================================================================================ ================================================================================ 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, 2001 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 AUGUST 1, 2001, 9,706,159 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 and Six months ended June 30, 2001 and June 30, 2000 Interim Condensed Consolidated Balance Sheets - 4 June 30, 2001 and December 31, 2000 (Audited) Interim Condensed Consolidated Statements of Cash Flows - 5 Six months ended June 30, 2001 and June 30, 2000 Notes to Interim Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition 11 and Results of Operations 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 2
ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED --------------------------------- --------------------------------- JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Net sales: North American Agricultural .................................. $ 24,611 $ 21,161 $ 47,664 $ 42,755 Industrial .................................... 32,121 28,735 56,105 46,569 European ......................................... 10,034 10,829 19,827 21,367 --------- --------- --------- --------- Total net sales ..................................... 66,766 60,725 123,596 110,691 Cost of sales ....................................... 50,561 45,409 93,000 82,730 --------- --------- --------- --------- Gross profit ........................................ 16,205 15,316 30,596 27,961 Selling, general and administrative expense ......... 9,862 8,672 19,535 16,603 --------- --------- --------- --------- Income from operations ........................... 6,343 6,644 11,061 11,358 Interest expense .................................... (1,012) (681) (1,812) (1,041) Interest income ..................................... 160 209 306 399 Other income (expense), net ......................... (85) 31 (15) (163) --------- --------- --------- --------- Income before income taxes ....................... 5,406 6,203 9,540 10,553 Provision for income taxes .......................... 1,930 2,053 3,171 3,721 --------- --------- --------- --------- --------- --------- --------- --------- Net income ....................................... $ 3,476 $ 4,150 $ 6,369 $ 6,832 ========= ========= ========= ========= Net income per common share: Basic ............................................ $ 0.36 $ 0.43 $ 0.66 $ 0.71 ========= ========= ========= ========= Diluted .......................................... $ 0.36 $ 0.43 $ 0.65 $ 0.71 ========= ========= ========= ========= Average common shares: Basic ............................................ 9,704 9,695 9,704 9,695 ========= ========= ========= ========= Diluted .......................................... 9,788 9,754 9,790 9,747 ========= ========= ========= ========= Dividends declared .................................. $ 0.06 $ 0.06 $ 0.12 $ 0.12 ========= ========= ========= ========= </TABLE> See accompanying notes. 3
ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2001 2000 (UNAUDITED) (AUDITED) ------------- -------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents ........................ $ 4,169 $ 2,929 Accounts receivable .............................. 68,736 50,359 Inventories ...................................... 64,946 59,608 Deferred income taxes ............................ 4,505 4,335 Prepaid expenses ................................. 2,031 2,183 --------- --------- Total current assets .......................... 144,387 119,414 Property, plant and equipment ..................... 66,239 66,305 Less: Accumulated depreciation ................ (38,323) (38,197) --------- --------- 27,916 28,108 Goodwill .......................................... 20,135 21,833 Other assets ...................................... 3,612 4,053 --------- --------- Total assets ................................. $ 196,050 $ 173,408 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ........................... 17,424 15,708 Income taxes payable ............................. 1,955 (69) Accrued liabilities .............................. 9,615 9,948 Current maturities of long-term debt ............. 1,647 1,484 --------- --------- Total current liabilities ..................... 30,641 27,071 Long-term debt, net of current maturities ......... 45,399 30,355 Deferred income taxes ............................. 1,914 1,443 Stockholders' equity: Common stock, $.10 par value, 20,000,000 shares authorized; 9,744,559 issued and outstanding at March 31, 2001 and December 31, 2000, respectively ................ 974 974 Additional paid-in capital ........................... 51,163 50,969 Treasury stock, at cost; 40,600 shares at March 31, 2001 .................................. (400) (400) Retained earnings .................................... 71,214 66,010 Accumulated other comprehensive income ............... (4,855) (3,014) --------- --------- Total stockholders' equity .................... 118,096 114,539 --------- --------- Total liabilities and stockholders' equity .... $ 196,050 $ 173,408 ========= ========= </TABLE> See accompanying notes. 4
