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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 MARCH 31, 2000
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 ___
AT MAY 1, 2000, 9,695,209 SHARES OF COMMON STOCK, $.10 PAR VALUE, OF THE
REGISTRANT WERE OUTSTANDING.
===============================================================================
===============================================================================
ALAMO GROUP INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
(Unaudited)
Interim Condensed Consolidated Statements of Income - 3
Three months ended March 31, 2000 and March 31, 1999
Interim Condensed Consolidated Balance Sheets - 4
March 31, 2000 and December 31, 1999 (Audited)
Interim Condensed Consolidated Statements of Cash Flows - 5
Three months ended March 31, 2000 and March 31, 1999
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 14
PART II. OTHER INFORMATION 16
Item 1. None
Item 2. None
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 17
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
2000 1999
----------------- ----------------
Net sales:
North American
Agricultural........................$ 21,594 $ 19,143
Industrial........................ 17,834 13,358
European............................. . 10,538 9,667
----------------- --------------
Total net sales......................... 49,966 42,168
Cost of sales........................... 37,321 32,090
----------------- --------------
Gross profit......................... 12,645 10,078
Selling, general and administrative
expense .............................. 7,931 6,864
----------------- --------------
Income from operations.............. 4,714 3,214
Interest expense....................... (360) (658)
Interest income ....................... 190 102
Other income (expense),net............ (194) (132)
----------------- --------------
Income before income taxes ......... 4,350 2,526
Provision for income taxes............ 1,668 906
Net income ......................... $ 2,682 $ 1,620
================ ================
Net income per common share:
Basic.....................................$ 0.28 $ 0.17
=================== ================
Diluted...................................$ 0.28 $ 0.17
=================== ================
Average common shares:
Basic................................... 9,695 9,736
=================== ================
Diluted................................. 9,752 9,752
=================== ================
Dividends declared..................... $ 0.06 $ 0.11
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ....... $ 4,157 $ 5,359
Accounts receivable ............. 61,475 41,764
Inventories...................... 53,241 45,570
Deferred income taxes ........... 4,309 4,193
Prepaid expenses and others...... 3,824 1,008
----------------- ---------------
Total current assets........ 127,006 97,894
Property, plant and equipment........ 57,093 54,161
Less: Accumulated depreciation... (32,929) (32,343)
----------------- ----------------
24,164 21,818
Goodwill............................. 14,190 9,937
Other assets......................... 3,640 3,146
----------------- ----------------
Total assets................ $ 169,000 $ 132,795
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............ 16,380 8,514
Income taxes payable.............. 2,470 1,080
Accrued liabilities............... 9,885 7,920
Current maturities of long-term
debt........................... 521 526
----------------- -----------------
Total current liabilities... 29,256 18,040
Long-term debt, net of current
maturities........................ 29,235 5,469
Deferred income taxes................ 1,262 1,256
Stockholders' equity:
Common stock, $.10 par value,
20,000,000 shares authorized;
9,735,809 issued at March 31,
2000 and December 31, 1999........ 974 974
Additional paid-in capital............ 50,775 50,775
Treasury stock, at cost; 40,600
shares................................. (400) (400)
Retained earnings........................ 59,698 57,568
Accumulated other comprehensive income... (1,800) (887)
-------------- ----------------
Total stockholders' equity..... 109,247 108,030
-------------- ----------------
Total liabilities and
stockholders' equity........... $ 169,000 $ 132,795
============ ================
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------------
MARCH 31, MARCH 31,
2000 1999
------------------ ------------------
OPERATING ACTIVITIES
Net income............................ $ 2,682 $ 1,620
Adjustment to reconcile net income
to net cash provided (used) by
operating activities:
Provision for doubtful accounts.... 37 115
Depreciation....................... 990 1,012
Amortization....................... 336 276
Provision for deferred income
tax benefit....................... 255 3
(Gain) on sale of equipment........ (42) (59)
Changes in operating assets and
liabilities, net of effect
of acquisitions:
Accounts receivable.................. (17,301) (10,930)
Inventories.......................... (287) 1,022
Prepaid expenses and other assets.... 517 231
Trade accounts payable and accrued
liabilities.......................... 4,941 3,724
Income taxes payable................. 1,118 801
--------------- ---------------
Net cash provided (used) by operating
activities.............................. (6,684) (2,185)
INVESTING ACTIVITIES
Acquisitions, net of cash acquire........ (15,000) -
Purchase of property, plant and
equipment............................... (2,260) (457)
Proceeds from sale of property,
plant and equipment..................... 67 82
Purchase of long-term investment (500)
-
----------------- ----------------
Net cash provided (used) by
investing activities................... (17,693) (375)
FINANCING ACTIVITIES
Net change in bank revolving
credit facility......................... 24,000 2,100
Principal payments on long-term
debt and capital leases................. (120) (115)
Dividends paid.......................... (582) (1,071)
---------------- ----------------
Net cash provided (used) by
financing activities..................... 23,298 914
Effect of exchange rate changes on cash.. (123) (91)
---------------- ----------------
Net change in cash and cash equivalents.. (1,202) (1,737)
Cash and cash equivalents at beginning
of the period............................ 5,359 2,748
--------------- ---------------
Cash and cash equivalents at end
of the period........................... $ 4,157 $ 1,011
================= ================
Cash paid during the period for:
Interest......................... $ 34 $ 720
Income taxes.................... 8 (51)
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2000
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 during the year ending December
31, 2000. The balance sheet at December 31, 1999, 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, 1999.
