ITEM 1. BUSINESS
GENERAL
Alamo Group Inc., which includes its subsidiaries ("Alamo Group," "Alamo" or the "Company"), is a leading manufacturer of high quality equipment for right-of-way maintenance and agriculture. Our products include tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, agricultural implements and related after market parts and services. The Company believes it is one of a few vegetation maintenance equipment manufacturers offering a comprehensive product line that employs the three primary heavy-duty cutting technologies: rotary, flail and sickle-bar. The Company emphasizes high quality, cost efficient products for its customers and strives to develop and market innovative products while constantly monitoring and containing its manufacturing and overhead costs. The Company has a long-standing strategy of supplementing its internal growth through acquisitions of businesses or product lines that currently command, or have the potential to achieve, a leading share of their niche markets.
The predecessor corporation to the Company was incorporated in Texas in 1969 as successor to a business that began selling mowing equipment in 1955. The Company was reincorporated in Delaware in 1987. As used herein and otherwise required by the context, the terms "Alamo Group" and "the Company" shall mean Alamo Group Inc. and its direct and indirect subsidiaries.
Since its founding in 1969, the Company has focused on satisfying customer needs through geographic market expansion, product development and refinement and selected acquisitions. The Company's first products were based on the rotary cutting technology. Through acquisitions, the Company added the flail cutting technology in 1983 and the sickle-bar technology in 1984. The Company added to its presence in the industrial and governmental markets with the acquisition of TIGER(R) at the end of 1994.
A major thrust into agricultural mowing markets began in 1986 with the acquisition of RHINO(R), a leading manufacturer in this field. With this acquisition, the Company embarked on an aggressive strategy to increase the RHINO dealer network during a period of industry contraction. Distribution network expansion remains a primary focus of the Company's marketing plans for agricultural and industrial uses. The addition of M&W(R) GEAR COMPANY in early 1995 allowed the Company to enter into the manufacturing and distribution of hay-making equipment that complements the RHINO distribution system. M&W has been integrated into the agricultural marketing group utilizing the same sales force to cross sell RHINO and M&W products throughout their dealer networks.
Another strategic move was made in late 1995 with the acquisition of HERSCHEL(R), a leading manufacturer and distributor of high wear, high turnover farm equipment replacement parts. In addition, the Company has concentrated on developing new products which meet the needs of its niche market customers and on adapting its existing products to serve other applications.
In 1991, the Company began its international expansion with the acquisition of MCCONNEL(R), a United Kingdom ("U.K.") manufacturer of vegetation maintenance equipment, principally hydraulic boom-mounted hedge and grass cutters and related parts. BOMFORD(R), also a U.K. company, was acquired in 1993. BOMFORD(R) is a manufacturer of heavy duty, tractor-mounted grass and hedge mowing equipment.
In 1994, the Company acquired S.M.A.(R) located in Orleans, France. S.M.A. manufacturers and sells principally to the French government, a line of heavy duty, tractor mounted grass and hedge mowing equipment and associated replacement parts. This acquisition along with smaller ones made in France and the Netherlands, when combined with MCCONNEL and BOMFORD, has made the Company one of the largest manufacturers in the European market for the kind of equipment sold by the Company.
On February 29, 2000, the Company acquired 100% of the outstanding shares of SCHWARZE INDUSTRIES, INC. ("SCHWARZE"). SCHWARZE is a manufacturer of sweeping equipment which is sold to governmental and contractor users. The Company believes the SCHWARZE sweeper products fit the Company's strategy of identifying product offerings with brand recognition in the industrial market place.
On September 8, 2000, the Company purchased the product line and associated assets of TWOSE(TM) OF TIVERTON LTD ("TWOSE") in the U.K. and incorporated its production into the existing facilities at McConnell and Bomford.
TWOSE was a small regional manufacturer of power arm flail mowers and parts, as well as harrows and rollers which solidified the Company's market leadership position.
On November 6, 2000, the Company acquired 100% of the issued and outstanding shares of SCHULTE INDUSTRIES, LTD. ("SCHULTE(TM)") and all of its affiliated and related companies. SCHULTE(TM) is a Canadian manufacturer of mechanical rotary mowers, snow blowers, and rock removal equipment. The Company expects SCHULTE to provide expansion into Canadian markets as well as manufacturing capabilities in Canada.
The principal executive offices of the Company are located at 1502 East Walnut, Seguin, Texas 78155, and its telephone number is (830) 379-1480.
MARKETING AND MARKETING STRATEGY
The Company's products are sold through the Company's seven marketing organizations, and extensive, world-wide dealer networks under the ALAMO INDUSTRIAL(R), TIGER(R), SCHWARZE, RHINO(R), M&W(R), HERSCHEL-ADAMS(R), SCHULTE(TM), MCCONNEL(R), BOMFORD(R), S.M.A.(R) and other trademarks and trade names.
ALAMO INDUSTRIAL equipment is principally sold to governmental end-users and, to a lesser extent, to the agricultural market and commercial turf market. Governmental agencies and contractors that perform services for such agencies purchase primarily hydraulically-powered, tractor-mounted mowers, including boom-mounted mowers, and replacement parts, for heavy-duty, intensive use applications, including the maintenance of highway, airport, recreational and other public areas. Municipal park agencies, golf courses and landscape maintenance contractors purchase certain ALAMO INDUSTRIAL mowers that deliver a fine manicured cut.
TIGER equipment includes heavy-duty, tractor-mounted mowing and vegetation maintenance equipment and replacement parts. A portion of TIGER sales includes tractors, which are not manufactured by TIGER. TIGER sells to state, county and local governmental entities through a network of dealers. In most cases, TIGER'S larger dealers' principal product line is TIGER equipment. TIGER'S dealership network is independent of ALAMO'S dealership network.