ALAMO GROUP INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED ----------------------------- JUNE 30, 2001 JUNE 30, 2000 ------------- ------------- <S> <C> <C> OPERATING ACTIVITIES Net income ...................................................... $ 6,369 $ 6,832 Adjustment to reconcile net income to net cash provided (used) by operating activities: Provision for doubtful accounts .......................... 1,300 145 Depreciation ............................................. 2,338 2,088 Amortization ............................................. 968 804 Provision for deferred income tax benefit ................ 408 280 (Gain) loss on sale of equipment ......................... (1,426) (171) Changes in operating assets and liabilities: Accounts receivable ...................................... (20,401) (16,437) Inventories .............................................. (6,087) 352 Prepaid expenses and other assets ........................ 979 (319) Trade accounts payable and accrued liabilities ........... 1,986 7,451 Income taxes payable ..................................... 2,064 1,051 -------- -------- Net cash provided by operating activities ....................... (11,502) 2,076 INVESTING ACTIVITIES Acquisitions, net of cash acquired .............................. -- (14,248) Purchase of property, plant and equipment ....................... (3,589) (9,504) Proceeds from sale of property, plant and equipment ............. 2,084 403 Sale of long-term investment .................................... -- (500) -------- -------- Net cash (used) by investing activities ......................... (1,505) (23,849) FINANCING ACTIVITIES Net change in bank revolving credit facility .................... 15,200 21,000 Principal payments on long-term debt and capital leases ......... 140 (442) Dividends paid .................................................. (1,165) (1,163) Proceeds from sale of common stock .............................. 194 -- Net cash provided (used) by financing activities ................ 14,369 19,395 Effect of exchange rate changes on cash ......................... (122) (215) -------- -------- Net change in cash and cash equivalents ......................... 1,240 (2,593) Cash and cash equivalents at beginning of the period ............ 2,929 5,359 -------- -------- Cash and cash equivalents at end of the period .................. $ 4,169 $ 2,766 ======== ======== Cash paid during the period for: Interest .................................................. $ 1,460 $ 626 Income taxes .............................................. $ 1,036 $ 2,539 </TABLE> See accompanying notes. 5
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2001 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, 2001. The balance sheet at December 31, 2000, 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, 2000. 2. ACCOUNTS RECEIVABLE Accounts Receivable is shown less allowance for doubtful accounts of $1,173,000and $1,322,000 at June 30, 2001 and December 31, 2000, respectively. 3. INVENTORIES Inventories valued at LIFO cost represented 64% and 61% of total inventory at June 30, 2001 and December 31, 2000, respectively. The excess of current costs over LIFO valued inventories were $4,138,000 at June 30, 2001 and 4,238,000 at December 31, 2000. Inventory obsolescence reserves were $3,106,000 at June 30, 2001 and $4,201,000 at December 31, 2000. Net inventories consist of the following (in thousands): JUNE 30, DECEMBER 31, 2001 2000 --------- ------------- Finished goods .................. $35,612 $40,135 Work in process ................. 19,444 9,711 Raw materials ................... 9,890 9,762 ------- ------- $64,946 $59,608 ======= ======= 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. 6
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2001 - (CONTINUED) 4. COMMON STOCK AND DIVIDENDS Dividends declared and paid on a per share basis were as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ---------- --------- ----------- ----------- <S> <C> <C> <C> <C> Dividends declared .......... $ 0.06 $ 0.06 $ 0.12 $ 0.12 Dividends paid .............. 0.06 0.06 0.12 0.12 </TABLE> 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, 2001 2000 2001 2000 --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net Income ....................................... $3,476 $4,150 $6,369 $6,832 ====== ====== ====== ====== Average Common Shares: BASIC (weighted-average outstanding shares) .. 9,704 9,695 9,704 9,695 Dilutive potential common shares from stock options and warrants ......................... 84 59 86 52 ------ ------ ------ ------ Diluted (weighted-average outstanding shares) 9,788 9,754 9,790 9,747 ====== ====== ====== ====== Basic earnings per share ......................... $ 0.36 $ 0.43 $ 0.66 $ 0.71 ====== ====== ====== ====== Diluted earnings per share ....................... $ 0.36 $ 0.43 $ 0.65 $ 0.71 ====== ====== ====== ====== </TABLE> 7
