the U.S.
and internationally (the "Year 2000" issue). The potential 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 information
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 will be made in the ordinary course of business and will be
completed by the third quarter 1999.
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 third quarter of 1999
and such modifications will be made in the ordinary course of business.
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 compliance
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 determinable. 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
modifications. The total cost of the Year 2000 project is not expected to
exceed $100,000 and is being expensed as incurred.
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.
12
<PAGE>
Alamo Group Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
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, particularly 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.
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 currencies 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.
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
13
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
its operations immediately. Disposal of the assets of the Rhino International
operation is under way, and the Company anticipates that these activities should
be concluded by mid-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 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", "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 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 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 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 implications 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. 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 fluctuations 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 accommodation of the Year 2000 in computer applications
or products; the inability of the Company's suppliers, customers, creditors,
government agencies, public utility providers and financial service
organizations to implement computer applications accommodating the Year 2000;
seasonal factors in 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
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 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.
14
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - (CONTINUED)
FOREIGN CURRENCY RISK
As a Result of Foreign Sales
A portion of the Company's operations consist 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 primarily
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 six months. As June 30,
1999, the Company had outstanding forward exchange contracts to sell
approximately $647,000 of foreign currencies. A 15% fluctuation in foreign
currency exchange rates for these currencies would change the market value by
approximately $1,000,000. However, since these 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.
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 six months ended June 30, 1999 was a loss of $20,079,000 which was
primarily caused due to the weakening of the British pound to the U.S. dollar.
On June 30, 1999, the British pound closed at 0.6340 relative to 1.00 U.S.
dollar, and the French franc closed at 0.0997 relative to 1.00 British pound. By
comparison, on June 30, 1998, the British pound closed at 0.5996 relative to
1.00 U.S. dollar, and the French franc closed at 0.0991 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 June 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.
Assuming the current level of borrowings at variable rates and a two percentage
point change in the second quarter of 1999 average interest rate under these
borrowings, the Company's interest expense would have changed by approximately
$150,000. In the event of adverse change in interst rates, management could take
actions to mitigate its exposure. However, due the uncertainity of the actions
tht 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.
15
<PAGE>
Alamo Group Inc. and Subsidiaries
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
(a) Exhibits
(b) Reports on Form 8-K
Form 8-K dated March 1, 1999, Reporting Item 5 and Item 7
16
<PAGE>
ALAMO GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on April 28, 1998,
with the following results of elections and approvals.
Votes Cast
Against/ Abstentions/
For Withheld Non-Votes
a. The following Directors
were elected to serve
until the next Annual
Meeting of Stockholders.
Donald J. Douglass 8,435,979 31,322 N/A
Oran F. Logan 8,435,879 31,422 N/A
Joseph C. Graf 8,433,280 34,021 N/A
O.S. Simpson, Jr. 8,435,979 31,322 N/A
William R. Thomas 8,434,079 31,822 N/A
David Morris 8,433,979 33,322 N/A
James B. Skaggs 8,434,079 33,222 N/A
b. Ernst & Young was approved
as the Company's auditors
for the 1999 fiscal year. 8,362,879 10,517 93,905
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
None
17
<PAGE>
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/ROBERT H. GEORGE
Robert H. George
(Acting Principal Accounting Officer)
18
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