SCHWARZE equipment includes air, mechanical broom, and regenerative air sweepers along with a high-efficiency environmental sweeper. SCHWARZE primarily sells their products to governmental and contractor customers. The Company believes that SCHWARZE compliments Alamo Industrial because the end user for both products in many cases is the same. This combination will strengthen both the marketing and geographical areas for the Company.
RHINO and M&W equipment is generally sold to farmers and ranchers to clear brush, maintain pastures and unused farmland, shred crops and for hay-making. It is also sold to other customers, such as mowing contractors and construction contractors, for non-agricultural purposes. RHINO equipment consists principally of a comprehensive line of tractor-mounted equipment, including rotary cutters, finishing mowers, flail mowers and disc mowers. RHINO also sells posthole diggers, scraper blades and replacement parts for all RHINO equipment. Farm equipment dealers play the primary role in the sale of RHINO equipment. M&W hay-making equipment uses a fixed chamber, round bale technology. A portion of the RHINO product line is also sold through MCCONNEL'S network of agricultural tractor dealers in the U.K.
SCHULTE equipment includes mechanical rotary mowers, snow blowers, and rock removal equipment. SCHULTE serves both the agricultural and industrial markets primarily in Canada and the U.S. The Company plans for market synergies in Canada for both TIGER and RHINO product lines with expectation of broadening product offerings to the existing customer base.
HERSCHEL-ADAMS replacement parts are sold for most types of tillage equipment and tractors, and certain types of mowing and construction equipment. HERSCHEL-ADAMS products include a full range of cutting parts, chromium carbide treated hard-faced and plain replacement tillage tools, disc blades and fertilizer application components. HERSCHEL-ADAMS replacement tools are sold throughout the United States, Canada and Mexico to five major customer groups: farm equipment dealers, fleet stores, wholesale distributors, original equipment manufacturers and construction equipment dealers.
MCCONNEL equipment principally includes a line of hydraulic, boom-mounted hedge and grass cutters, as well as other tractor attachments and implements such as hydraulic backhoes, cultivators, subsoilers, buckets and other digger implements and replacement parts. MCCONNEL also sells turf maintenance equipment to the golf course and leisure markets. MCCONNEL equipment is sold primarily in the U.K. and France, and to a lesser extent in other parts of Europe, Australia, and North America. MCCONNEL primarily focuses on the agricultural and commercial end-user.
MCCONNEL products are sold in the U.K. through a network of agricultural tractor dealers, with exports sold primarily through distributors.
BOMFORD equipment includes hydraulic, boom-mounted hedge and hedgerow cutters, industrial grass mowers, agricultural seed bed preparation cultivators and replacement parts. BOMFORD equipment is sold to governmental agencies, contractors and agricultural end-users in the U.K., and France and to a lesser extent Germany, Scandinavia, North America, Australia and the Far East. BOMFORD'S sales network is very similar to that of MCCONNEL in the U.K.
SMA equipment includes hydraulic, boom-mounted hedge and hedgerow cutters and associated replacement parts. SMA'S principal customers are French local authorities. SMA'S product offerings were expanded in 1994 to include certain quick-attach boom mowers manufactured by the Company in the U.K. to expand its presence in agricultural dealerships.
In addition to the sales of HERSCHEL-ADAMS replacement parts, the Company derives a significant portion of its revenues from sales of replacement parts for each of its whole goods lines. Replacement parts represented approximately 30% of the Company's total sales for the year ended December 31, 2000. Replacement parts are more profitable and generally less cyclical than wholegoods.
While the Company believes that the end-user of its products evaluates the purchase of such products on the basis of price and product quality, such purchases are also based on a dealer's service, support and loyalty to the dealer based on previous purchases.
Demand for products tend to be strongest in the spring and summer growing seasons. The Company provides incentives for off-season purchases, including discounts, as a way to even out seasonal variations in its manufacturing cycles.
PRODUCT DEVELOPMENT
The Company's ability to provide innovative responses to customer needs, to develop and manufacture new products, and to enhance existing product lines is important to its success. The Company continually conducts research and development activities in an effort to improve existing products and develop new products. The Company currently employs 99 people in its engineering department, 43 of whom are professionals and the balance of whom are support staff. Amounts expended on research and development activities were approximately $2,396,000 in 2000, $1,722,000 in 1999, and $1,685,000 in 1998. As a percentage of sales research and development was 1.1% in 2000, 1.0% in 1999 and 1% in 1998 respectively. The increase in 2000 is primarily from the acquisition of SCHWARZE and to a lessor extent SCHULTE.
SEASONALITY
In general, (the vegetation maintenance equipment) industry tends to follow the seasonal buying patterns of its major customers with peak sales occurring in the summer from May through August. Agricultural and governmental end-users typically purchase new equipment during the first and second calendar quarters. The timing of these purchases, however, may be affected by weather conditions and general economic conditions. In order to achieve efficient utilization of manpower and facilities throughout the year, the Company estimates seasonal demand months in advance, and equipment is manufactured in anticipation of such demand. The Company utilizes a rolling monthly sales forecast provided by the Company's marketing divisions, and order backlog in order to develop a production plan for its manufacturing facilities. Additionally, the Company attempts to equalize demand for its products throughout the calendar year by offering seasonal sales programs which may provide additional incentives on equipment that is ordered during off-season periods.