2. ACCOUNTS RECEIVABLE
Accounts Receivable showed less allowance for doubtful accounts are
$1,465,000 and $1,231,000 at March 31, 2000 and December 31, 1999, respectively.
3. ACQUISITIONS AND INVESTMENTS
On February 29, 2000, the Company acquired all the shares of Schwarze
Industries Inc. ("Schwarze"), an Alabama corporation. In connection with the
acquisition of Schwarze for a purchase price of approximately $15,000,000, the
Company acquired assets with an approximate value of $13,650,000 and assumed
liabilities of approximately $4,521,000. Purchase accounting is preliminary
based on final review of fair value of assets acquired and liabilities assumed.
Schwarze is a manufacturer of sweeping equipment which is sold to governmental
and contractor users. The pro forma statement of the Company assuming the
transaction was completed at January 1, 1999, is listed in the following table
(in thousands):
THREE MONTHS ENDED
-----------------------------------
MARCH 31, MARCH 31,
2000 1999
---------------- ------------------
Net sales...................... $ 56,639 $ 51,525
Net income..................... 2,782 1,778
Net income per share, diluted.. $ 0.28 $ 0.18
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2000 - (CONTINUED)
4. INVENTORIES
Inventories valued at LIFO cost represented 84% and 82% of total inventory
at each of March 31, 2000 and December 31, 1999, respectively. The excess of
current costs over LIFO valued inventories were $3,925,000 at March 31, 2000 and
at December 31, 1999, respectively. Inventory obsolescence reserves were
$5,446,000 at March 31, 2000 and $5,216,000 at December 31, 1999. Net
inventories consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
---------------- -----------------
Finished goods..................... $ 46,066 $ 39,310
Work in process.................... 3,937 2,754
Raw materials..................... 3,238 3,506
------------- -----------------
$ 53,241 $ 45,570
================ =================
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.
5. COMMON STOCK AND DIVIDENDS
Dividends declared and paid on a per share basis were as follows:
THREE MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
2000 1999
-------------- ----------------
Dividends declared.................... $ 0.06 $ 0.11
Dividends paid........................ $ 0.06 $ 0.11
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2000 - (CONTINUED)
6. 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)
THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2000 1999
---------------- ---------------
Net Income................................. $ 2,682 $ 1,620
=============== ===============
Average Common Shares:
BASIC (weighted-average outstanding
shares)................................ 9,695 9,736
Dilutive potential common shares from
stock options and warrants............. 57 -
--------------- ---------------
DILUTED (weighted-average outstanding
shares)................................. 9,752 9,736
=============== ===============
Basic earnings per share.................. $ 0.28 $ 0.17
=============== ===============
Diluted earnings per share................. $ 0.28 $ 0.17
=============== ===============
7. PENDING ACCOUNTING STANDARDS AND DISCLOSURES
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133. "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 deferred the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
In December 1999, SEC Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements," was issued. This pronouncement
summarizes certain of the SEC staff's views in applying generally accepted
accounting principles to revenue recognition. The guidance provided by SAB 101
is required to be adopted by the Company no later than the second quarter of
2000. The Company is currently of SAB 101 and assessing its impact on the
Company's financial statements, if any.
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2000 - (CONTINUED)
8. COMPREHENSIVE INCOME
During the first quarter of 2000 and 1999, Comprehensive Income amounted to
$1,769,000 and $383,000, respectively.
The components of COMPREHENSIVE INCOME, are as follows (in thousands):
THREE MONTHS ENDED
----------------------------------
MARCH 31, MARCH 31,
2000 1999
----------------- ---------------
Net income............................... $ 2,682 $ 1,620
Unrealized gains on securities........... - -
Foreign currency translation adjustments.. (913) (1,237)
------------------ ---------------
Comprehensive income...................... $ 1,769 $ 383
================== ===============
The components of ACCUMULATED OTHER COMPREHENSIVE INCOME are as follows (in
thousands):
MARCH 31, DECEMBER 31,
2000 1999
----------------- ---------------
Foreign currency translation
adjustments.............................. $ (1,800) $ (887)
----------------- ---------------
Accumulated other comprehensive
income.................................. $ (1,800) $ (887)
================= ===============
9. 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.