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2001 - (CONTINUED) 6. SEGMENT REPORTING At June 30, 2001 the following unaudited financial information is segmented: (in thousands) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> NET REVENUE Agricultural ........................ $ 24,611 $ 21,161 $ 47,664 $ 42,755 Industrial .......................... 32,121 28,735 56,105 46,569 European ............................ 10,034 10,829 19,827 21,367 -------- -------- -------- -------- Consolidated ........................... 66,766 60,725 123,596 110,691 OPERATING INCOME Agricultural ........................ $ 2,276 $ 1,744 $ 3,661 $ 2,562 Industrial .......................... 3,271 3,612 6,010 6,222 European ............................ 796 1,288 1,390 2,574 -------- -------- -------- -------- Consolidated ........................... 6,343 6,644 11,061 11,358 TOTAL IDENTIFIABLE ASSETS Agricultural ........................ $ 86,741 $ 60,681 $ 86,741 $ 60,681 Industrial .......................... 70,782 67,400 70,782 67,400 European ............................ 38,527 40,495 38,527 40,495 -------- -------- -------- -------- Consolidated ........................... 196,050 168,576 196,050 168,576 </TABLE> 7. NEW ACCOUNTING STANDARDS AND DISCLOSURES In June 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" (FAS 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 will require the purchase method of accounting to be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. FAS 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill. Upon adoption of FAS 142, amortization of existing goodwill would cease and the remaining book value would be tested for impairment at least annually at the reporting unit level using a new two-step impairment test. Amortization of goodwill recorded on equity investments would also cease, but this embedded goodwill will continue to be tested for impairment under current accounting rules for equity investments. In addition, we will have adjustments to the equity in net income of affiliates line item to reflect the impact of adopting these new statements on the operations of our equity investments. The Company will adopt both statements on January 1, 2002 and we are currently in the process of determining the impact of these pronouncements on its financial position and results of operation. Any impairment resulting from our initial application of the statements will be recorded as a cumulative effect of accounting change as of January 1, 2002. The Company adopted Statement of Financial Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities," and its amendments, Statements 137 and 138, on January 1, 2001. FAS 133 8
requires that all derivative instruments be recorded on the balance sheet at fair value. The Company has designed its foreign currency hedge agreements as cash flow hedge instruments. The hedge agreements are used to manage exposure to exchange rate movement by effectively changing the variable rate to a fixed rate. The critical terms of the foreign currency hedge agreements and the sales associated with the hedging agreements are the same; therefore, the Company has assumed that there is no ineffectiveness in the hedge relationship. Changes in fair value of the foreign currency hedging agreements will be recognized in other comprehensive income, net of tax effects, until the hedged items are recognized in earnings. The Company has hedged its exposure to foreign exchange rate movement through December 27, 2001. At January 1, 2001, the foreign currency hedge agreements were in an unfavorable position by approximately $77,000. In accordance with the transition provisions of FAS 133, the net-of-tax cumulative effect of an accounting change adjustment on January 1, 2001, was a loss of $50,000 in accumulated other comprehensive income with a deferred income tax asset of $27,000. At June 30, 2001, the fair value of the hedge agreements were in an unfavorable position; therefore, the derivative financial instruments were adjusted to a liability of $25,000. Accumulated other comprehensive income was adjusted to an accumulated loss of $19,000 and the deferred income tax was adjusted to a $6,000 tax asset. As the hedge agreements are deemed to be effective cash flow hedges, there was no income statement impact related to hedge ineffectiveness. The Company expects to reclassify approximately $19,000 of existing losses in accumulated other comprehensive income, net of taxes, into net income (loss) through December 27, 2001. In December 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 summarizes certain SEC staff views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 was effective for the Company in the fourth quarter of fiscal year 2000. The Company recognizes revenue when each of the following four criteria are met: 1) a contract or sales arrangement exists; 2) products have been shipped or services have been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectibility is reasonably