COMPETITION
The Company's products are sold in highly competitive markets throughout the world. The principal competitive factors are price, quality, service and reputation. The Company competes with several large national and international companies that offer a broad range of agricultural equipment and replacement parts, as well as numerous small, privately-held manufacturers and suppliers of a limited number of products. However, the Company has fewer competitors in wide-swath and boom-mounted mowing equipment within the governmental niche. Some of the Company's competitors are significantly larger than the Company and have substantially greater financial and other resources at their disposal. The Company believes that it is able to compete successfully in its markets by
containing its manufacturing costs, offering high quality products, developing and designing innovative products and, to some extent, avoiding direct competition with significantly larger competitors. There can be no assurance that such competitors will not substantially increase the resources devoted to the development and marketing of products competitive with those of the Company. The Company believes that within the U.S. it is the largest supplier within governmental markets for its kind of equipment, a major supplier in the U.S. agricultural market for such equipment and one of the largest suppliers in the European market for such equipment.
UNFILLED ORDERS
As of December 31, 2000, the Company had unfilled customer orders of $44,269,000 compared to $34,266,000 at the end of 1999. The increase is primarily attributable to RHINO branded products, which experienced an increased backlog during the fourth quarter of 2000 as apart of its preseason selling program. The Company also had increased backlog from the three acquisitions it made in 2000, SCHWARZE, TWOSE and SCHULTE. Management expects that substantially all of the Company's backlog as of December 31, 2000, will be shipped during fiscal year 2001. The amount of unfilled orders at a particular time is affected by a number of factors, including the scheduling of manufacturing and shipping of the product, which in most instances are dependent on the Company's seasonal sales programs and the requests of its customers. Certain of the Company's orders are subject to cancellation anytime before shipment; therefore, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of future actual shipments.
SOURCES OF SUPPLY
The principal raw materials used by the Company include steel and purchased components. During 2000, the raw materials used by the Company were available from a variety of sources in adequate quantities and at prevailing market prices. A number of the Company's units are mounted on and shipped with a tractor. Tractors are generally available, but in some periods delays in receiving tractors have been experienced. No single supplier is responsible for supplying more than 10% of the principal raw materials used by the Company.
While the Company manufactures many of the parts for its products, a significant percentage of parts, including most drive lines, gear boxes and hydraulic pumps and motors, are purchased from outside suppliers which manufacture to the Company's specifications.
Approximately 15% of the aggregate dollar amount of parts purchased by the Company's U.S. operations are imported.
PATENTS AND TRADEMARKS
The Company owns U.S. and foreign patents. While the Company considers its patents to be advantageous to its business, it is not dependent on any single patent or group of patents.
Products manufactured by the Company are advertised and sold under numerous trademarks. ALAMO INDUSTRIAL(R), RHINO(R), M&W(R), FUERST(R), MCCONNEL(R), BOMFORD(R), SMA(R), TIGER(R), SCHULTE(TM) and HERSCHEL-ADAMS(R) trademarks are the primary marks for the Company's products. The Company also owns other trademarks which it uses to a lesser extent such as TERRAIN KING(R), TRIUMPH(R), MOTT(R), TURNER(R), and DANDL(R). Management believes that the Company's trademarks are well known in its markets and are valuable and that their value is increasing with the development of its business, but that the business is not dependent on such trademarks. The Company, however, vigorously protects its trademarks against infringement. The Company believes it has registered its trademarks in the appropriate jurisdictions.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
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, 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.
EMPLOYEES
As of December 31, 2000, the Company employed 1,535 full-time employees. The HERSCHEL facility in Indianola, Iowa has a collective bargaining agreement which covers approximately 46 employees, and the two U.K. subsidiaries, MCCONNEL and BOMFORD, employing approximately 285 persons, also have collective bargaining agreements. The Company considers its employee relations to be satisfactory.
FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION
See Note 13 of the accompanying consolidated financial statements.
FORWARD-LOOKING INFORMATION
Part I of this Annual Report on Form 10-K and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II of this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company.
Statements that are not historical are forward-looking. When used by or on behalf of the Company, the words "estimate," "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 interest rates and fluctuations in foreign 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 2.
ITEM 2. PROPERTIES
At December 31, 2000, the Company utilized six principal manufacturing plants located in the United States, four in Europe, one in Canada, and one in Australia. Listed below are the facilities:
Approximately 87% of the manufacturing and office space is owned, with the balance being leased. The Company has 64,700 square feet of warehouse space in three locations, of which 20,000 square feet is owned. The Company closed its manufacturing facility in LaGrange, Illinois during 1999 and the facility was subsequently sold on January 24, 2001. The Company closed and sold its warehouse location in Harrisburg, Pennsylvania in 2000. Further, the Company is in the process of closing the majority of its manufacturing facilities in Guymon, Oklahoma which is expected to be completed by March 31, 2001. Except as otherwise stated herein, the Company considers each of its facilities to be well maintained, in good operating condition, and adequate for its present level of operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which substantial damages are sought, the Company, cannot state what the eventual outcome of pending matters will be. The Company is contesting the allegations made in each pending matter and believes, based on current knowledge and after consultation with counsel, that the outcome of such matters will not have a material adverse effect on the
consolidated financial condition of the Company, but may be material to the Company's operating results for any particular period, depending on the level of the Company's income for such period.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended December 31, 2000.
ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY
Certain information is set forth below concerning the executive officers of the Company, each of whom has been selected to serve until the 2001 annual meeting of directors or until his successor is duly elected and qualified.
Donald J. Douglass founded the Company in 1969 and served as Chairman of the Board and Chief Executive Officer of the Company since 1969. Mr. Douglass resigned his position as Chief Executive Officer on July 7, 1999, but continues to serve as a director and Chairman of the Board for the Company.
Ronald A. Robinson, was appointed President, Chief Executive Officer and a director of the Company on July 7, 1999. Mr. Robinson had previously been President of Svedala Industries, Inc. the U.S. subsidiary of Svedala Industries AB of Malmo, Sweden, a leading manufacturer of equipment and systems for the worldwide construction, mineral processing and materials handling industries. Mr. Robinson joined Svedala in 1992 when it acquired Denver Equipment Company of which he was Chairman and Chief Executive Officer.