The Company was involved in a lawsuit between Rhino International and
certain of its former dealers. This lawsuit involved claims against Rhino
International totaling $3.8 million. In April 1998, a judgment was entered
requiring the Company to pay $110,000, net of its 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.
ALAMO GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
MARCH 31, 2000 - (CONTINUED)
The Company is subject to numerous environmental laws and regulations
concerning air emissions, discharges into waterways and the generation,
handling, storage, transportation, treatment and disposal of waste materials.
The Company's policy is to comply with all applicable environmental, health and
safety laws and regulations, and the Company believes it is currently in
material compliance with all such applicable laws and regulations. These laws
and regulations are constantly changing, and it is impossible to predict with
accuracy the effect that changes to such laws and regulations may have on the
Company in the future. Like other industrial concerns, the Company's
manufacturing operations entail the risk of noncompliance, and there can be no
assurance that material costs or liabilities will not be incurred by the Company
as a result thereof. The Company has learned that the Indianola, Iowa property
on which its Herschel facility operates is contaminated with chromium. The
contamination likely resulted from chrome-plating operations which were
discontinued several years before the Company purchased the property. The
Company is working with an environmental consultant and the state of Iowa to
develop and implement a plan to remediate the contamination. All present and
future remediation costs have been or will be paid by the previous owner of the
property pursuant to the agreement by which the Company purchased said property.
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
------------------------------------
(SALES, AS PERCENT OF NET SALES) MARCH 31, MARCH 31,
2000 1999
------------------ ----------------
Domestic
Agricultural....................... 43.2 % 45.4 %
Industrial......................... 35.7 % 31.7 %
European............................... 21.1 % 22.9 %
------------------ ----------------
Total sales, net..................... 100.0 % 100.0 %
THREE MONTHS ENDED
------------------------------------
(COST TRENDS AND PROFIT MARGIN, MARCH 31, MARCH 31,
AS PERCENTAGES OF NET SALES 2000 1999
--------------- ---------------
Gross margin............................. 25.3 % 23.9 %
Income from operations................... 9.4 % 7.6 %
IncomE before income taxes............... 8.7 % 6.0 %
Net income............................... 5.4 % 3.8 %
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
The Company's net sales for the first quarter of 2000 were $49,966,000 an
increase of $7,798,000 or 18.5% compared to $42,168,000 for the first quarter of
1999. The increase was primarily attributable to the improved agricultural
market which began late in 1999. Also net sales includes one month of sweeper
sales from Schwarze Industries which was acquired on February 29, 2000.
North American Agricultural sales (Net) were $21,594,000 in the first
quarter of 2000 compared to $19,143,000 for the first quarter of 1999, an
increase of $2,451,000 or 12.8%. The Company began to see market
improvement in late 1999 with increased new orders. Higher cattle prices
which support increased agricultural market sales improved as well as
higher rainfall in its core markets which had experienced drought
conditions.
North American Industrial sales (Net) were $17,834,000 in the first
quarter of 2000 compared to $13,358,000 in the first quarter of 1999, an
increase of $4,476,000 or 33%. Higher backlogs from the end of 1999
resulting from higher state governmental spending as well as increased
rainfall in its major markets supported increased industrial sales. Also
included was sweeper sales for the first quarter of 2000. Schwarze
Industries which produces the street sweepers was acquired on February
29, 2000.
European sales (Net) were $10,538,000 in the first quarter of 2000
compared to $9,667,000 in the first quarter of 1999, an increase of
$877,000 or 9.0%. Sales momentum continued to remain positive following
the fourth quarter of 1999 as European markets remain strong and the U.K.
market continued to stabilize.
Gross margin for the first quarter of 2000 was $12,645,000 (25.3% of net
sales) compared to $10,278,000 (23.9% of net sales) for the first quarter of
1999. Margins were up due higher sales for the quarter as mentioned above with
margin percentages improving due to stronger product sales in the higher margin
wholegoods and OEM parts business.
Selling, general and administration expenses (SG&A) for the first quarter
of 2000 were $7,931,000 (15.9% of net sales) compared to $6,864,000 (16.3% of
net sales) during the same period of 1999. The increase in SG&A expenses of
$1,067,000 was primarily attributable to SG&A expenses relating to Schwarze
Industries which was acquired during the first quarter of 2000.