assured. The Company has evaluated the possible impact of SAB 101 with its independent auditors and it believes that its revenue recognition policy is in accordance with SAB 101. In September 2000, the Emerging Issues Task Force issued EITF 00-10 which requires disclosure of shipping and handling costs that are not included in costs of goods sold. The Company's policy is to include shipping and handling costs in cost of goods sold. 8. COMPREHENSIVE INCOME During the second quarter of 2001 and 2000, Comprehensive Income amounted to $3,718,000 and $3,262,000 and for the six months ended June 30, 2001 and 2000, it was $4,527,000 and $5,031,000 respectively. The components of COMPREHENSIVE INCOME, net of related tax are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ---------- ---------- ---------- ----------- <S> <C> <C> <C> <C> Net Income .................................... $ 3,476 $ 4,150 $ 6,369 $ 6,832 Foreign currency translations adjustment ..... 242 (888) (1,842) (1,801) ------- ------- ------- ------- Comprehensive Income .......................... $ 3,718 $ 3,262 $ 4,527 $ 5,031 ======= ======= ======= ======= </TABLE> The components of Accumulated Other Comprehensive Income as shown on the Balance Sheet are as follows (in thousands): <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 2001 2000 ----------- -------------- <S> <C> <C> Foreign currency translation .................. $(4,855) $(3,013) ------- ------- Accumulated other comprehensive income ........ $(4,855) $(3,013) ======= ======= </TABLE> 9
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) JUNE 30, 2001 - (CONTINUED) 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 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 is aware 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, the previous owner of the property, and the state of Iowa to develop and implement a plan to remediate the contamination. All present and future remediation costs have been or are expected to be paid by the previous owner of the property pursuant to the agreement by which the Company purchased said property. The Company is subject to various other federal, state, and local laws affecting its business, as well as a variety of regulations relating to such matters as working conditions, equal employment opportunities and product safety. A variety of state laws regulate the Company's contractual relationships with its dealers, some of which impose substantive standards on the relationship between the Company and its dealers, including events of default, grounds for termination, non-renewal of dealer contracts and equipment repurchase requirements. The Company believes it is currently in material compliance with all such applicable laws and regulations. The Company closed on the sale of its property located in LaGrange, Illinois during the first quarter of 2001. Sales price for the building and the land was $1,755,000. Also, the Company previously announced the closure of the manufacturing operation in Guymon, Oklahoma and expects this to be completed during 2001. 10
ALAMO GROUP INC. AND SUBSIDIARIES 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: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ---------------------- SALES DATA IN THOUSANDS JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> North American Agricultural ............................ 36.9% 34.9% 38.6% 38.6% Industrial .............................. 48.1% 47.3% 45.4% 42.1% European ................................... 15.0% 17.8% 16.0% 19.3% --------- --------- --------- --------- Total sales, net ........................ 100.0% 100.0% 100.0% 100.0% ========= ========= ========= ========= THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ---------------------- COST TRENDS AND PROFIT MARGIN, AS JUNE 30, JUNE 30, JUNE 30, JUNE 30, PERCENTAGES OF NET SALES 2001 2000 2001 2000 --------- --------- --------- --------- Gross margin ............................... 24.3% 25.2% 24.8% 25.3% Income from operations ..................... 9.5% 10.9% 8.9% 10.3% Income before income taxes ................. 8.1% 10.2% 7.8% 9.5% Net income ................................. 5.2% 6.8% 5.1% 6.2% </TABLE> RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 VS. THREE MONTHS ENDED JUNE 30, 2000 Net sales for the second quarter of 2001 were $66,766,000, an increase of $6,041,000 or 9.9% compared to $60,725,000 for the second quarter of 2000. The increase was primarily attributable to the acquisition of Schulte Industries, LTD. ("Schulte") on November 7, 2000. Net North American Agricultural sales were $24,611,000 in 2001 compared to $21,161,000 for the same period in 2000 an increase of $3,450,000 or 16.3%. The increase in sales was primarily due to the acquisitions of Schulte as well as improved sales from the Rhino mower product line. The Company continued to experience a very soft market in tillage products and distributed parts. The overall market continues to remain weak for 2001. Net North American Industrial sales increased during the second