Robert H. George joined the Company in May 1987 as Vice President and Secretary and has served the Company in various executive capacities since that time. Prior to joining the Company, Mr. George was Senior Vice President of Frost National Bank from 1978 to 1987.
Ian Burden has been Executive Vice President of Alamo Group (USA) Inc. since January 1994 and manages the Alamo Industrial division. Since 1981 Mr. Burden served in various sales and marketing capacities for Bomford Turner, Ltd., a U.K. company acquired by Alamo in 1993.
Geoffrey Davies has been Managing Director of Alamo Group (EUR) Ltd. since December 1993. From 1988 to 1993, Mr. Davies served McConnel Ltd., a U.K. company acquired by Alamo in 1991, in various capacities including serving as its Marketing Director from February 1992 until December 1993.
John C. Moon has been Executive Vice President of Alamo Group (USA) Inc. since May 1991 and manages the Agricultural division. Prior to his appointment as Vice President, Mr. Moon has served Rhino in a number of sales and marketing positions since 1983.
Richard J. Wehrle has been Vice President and Corporate Controller of Alamo Group (USA) Inc. since September 1995. Prior to his appointment, Mr. Wehrle has served in various accounting management capacities within the Company since 1988.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the New York Stock Exchange under the symbol: ALG. On February 29, 2001, there were 9,703,659 shares of common stock outstanding, held by approximately 200 holders of record. The total number of beneficial owners of the Company's common stock exceeds this number. On February 29, 2001, the closing price of the common stock on the New York Stock Exchange was $15.50 per share.
The following table sets forth for the period indicated, on a per share basis, the range of high and low sales prices for the Company's common stock as quoted by the New York Stock Exchange. These price quotations reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions.
HIGH AND LOW STOCK PRICES FOR THE LAST TWO FISCAL YEARS WERE:
On July 7, 1999, the Board of Directors of the Company reduced its quarterly dividend from $0.11 per share to $0.06 per share effective for the second quarter of 1999. The change was made in order to increase the Company's ability to grow its business both internally and externally.
On January 5, 2001, the Board of Directors of the Company declared a quarterly dividend of $.06 per share which was paid on February 5, 2001, to holders of record as of January 18, 2001. The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends as they depend on future earnings, capital requirements and financial condition. In addition, the payment of dividends is subject to restrictions under the Company's bank revolving credit agreement.
The Company's bank revolving credit agreement prohibits the Company from paying quarterly dividends on its Common Stock in excess of $0.11 per share through March 31, 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Item 7 of Part II of this Annual Report on Form 10-K for a further description of the bank revolving credit agreement.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from the consolidated financial statements of Alamo Group Inc. and Subsidiaries. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
(in thousands, except per share amounts)
(1) Includes the results of operations of companies acquired from the effective dates of acquisitions.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
The following tables set forth, for the periods indicated, certain financial data:
Cost and profit margins, as percentages of net sales:
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
The Company's net sales in the fiscal year ending December 31, 2000 ("2000") were $215,874,000, an increase of $39,266,000 or 22.3% compared to $176,608,000 for the fiscal year ended December 31, 1999. The increase in sales was primarily attributable to the acquisition of SCHWARZE Industries on February 29, 2000.
North American Agricultural sales (Net) were $79,752,000 in 2000 compared to $75,931,000 in 1999, representing a increase of $3,821,000 or 5.0%. The revenue growth was encouraging given the continued depressed condition in the overall U.S. agriculture market. RHINO product sales improved throughout the year as order rates continued to follow an increased pace that began during the fourth quarter of 1999. Both the M & W and HERSCHEL products showed no significant change in sales as demand for bailers and tillage equipment continued to be soft.
North American Industrial sales (Net) in 2000 were $95,867,000 compared to $58,719,000 in 1999, a $37,148,000 or 63.2% increase. The acquisition of SCHWARZE Industries in the first quarter of 2000 accounted for the majority of the increase. ALAMO Industrial products showed slight improvement, but internal growth was hampered by delivery delays that occurred during the second and third quarter of 2000. Overall, the industrial market continues to be steady with the exception of the sweeper market which had experienced softness during the latter part of the fourth quarter which has continued into the first quarter of 2001.
European sales (Net) decreased $1,703,000 or 4.1% to $40,255,000 in 2000 compared to $41,958,000 in 1999. The decrease was attributed to the weakness in both the British Pound and the Euro that persisted throughout 2000. Europe's agricultural sector continued to be depressed which hurt market conditions for the Company's products. The situation is not expected to improve during 2001 especially since the outbreak of hoof and mouth disease in the U.K. during the first quarter of 2001.
Gross Margins for 2000 were $52,151,000 (24.2% of net sales) compared to $40,903,000 (23.2% of net sales) in 1999. 2000 margins were down slightly more than expected due to unfavorable variances from production issues during the middle of the year. Margin percentages for 1999 were negatively impacted by lower production volumes primarily for agricultural products as well as an inventory obsolescence charge in the third quarter of $3,201,000 from a fundamental change in business policy relating to inventory.
Selling, general and administrative expenses ("SG&A") were $34,650,000 (16.1% of net sales) in 2000 compared to $30,123,000 (17.1% of net sales) in 1999. The increase of $4,527,000 over 1999 was primarily due to the acquisition of SCHWARZE Industries during the first quarter of 2000.
Interest expense for 2000 was $2,190,000 compared to $1,495,000 in 1999, a $695,000 or 46.5% increase. The acquisition of SCHWARZE and SCHULTE primarily caused the increase for the year.
