Alamo (ALG) - 2023 Q4 - Annual Report

PART I Business Alamo Group is a global leader in vegetation management and infrastructure equipment, growing through innovation, cost control, and strategic acquisitions - The company operates 29 plants and employs approximately 4,350 people globally[13] - Operations realigned into Vegetation Management and Industrial Equipment Divisions in 2021 for synergy[34] - Growth strategy includes acquisitions, with Royal Truck & Equipment, Inc. acquired in 2023 for highway safety expansion[12][31] Replacement Parts Sales Contribution | Year | Percentage of Total Sales | | :--- | :--- | | 2023 | ~17% | | 2022 | ~19% | | 2021 | ~20% | Research & Development Expenditure | Year | Amount (USD Million) | % of Sales | | :--- | :--- | :--- | | 2023 | $13.4 | 0.8% | | 2022 | $14.3 | 0.9% | | 2021 | $11.7 | 0.9% | - Backlog decreased from $1.0 billion at the end of 2022 to $859.8 million at the end of 2023[59] Risk Factors The company faces material risks from economic downturns, supply chain disruptions, labor shortages, cybersecurity threats, and regulatory changes - Revenue sensitivity to governmental spending due to substantial reliance on public sector customers[100] - Dependence on raw material prices and availability, with supply chain disruptions impacting profitability[97] - Heavy reliance on IT systems exposes the company to significant cybersecurity threats and potential financial loss[104][105] - Acquisition-driven growth carries risks in target identification, financing, and successful integration for synergy realization[115][117] - Stricter engine emission regulations, like EPA Tier 4 and CARB, may impact product sales or raise compliance costs[126] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments to report[145] Cybersecurity The company's cybersecurity program, based on CIS and NIST, is overseen by the Audit Committee, with no material incidents to date - Cybersecurity framework based on CIS Critical Security Controls, guided by NIST and CISA[147] - Audit Committee oversees cybersecurity risks, receiving regular updates and assessments[150] - No identified cybersecurity risks or incidents have materially affected the company's business or financial condition to date[149] Properties Alamo Group operates 29 manufacturing plants globally, with 82% owned and considered well-maintained and adequate Manufacturing Plant Locations | Region | Number of Plants | | :--- | :--- | | United States | 17 | | Europe | 8 | | Canada | 3 | | Brazil | 1 | - Approximately 82% of the company's manufacturing, warehouse, and office space is owned[157] Legal Proceedings The company faces ordinary course legal actions, primarily product liability claims, which are insured and not expected to be material - Most prevalent legal actions are product liability claims, generally covered by insurance after self-insured retention[158] - Management does not expect current litigation to materially affect the company's financial position[158] Mine Safety Disclosures This item is not applicable to the company - Not applicable[158] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alamo Group's common stock (ALG) trades on NYSE, increased quarterly dividend to $0.26, and outperformed key indices - Common stock trades on NYSE under symbol ALG[159] - Quarterly dividend increased from $0.22 to $0.26 per share on January 2, 2024[140][160] Five-Year Cumulative Total Return Comparison | Company/Index | 12/31/18 | 12/31/23 | Cumulative Return | | :--- | :--- | :--- | :--- | | Alamo Group Inc. | $100.00 | $278.40 | +178.4% | | S&P SmallCap 600 | $100.00 | $168.73 | +68.7% | | S&P 500 Industrials | $100.00 | $194.31 | +94.3% | Management's Discussion and Analysis of Financial Condition and Results of Operations Alamo Group achieved record net sales and income in 2023, driven by demand and improved supply, despite a backlog decrease - 2023 was a record year with a 12% increase in net sales and 34% increase in net income compared to 2022[167] Key Financial Metrics (as % of Net Sales) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Gross Profit | 26.8% | 24.9% | 25.1% | | Income from Operations | 11.7% | 9.8% | 8.8% | | Net Income | 8.1% | 6.7% | 6.0% | Net Sales by Division (in thousands) | Division | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Vegetation Management | $979,040 | $937,065 | $812,676 | | Industrial Equipment | $710,611 | $576,551 | $521,547 | | Total Net Sales | $1,689,651 | $1,513,616 | $1,334,223 | - Backlog decreased 15% from $1.0 billion in 2022 to $859.8 million in 2023 due to order normalization[170] - Net cash from operating activities significantly increased to $131.2 million in 2023 from $14.5 million in 2022[189] Results of Operations In 2023, net sales rose 11.6% to $1.69 billion, with gross profit margin improving to 26.8% and net income increasing 33.7% - In 2023, net sales increased by $176.1 million (11.6%) due to strong demand, pricing, and supply chain improvements[175] - Gross profit margin improved from 24.9% in 2022 to 26.8% in 2023 due to volume, operations, and pricing[177] - Interest expense increased 81.7% in 2023 to $26.1 million, primarily due to higher interest rates[179] Liquidity and Capital Resources Liquidity is strong with working capital at $590.0 million and operating cash flow at $131.2 million, supported by a $655.0 million credit facility - Working capital increased by $53.3 million to $590.0 million by year-end 2023, driven by receivables and inventory[189] - A $655.0 million credit facility, comprising a $255.0 million Term Facility and $400.0 million Revolver Facility, was established in October 2022[192] - As of December 31, 2023, $235.2 million was outstanding on the Term Facility, with $397.4 million available on the Revolver Facility[193] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency fluctuations and variable interest rates, partially mitigated by forward contracts - A hypothetical 10% USD strengthening would decrease gross profit by approximately $12.5 million[207] - A hypothetical 200 basis point (2%) interest rate change would alter 2023 interest expense by approximately $7.0 million[208] Financial Statements and Supplementary Data Consolidated financial statements and supplementary data, audited by KPMG LLP, are incorporated by reference from pages 49-79 - Financial statements and supplementary data are incorporated by reference from pages 49-79[209] Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal controls identified in Q4 - Management concluded disclosure controls and procedures were effective at period-end[209] - Internal control over financial reporting effectiveness as of December 31, 2023, audited by KPMG LLP[210] PART III Directors, Compensation, Security Ownership, and Accountant Fees Items 10-14, covering directors, compensation, security ownership, and accountant fees, are incorporated by reference from the 2024 proxy statement - Information on Directors, Executive Officers, and Corporate Governance (Item 10) incorporated by reference from 2024 proxy statement[213] - Executive Compensation details (Item 11) incorporated by reference from 2024 proxy statement[216] - Security ownership (Item 12) and equity compensation plan details incorporated by reference from 2024 proxy statement[217] - Principal Accountant Fees and Services (Item 14) for KPMG LLP incorporated by reference from 2024 proxy statement[221] PART IV Exhibits and Financial Statement Schedules This section indexes consolidated financial statements and lists all exhibits, including governance documents and material contracts - Provides an index to Consolidated Financial Statements, starting on page 44[224] - Lists filed exhibits, including governance documents, material contracts, and executive compensation plans[227]