Interest expense for first quarter of 2000 was $360,000 compared to
$658,000 for the first quarter of 1999, a decrease of $298,000 or 45.3%. Lower
debt levels during the first quarter of 2000 was the primary contributor of
reduced interest expense. The bank revolving credit facility was zero at the end
of 1999 with a significant increase during the first quarter of 2000 from the
acquisition of Schwarze Industries on February 29, 2000.
The Company's net income after tax was $2,682,000 for the first quarter of
2000 compared to $1,620,000 for the first quarter of 1999 an increase of
$1,062,000 or 65.6% from result of factors described above.
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $6,684,000 for the three month
period ended March 31, 2000, compared to $2,185,000 for the same period in 1999,
a increase of $4,499,000. The increase was primarily attributable to increases
in accounts receivable reflecting normal seasonal levels.
The Company's working capital requirements are seasonal with investments in
working capital typically building during the first half of the year and then
declining in the second half of the year. The Company had $97,750,000 of working
capital, as of March 31, 2000, an increase of $17,896,000 over working capital
of $79,854,000 as of December 31, 1999. The increase in working capital was
primarily due to higher accounts receivable, particularly in U.S. operations,
reflecting the impact of normal seasonal fluctuation and the acquisition of
Schwarze Industries.
Capital expenditures were $2,260,000 for the first quarter of 2000,
compared to $457,000 during the first quarter of 1999. Capital expenditures for
the year of 1999 are expected to be approximately $12,000,000. The significant
increase is attributable to several items, the largest one being the proposed
purchase of the Company's Bomford manufacturing facility and adjacent land in
the U.K. which is currently leased on a long-term basis. The purchase price is
approximately $5,300,000 and the transaction is expected to be complete by mid
2000. Other major components of the increase are related to improvements at the
Company's Seguin and Holton plants to improve their overall efficiency and
increase capacity to take on production being transferred as a result of the
closure of the Company's LaGrange facility. And, approximately $900,000 of the
increase is a result of rebuilding the office building at the Company's Gibson
City plant which was destroyed in January 1999 by a snowstorm. This cost has
been recovered from the Company's insurance provider. The Company expects to
fund such expenditures from operating cash flows or through its revolving credit
facility, described below.
The Company was authorized by its Board of Directors in 1997 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 in 1998. In 1999, the Company
repurchased 40,600 shares in the third quarter.
Net cash provided by financing activities was $23,298,000 during the first
quarter of 2000 compared to $914,000 for the same period in 1999. The increase
primarily came from borrowings on the bank revolving credit facility used to
acquire Schwarze Industries, effective February 29, 2000 for approximately
$15,000,000.
As of March 31, 2000, 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 various
rate options based upon Prime or Eurodollar rates, with such rates either
floating on a daily basis or fixed for periods up to 180 days. Proceeds may be
used for general corporate purposes or, subject to some limitations,
acquisitions. The loan agreement contains certain financial covenants, 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 covenants at March 31, 2000. As of March
31, 2000, $24,000,000 had been borrowed under the revolving credit facility at
various interest rate options, with an average effective rate of 7.04%. At March
31, 2000, $1,786,000 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.
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
IMPACT OF YEAR 2000
In 1998, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In late 1999, the Company completed its remediation
and testing of systems. As a result of this planning and implementation effort,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $70,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with our products, our internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
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. France was a participating country in the
first group to adopt the EMU, which effects the Company's French operations. The
U.K. is currently not a part of the EMU.
Based on its evaluation to date, management believes that the introduction
of the euro will 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 did not 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.
ALAMO GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
the inability of the Company's suppliers, customers, creditors, government
agencies, public utility providers; 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.
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 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 of March
31, 2000, the Company had no outstanding forward exchange contracts. 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 first quarter of 2000 was a loss of $913,000, which was primarily
caused due to the weakening of the British pound to the U.S. dollar. On March
31, 2000, the British pound closed at 0.6284 relative to 1.00 U.S. dollar, and
the French franc closed at 0.0914 relative to 1.00 British pound. By comparison,
on March 31, 1999, the British pound closed at 0.6204 relative to 1.00 U.S.
dollar, and the French franc closed at 0.1020 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 March 31, 2000, 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 first quarter of 2000 average interest rate under
these borrowings, the Company's interest expense would have changed by
approximately $150,000. In the event of an adverse change in interest rates,
management could take actions to mitigate its exposure. However, due to the
uncertainty of the actions that would be taken and their possible effects, this
analysis assumes no such actions. Further this analysis does not consider the
effects of the change in the level of overall economic activity that could exist
in such an environment.
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 15, 2000, Reporting Item 2
<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/
-------------------------
Ronald A. Robinson
President and CEO
(Principal Accounting
and Financial Officer)
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