Net Income for 2000 was $10,770,000 compared to $6,102,000 in 1999 due to the factors described above.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's net sales in the fiscal year ending December 31, 1999 ("1999") were $176,608,000, a decrease of $23,945,000 or 11.9% compared to $200,553,000 for the fiscal year ended December 31, 1998 ("1998"). The decrease in sales was primarily attributable to the cyclical decline in the agricultural market, which began in late 1998 and continued throughout 1999.
North American Agricultural sales (Net) were $75,931,000 in 1999 compared to $98,393,000 in 1998, representing a decline of $22,462,000 or 22.8%. The continued weakness in the overall agricultural economy affected all product lines during the first three quarters of 1999. The Company began to see some gradual improvement in the fourth quarter with increased new orders, especially in the RHINO and HERSCHEL ADAMS products. Demand for M&W products continued to be less than anticipated and has not rebounded to historical backlog levels.
North American Industrial sales (Net) in 1999 were $58,719,000 compared to $61,133,000 in 1998, a $2,414,000 or 3.9% decrease. Wholegood sales improved over 1998 but tractor shipments declined due to
a slowdown in deliveries from major tractor suppliers which is expected to last through the first quarter of 2000. Also affecting sales were drought conditions that affected the northeast areas of the U.S. Industrial backlogs improved during the fourth quarter of 1999 increasing over last year's levels due to higher state governmental agency spending.
European sales (Net) increased $931,000 or 2.3% to $41,958,000 in 1999 compared to $41,027,000 in 1998. Exchange rates between the French franc and the British pound were stable during the first half of 1999 but weakened during the third and fourth quarter of 1999. European markets rebounded somewhat during the fourth quarter of 1999 resulting in improved sales.
Gross Margins for 1999 were $40,903,000 (23.2% of net sales) compared to $43,658,000 (21.8% of net sales) in 1998. Margin percentages for 1999 were negatively impacted by lower production volumes primarily for agricultural products as well as an inventory obsolescence charge in the third quarter of $3,201,000 from a fundamental change in business policy relating to inventory. The 1998 margin percentages were substantially impacted due to the write-off of Rhino International assets relating to the shutdown of the operations totaling $4,513,000.
Selling, general and administrative expenses ("SG&A") were $30,123,000 (17.1% of net sales) in 1999 compared to $35,169,000 (17.5% of net sales) in 1998. In the last quarter of 1999, the Company expensed a post retirement benefit for Donald J. Douglass, Chairman of the Board of the Company, who retired as an employee of the Company on December 31, 1999. The total expense was $707,000. The Company also expensed a Consulting and Non-Competition Agreement with its previous President and Chief Operating Officer, Oran Logan in the amount of $400,000. Mr. Logan's agreement was filed with the Company's 10-Q for the third quarter of 1999. The Company's 1999 marketing expenses were down due to lower agricultural sales volumes which translated to reduced commission levels and a reduction of advertising costs. During 1998, the Company experienced costs relating to the settlement of a lawsuit as well as write-off of goodwill relating to its Rhino International operations. The Company also incurred expenses relating to the terminated WEC acquisition.
Interest expense for 1999 was $1,495,000 compared to $2,647,000 in 1998, a $1,152,000 or 43.5% decrease. Increased cash flow from operations was primarily responsible for lowering debt levels throughout the year thereby reducing interest expense.
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 quarter and early spring of the year and partly 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 preseason sales. These sales balance the Company's production during the off season.
As of December 31, 2000, the Company had working capital of $92,343,000, which represents an increase of $12,489,000 from working capital of $79,854,000 as of December 31, 1999. The increase in working capital was primarily due to the acquisition of SCHWARZE and SCHULTE, which provided increased levels of accounts receivable and inventory.
Capital expenditures were $12,650,000 for 2000, compared to $3,616,000 for 1999. Capital expenditures for 2001 are expected to be approximately $6,000,000. The significant increase in 2000 is attributable to several items, the largest one being the purchase of the Company's Bomford manufacturing facility and adjacent land in the U.K., which was leased on a long-term basis. The purchase price was approximately $5,300,000 and the transaction was completed in June 2000. Other major components of the increase were related to improvements at the Company's Seguin and Holton plants to increase efficiencies and capacity to take on production being transferred as a result of the closure of the Company's LaGrange facility and transfer of RHINO production from Seguin to Holton. 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 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.
Net cash provided by operating activities was $9,010,000 for 2000, compared to $39,188,000 for 1999. The decrease of cash from operating activities resulted primarily from increased inventory and accounts receivables due to the SCHWARZE and SCHULTE acquisitions. In 1999, operating activities significantly increased due to an inventory reduction plan that reduced excess and obsolete inventory.
Net cash provided by financing activities was $25,853,000 for 2000, compared to net cash provided of $33,483,000 for 1999. The change in activity was primarily a result of the SCHWARZE and SCHULTE acquisitions of approximately $25,000,000. In 1999, the Company's increased cash flow reduced its bank revolving credit facility by $29,600,000.
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 Libor 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 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 December 31, 2000. As of December 31, 2000, there was $28,800,000 borrowed under the revolving credit facility. At December 31, 2000, $2,982,000 of the revolver capacity was committed to irrevocable standby letters of credit issued in the ordinary course of business as required by vendor's contracts. The Company's borrowing levels for working capital are seasonal with the greatest utilization generally occurring in the first quarter and early spring. Management believes that the bank credit facility and the Company's ability to internally generate funds from operations should be sufficient to meet the Company's cash requirements for the foreseeable future.
INFLATION
The Company believes that inflation generally has not had a material impact on its operations or liquidity to date.
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.
NEW ACCOUNTING STANDARDS AND DISCLOSURES
Accounting for Derivative Instruments and Hedging Activities. In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". In September 1999, the FASB agreed to defer the effective date of Statement No. 133 for one year until the first quarter of 2001, 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.