quarter by $3,386,000 or 11.8% to $32,121,000 for 2001 compared to $28,735,000 during the same period in 2000. The increase was primarily from the Alamo and Tiger product lines which experienced strong governmental contract bids being delivered during the quarter. Sales of Schwarze Industries sweepers to direct contract markets were down due to continued high fuel prices which is expected to continue into the 3rd quarter of this year. Net European Sales for the second quarter of 2001 were $10,034,000 a decrease of $795,000 or 7.3% compared to $10,829,000 during the second quarter of 2000. The decrease was a result of the spread of foot and mouth disease in the United Kingdom (U.K.) which severely hampered its business. The effect of the disease, which is expected to continue until late August of this year, has shown improvement over the last few months. Gross profit for the second quarter of 2001 was $16,205,000 (24.3% of net sales) compared to $15,316,000 (25.2% of net sales) during the same period in 2000, an increase of $1,746,000. The increase in gross profit was mainly attributable to the additional sales from the acquisition of Schulte. The decrease in gross margin percentage is 11
ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) due to inefficiencies in the manufacturing facilities that produced lower than expected sales of tillage and distributed products. Steps have been taken to improve margins by reducing expenses in production areas. Also affecting margins were lower than expected sales of replacement parts during the quarter which was caused by extended winter weather conditions into spring. The replacement parts business had improved during the later part of the quarter but not enough to improve margins. Selling, general and administrative ("SG&A") were $9,862,000 (14.8% of net sales) during the second quarter of 2000 compared to $8,672,000 (14.3% of net sales) during the same period of 2000, and increase of $1,190,000. SGA for the second quarter of 2001 had increased operating and amortization expense relating to the addition of Schulte. Interest Expense was $1,012,000 for the second quarter of 2001 compared to $681,000 during the same period in 2000, an increase of $331,000. This increase was attributable to the acquisition of Schulte and seasonal working capital requirements. The Company's net income after tax was $3,476,000 or $.36 per share on a diluted basis for the second quarter of 2001 compared to $4,150,000 or $.43 per share on a diluted basis. This decrease of $674,000 resulting from factors described above. SIX MONTHS ENDED JUNE 30, 2001 VS. SIX MONTHS ENDED JUNE 30, 2000 Net sales were up 11.7% to $123,596,000 for the first six months of 2001 compared to $110,691,000 for the first six months of 2000. The increase was a result of the acquisition of Schulte and increased sales in the Company's agricultural products. Net North American Agricultural sales were $47,664,000 for the first six months of 2001 compared to $42,755,000 for the first six months of 2000, representing an increase of $4,909,000 or 11.5%. The increase in sales was primarily due to improved market conditions in some of our core markets as well as the acquisition of Schulte, but we continue to be impacted by the soft market conditions in the overall agriculture industry. Net North American Industrial sales increased for the first six months of 2001 by $9,536,000 or 20.5% to $56,105,000 compared to $46,569,000 during the first six months of 2000. The increase was primarily due to reflecting a full year of sales from the purchase of Schwarze Industries on February 29th, 2000, as well as improved sales in our Alamo and Tiger products as described above. Net European sales for the first six months of 2001 were $19,827,000, compared to $21,367,000 during the first six months of 2000, reflecting a decrease of $1,540,000 or 7.2%. The negative currency impact of the decline in the Euro and the French Franc against the British pound sterling and U.S. dollar and the weakening U.K. market conditions during the year contributed to lower year to date sales. Gross profit for the first six months of 2001 was $30,596,000 (24.8% of net sales) compared to $27,961,000 (25.3% of net sales) during the first six months of 2000. The increase in gross profit was mainly attributable to the acquisition of Schulte and increased agricultural sales as stated above. Margin percentages were down due to the reasons described above. Selling, general and administrative expenses (SG&A) for the first six months of 2001 were $19,535,000 (15.8% of net sales) compared to $16,603,000 (15.0% of net sales) in the first six months of 2000, an increase of $2,932,000 or 17.7%. The acquisition of Schulte was the main cause for the increase. Interest Expense was $1,812,000 for the first six months of 2001 compared to $1,041,000 during the same time in 2000. The acquisition of Schulte and Schwarze are the principal reason for the increase in interest expense. 12
ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) The Company's net income after tax was $6,369,000 for the first six months of 2001 compared to $6,832,000 for the first six months of 2000, a decrease of $463,000 or 6.7% from result of factors described above. LIQUIDITY AND CAPITAL RESOURCES In addition to normal operating expenses, the Company has on going cash requirements 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 half of the year and in the fourth quarter in anticipation of the spring and fall selling seasons. Accounts Receivable historically builds in the first and fourth quarters of each year as a result of fall preseason sales programs and out of season sales. These sales enhance the Company's production ability during the off season. As of June 30, 2001, the Company had working capital of $113,746,000 which represents an increase of $21,403,000 from working capital of $92,343,000 as of December 31, 2000. The increase in working capital was primarily from higher accounts receivable and inventory levels due to seasonality. Capital expenditures were $3,456,000 for the first six months of 2001, compared to $9,504,000 during the first six months of 2000. During 2000, the Company purchased the manufacturing facility and adjacent land at its Bomford facility in the United Kingdom for approximately $5,300,000. The Company expects to fund 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 1999, the Company repurchased 40,600 shares in the third quarter. No shares were repurchased in 2000 or in the first six months of 2001. Net cash provided by financing activities was $14,369,000 during the six month period ending June 30, 2001, compared to $19,395,000 net cash used by financing activities for the same period in 2000. The change in activities is attributable primarily to the acquisition of Schwarze during 2000. The Company has a $55,000,000 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 libor rates, with such rates either floating on a daily basis or fixed for periods up to 180 days. The Company increased its line of credit temporarily by $10,000,000 and is negotiating with its bank group for a new $70,000,000 line of credit. Proceeds may be used for general corporate purposes or, subject to certain 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, 2001. As of June 30, 2001, $44,000,000 was borrowed under the revolving credit and $2,962,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by certain vendor's contracts. The Company's borrowing levels for working capital are seasonal with the greatest utilization generally occurring in the first and second quarter. 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. 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. 13
ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) 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. 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", "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 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 North American 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 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 affect 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; seasonal factors that could materially 14
ALAMO GROUP INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) 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 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 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 consist of manufacturing and sales activities in foreign jurisdictions. The Company manufactures its products in the United States, Australia, 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 order 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 71% of its future net foreign currency receivables covering a period of approximately six months. As of June 30, 2001, the Company had $977,000 in 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, Euro 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, Euro 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. On June 30, 2001, the British pound closed at 0.7066 relative to 1.00 U.S. dollar, and the French Franc closed at 0.0917 relative to 1.00 British pound. By comparison, on June 30, 2000, the British pound closed at 0.6591 relative 1.00 U.S. dollar, and the French franc closed at 0.0965 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. 15
ALAMO GROUP INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS - (CONTINUED) INTEREST RATE RISK At June 30, 2001, 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 six months 2001 average interest rate under these borrowings, the Company's interest expense would have changed by approximately $900,000. 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. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 16
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 ------------------------------------ Ronald A. Robinson President & CEO /s/ Richard J. Wehrle ------------------------------------ Richard J. Wehrle Vice President and Corporate Controller Principal Accounting Officer 17