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 heave 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 costs of goods sold.
ITEM 7A.
ITEM 7A. 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.
FOREIGN CURRENCY RISK
AS A RESULT OF FOREIGN SALES
A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company primarily manufactures its products in the United States, the 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 markets in which the U.S. or U.K. subsidiaries of the Company distributes its 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 transactions over a period of six months. As of December 31, 2000, the Company had $1,409,840 outstanding forward exchange contracts related to sales, additionally there was an exchange contract of $5,173,000 relating to a short-term inter-company cash transfer. A 15% fluctuation in exchange rates for these currencies would change the fair value by approximately $1,000,000. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts should be offset by changes in the underlying value of the transaction being hedged.
EXPOSURE TO EXCHANGE RATES AS A RESULT OF FOREIGN SALES
The Company's earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominately in European countries, as a result of the sales of its products in foreign markets. Foreign currency options and forward contracts are used to hedge against the earnings effects of such fluctuations. At December 31, 2000, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would result in a decrease in gross profit of $1,226,000 for the year ending December 31, 2000. Comparatively, at December 31, 1999, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would have resulted in a
decrease in gross profit of $1,226,000 for the year-ended December 31, 1999. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices. The translation adjustment during 2000 was a loss of $2,127,000. On December 31, 2000, the British pound closed at .6697 relative to 1.00 U.S. dollar, and the French franc closed at .0958 relative to 1.00 British pound. By comparison, on December 31, 1999, the British pound closed at .6191 relative to 1.00 U.S. dollar, and the French franc closed at .0953 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 December 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 hundred basis point change in the 2000 average interest rate under these borrowings, the Company's 2000 interest expense would have changed by approximately $575,000. In the event of an adverse change in interest rates, management could take actions to mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such actions. Further, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The financial statements and supplementary data described in Item 14(a)1 of this report and included on pages through of this Report are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
There is incorporated herein, by reference, that portion of the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders, which appears therein under the captions "Item 1: Election of Directors," "Information Concerning Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance." See also the information in Item 4a. of Part I of this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There is incorporated in this Item 11, by reference, that portion of the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders, which appears under the caption "Executive Compensation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is incorporated in this Item 12, by reference, that portion of the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders, which appears under the caption "Beneficial Owners of Common Stock."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13, by reference, that portion of the Company's definitive proxy statement for the 2001 Annual Meeting of Stockholders, which appears under the captions "Certain Relationships and Related Transactions" and "Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included following the Index to Consolidated Financial Statements on page of this Report.
(a)2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not required under the instructions or the information requested is set forth in the consolidated financial statements or related notes thereto.
(a)3. EXHIBITS
The following Exhibits are incorporated by reference to the filing indicated or are included following the Index to Exhibits.
INDEX TO EXHIBITS
* Compensatory Plan
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 2000
Form 8-K dated November 21, 2000 reporting Item 2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
Date: March 23, 2001 By: /s/ RONALD A. ROBINSON ------------------------------ President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
ALAMO GROUP INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders Alamo Group Inc.
We have audited the accompanying consolidated balance sheets of Alamo Group Inc. and its subsidiaries as of December 31, 2000 and December 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alamo Group Inc. and its subsidiaries at December 31, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Antonio, Texas March 13, 2001
ALAMO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS AND SEGMENTS
The Company manufactures, distributes and services high quality equipment for right-of-way maintenance and agriculture. Our products include tractor-mounted mowing and other vegetation maintenance equipment, street sweepers, agricultural implements and related after market parts and services.
Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect results of operations or financial position. The Company manages its business in three principal reporting segments; Agricultural, Industrial, and European. The adoption of Statement 131 requires segment reporting and certain geographic disclosures which are included in Footnotes 13 and 14.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Alamo Group Inc. and its subsidiaries ("the Company"), all of which are wholly owned. Other investments are accounted for under the equity method or the cost method. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform with the 1998 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY
The Company translates the assets and liabilities of foreign-owned subsidiaries at rates in effect at the end of the year. Revenues and expenses are translated at average rates in effect during the reporting period. Translation adjustments are included in accumulated comprehensive income within the statement of stockholders' equity.
The Company enters into foreign currency forward contracts to hedge its exposure on material foreign currency transactions. The Company does not hold or issue financial instruments for trading purposes. Changes in the market value of the foreign currency instruments are recognized in the financial statements upon settlement of the hedged transaction. At December 31, 2000, the Company had $1,409,840 outstanding forward exchange contracts related to sales and a foreign currency forward contract of $5,173,000 relating to a short term inter-company cash transfer maturing in January 2001. The maximum exposure of the December 31, 2000 contracts that the Company expects to incur during the first quarter of 2001 is approximately $77,000 loss. Foreign currency transaction gains or losses are included in Other income (expense), net. For 2000, 1999 and 1998, such transactions netted a loss of $204,000, a loss of $906,000 and a gain of $99,000, respectively.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with a maturity date no longer than 90 days.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The credit risk is limited because of the large numbers and types of customers and their geographic dispersion.
INVENTORIES
Inventories of U.S. operating subsidiaries are principally stated at the lower of cost (last-in, first-out method) ("LIFO") or market, and the Company's foreign subsidiaries' inventories are stated at the lower of cost (first-in, first-out) ("FIFO") or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated on the basis of cost. Major renewals and betterments are charged to the property accounts while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed currently. Depreciation is provided at amounts calculated to amortize the cost of the assets over their estimated useful economic lives using the straight-line method.
GOODWILL
Goodwill is related to purchase acquisitions and, with minor exceptions, is being amortized over fifteen years from respective acquisition dates. Goodwill is shown net of amortization of $6,520,000 and $5,343,000 for the years ended December 31, 2000 and 1999, respectively. The Company continually evaluates the existence of goodwill impairment on the basis of whether the goodwill is fully recoverable from projected, undiscounted net cash flows of the related business unit.
LONG-TERM INVESTMENTS
At December 31, 2000 and 1999, respectively, the Company had $2,000,000 and $1,500,000 invested in a Small Business Investment Company which is carried at cost in Other assets.
RELATED PARTY TRANSACTIONS
Notes receivable from officers of the Company was $970,000 for the years ended December 31, 2000 and 1999, respectively, are included in Other assets.
REVENUE RECOGNITION
Product revenue is recognized when the product is shipped. Pre-season sales orders are solicited in the fall in advance of the dealer's sales season in the spring and summer. Pre-season sales orders are shipped beginning in the fall and continuing through the spring and represent an opportunity for the Company's factories to level their production/shipping volumes through the winter months. These pre-season shipments carry descending discounts in conjunction with delayed payment terms of up to six months from the dealer's requested delivery date. Revenue from sales is recorded net of a provision for discounts that are anticipated to be earned and deducted at time of payment by the customer. These approximated discounts represent an average of historical amounts taken and are adjusted as program terms are changed. The reserves for discounts are reviewed and adjusted quarterly. 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 heave been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectibility is reasonably assured.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
SHIPPING AND HANDLING COSTS
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 costs of goods sold.
RESEARCH AND DEVELOPMENT
Product development and engineering costs charged to Selling, general and administrative expense amounted to $ 2,396,000, $1,722,000, and $1,685,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in 2000 is primarily from the acquisition of SCHWARZE and to a lessor extent, SCHULTE.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between the financial reporting basis and tax basis of assets and liabilities and are measured using presently enacted tax rates and laws.
STOCK-BASED COMPENSATION
Effective January 1, 1996 the Company adopted Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, and elected to continue to use the intrinsic value method in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the financial statements for these plans.
2. 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 amounts)
Stock options were 5,000 shares in 2000 and 101,000 shares in 1999, and were not included in the diluted earnings per share calculation as they were antidilutive.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
3. TERMINATION OF OPERATIONS OF SUBSIDIARY
In December 1998, the Company announced its decisions to terminate the operations of the Company's Chinese tractor import and marketing business, Rhino International. This operation experienced a decline in sales and profitability related to business factors. Sales in 2000 were immaterial versus $1,223,000 in 1999 and $2,197,000 in 1998. Disposal of the assets of the Rhino International operation were substantially concluded in 1999, and resulted in an after-tax loss of $665,000. In 1998, the effect of Rhino International, including settlement of certain litigation, charges of $955,000 related to impairment of goodwill and other intangibles, $650,000 of various other costs involved in terminating operations, and reserves for inventory and accounts receivable losses expected in final collection and disposition, was an after-tax loss of $6,417,000. These charges are included in net sales, cost of sales and selling, general and administrative expense as appropriate.
4. VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts included the following (in thousands):
5. INVENTORIES
Inventories valued at LIFO cost represented 61% and 82% of total inventory for the years ended December 31, 2000 and 1999, respectively. The excess of current costs over LIFO-valued inventories was $4,238,000 and $3,925,000 at December 31, 2000 and December 31, 1999, respectively. Net inventories consist of the following (in thousands):
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
Property, plant and equipment at December 31, 2000 and December 31, 1999 includes $2,540,000 and $6,272,000, respectively, for buildings, machinery and equipment held under capitalized leases.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following balances (in thousands):
8. LONG-TERM DEBT
The components of long-term debt at December 31 are as follows (in thousands):
As of December 31, 2000, the Company had 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. Due to the losses related to Rhino International discussed in Note 3, the Company was not initially in compliance with certain of the covenants at December 31, 1998. The bank amended the covenant requirements effective for the
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
period ended December 31, 1998 and for future periods. After this amendment the Company was in compliance with all covenants as of December 31, 1998. The Company is in compliance with all convenants at December 31, 2000. At December 31, 2000, $28,800,000 was outstanding on the revolving credit facility. At December 31, 2000, $2,982,000 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 aggregate maturities of long-term debt, as of December 31, 2000, are as follows: $1,383,000 in 2001, $29,246,000 in 2002, $470,000 in 2003, $471,000 in 2004 and $214,000 in 2005 and $55,000 thereafter.
Long-term debt is stated at estimated fair value.
9. INCOME TAXES
U.S. and non-U.S. income before income taxes is as follows (in thousands):
The provision for income taxes consists of (in thousands):
Reconciliation of the statutory U.S. federal rate to actual tax rate is as follows (in thousands):
At December 31, 2000, the Company had unremitted earnings of foreign subsidiaries of $22,995,000. These earnings, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or can be remitted without substantial additional tax. Accordingly, no provision has been made for taxes that might be payable upon remittance of such earnings nor is it practicable to determine the amount of this liability.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
The components of deferred tax assets and liabilities included in the balance sheets are as follows (in thousands):
At December 31, 2000, net current deferred tax assets were $4,335,000 ($4,193,000 in 1999). Net non-current deferred tax liabilities were $1,443,000 ($1,256,000 in 1999).
10. COMMON STOCK
In conjunction with the issuance of debt in a prior year, the Company issued warrants to purchase 62,500 shares of common stock to the lender. The exercise price of $16 per share was subject to adjustment, and the warrants expired in January 2000 without being exercised.
Subsequent to December 31, 2000, the Company declared and paid a dividend of $.06 per share.
11. STOCK OPTIONS
INCENTIVE OPTIONS
On April 28, 1994, the stockholders approved the 1994 Incentive Stock Option Plan ("1994 ISO Plan") for key employees. Each option becomes vested and exercisable for up to 20% of the total optioned shares each year after grant. Under the terms of this plan, the exercise price of the shares subject to each option granted will not be less than the fair market value of the common stock at the date the option is granted.
On August 31, 1999, the stockholders of the Company approved amending the 1994 ISO Plan. During the period ended December 31, 1999, options to purchase 101,000 shares have been granted. The amendment was filed on Schedule 14A, dated July 30, 1999. At December 31, 1999, the Company has reserved 385,525 shares of common stock for these options.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
Following is a summary of activity in the incentive stock option plans for the periods indicated:
PER SHARE OPTION PRICES, FOR OPTIONS OUTSTANDING AT DECEMBER 31, 2000, RANGED FROM $8.9375 TO $9.25.
NONQUALIFIED OPTIONS
On February 2, 1993, the Company granted nonqualified options for 200,000 shares of common stock to key employees of the Company at $11.50 per share. Each option becomes vested and exercisable for up to 20% of the total optioned shares after one year following the grant of the option and for an additional 20% of the total optioned shares after each succeeding year until the option is fully exercisable at the end of the fifth year. During 2000 and 1999, no shares were exercised, in 1998 there were 20,000 shares exercised, and 20,000 shares remain outstanding and exercisable until January 30, 2003.
On July 7, 1999, the Company granted 200,000 shares of the Company's Common Stock from the 1999 Non-Qualified Stock Option Plan at the exercised price of $8.9375 per share being the closing price of the Company's Common Stock on the grant date. Each option becomes vested and exercisable for up to 20% of the total optioned shares after one year following the grant of the option and for an additional 20% of the total optioned shared after each succeeding year until the option is fully exercisable.
Following is a summary of activity in the nonqualified option plans for the periods indicated:
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
12. RETIREMENT BENEFIT PLANS
The Company provides a defined contribution 401(k) retirement and savings plan for eligible U.S. employees. Company matching contributions are based on a percentage of employee contributions. Company contributions to the plan during 2000, 1999 and 1998 were $508,000, $578,000, and $620,000, respectively.
Three of the Company's foreign subsidiaries also participate in a defined contribution and savings plan covering eligible employees. The Company's foreign subsidiaries contribute between 3% and 7.5% of the participant's salary up to a specific limit. Contributions were $312,000 in 2000, $282,000 in 1999, and $428,000 in 1998.
13. SEGMENT REPORTING
At December 31, 2000 the following audited financial information is segmented: (in thousands)
14. FOREIGN OPERATIONS AND GEOGRAPHIC INFORMATION
Following is selected financial information on the Company's foreign operations (located in Europe) (in thousands):
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
Following is other selected geographic financial information on the Company's operations (in thousands):
Net sales are attributed to countries based on the location of customers.
15. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, REPORTING COMPREHENSIVE INCOME. The adoption of this Statement has no impact on the net income or stockholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported in stockholders' equity, to be included, along with net income, in Comprehensive income. Prior years' data have been conformed to the requirements of Statement 130.
For 2000, 1999 and 1998 the Company's Comprehensive Income was $8,643,000, $4,564,000, and $4,699,000, respectively.
The components of Accumulated Other Comprehensive Income are as follows (in thousands):
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
16. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space and transportation equipment under various operating leases which generally are expected to be renewed or replaced by other leases. The Company has certain capitalized leases consisting principally of leases of buildings. At December 31, 2000, future minimum lease payments under these noncancelable leases and the present value of the net minimum lease payments for the capitalized leases are (in thousands):
Rental expense for operating leases was $ 1,928,000 for 2000, $1,351,000 for 1999, and $1,404,000 for 1998.
OTHER
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 had an executive loan program pursuant to which the Company made loans to certain officers and employees of the Company to purchase stock of the Company. The loans are subject to approval by the Compensation Committee of the Board of Directors. All loans are secured by a pledge of the shares being purchased. The maximum aggregate amount which officers and employees may borrow is $400,000 and $200,000, respectively. Each loan bears interest at prime and is payable quarterly. Beginning March 2001, each employee must make annual principal payments equal to 10% of the amount loaned to the employee. As of December 31, 2000, and 1999, $261,000 and $317,000, respectively, were outstanding under the program and are included in additional paid-in capital. The executive loan program has expired.
ALAMO GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, DECEMBER 31, 1999 AND DECEMBER 31, 1998
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2000 and 1999 is presented below. Seasonal influences affect the Company's sales and profits with peak business occurring in May through August. (In thousands, except per share amounts):
18. ACQUISITIONS AND INVESTMENTS
During 2000 the Company made the following acquisitions:
o On February 29, 2000, the Company acquired 100% of the outstanding shares of Schwarze Industries Inc. ("Schwarze"). Schwarze is a manufacturer of sweeping equipment which is sold to governmental and contractor users. The Company acquired assets for a purchase price of approximately $15,000,000. All goodwill will be amortized over 15 years.
o On September 8, 2000, the Company purchased the product line and associated assets out of receivership of Twose of Tiverton LTD ("Twose") in the U.K. Twose was a small regional manufacturer of power arm flail mowers and parts. The acquisition price was approximately $1,200,000.
o On November 6, 2000, the Company acquired 100% of the issued and outstanding shares of Schulte Industries, LTD ("Schulte") and all its affiliated and related companies for approximately $9,000,000. Schulte is a Canadian manufacturer of mechanical rotary mowers, snow blowers, and rock removal equipment. All related goodwill will be amortized over 15 years.
The pro forma statement of the Company assuming the transactions were completed at January 1, 1999 is listed in the following table (in thousands except for per share):
19. SUBSEQUENT EVENTS
The Company closed on the sale of its La Grange, Illinois, facility on January 24, 2001, which ceased production at the end of 1999. Sales price for the building and the land was $1,755,000.