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ALAMO GROUP REPORTS 4Q 2017 SALES UP 18.4%
Source: Alamo Group news release

Seguin, Texas -- Alamo Group Inc. reported results for the fourth quarter and year ended Dec. 31, 2017.

Highlights

Fourth quarter results include U.S. tax reform related charges of $10.2 million;

Net income for the fourth quarter was $3.2 million; excluding the U.S. tax reform related charge, adjusted net income was $13.5 million;

Record net sales for the fourth quarter of $243.3 million, up 18.4%;

Industrial Division net sales of $147.2 million, up 20.2%;

Agricultural Division net sales of $56.5 million, up 15.5%;

European Division net sales of $39.6 million, up 16%;

Net income for the full year was $44.3 million; excluding the U.S. tax reform related charge, adjusted net income was $54.6 million;

Record net sales for full year of $912.4 million, up 8%;

Backlog at the end of the year was $218.2 million, up 48.2% compared to the previous year end.

Results for the Quarter

Net sales for the fourth quarter of 2017 were $243.3 million compared to net sales of $205.5 million in the fourth quarter of 2016, an increase of 18.4%. Net income for the fourth quarter was $3.2 million, or $0.27 per diluted share. The fourth quarter results include a one-time net charge of $10.2 million related to the U.S. tax reform bill that was enacted in December 2017. Excluding this charge, 2017 fourth quarter adjusted net income was $13.5 million. This compares to fourth quarter 2016 net income of $7.6 million. Fourth quarter 2016 results include a $2.9 million non-cash charge related to a pension plan termination. Without this charge, 2016 adjusted fourth quarter net income was $9.4 million, or $0.81 per diluted share.

Results for the Full Year

Net sales for the full year of 2017 were $912.4 million, up 8% compared to net sales of $844.7 million in the prior year. Net income for the full year was $44.3 million.
Excluding the effects of the U.S. tax reform related charges referenced above, adjusted net income for the full year was $54.6 million compared to 2016 adjusted net income of $41.9 million, an increase of 30.2%. Full year 2016 adjusted results exclude the fourth quarter charge related to the pension plan termination mentioned above.

The results for the fourth quarter and full year of 2017 included the effects of the acquisitions of Santa Izabel and Old Dominion Brush Co., which were both completed in June 2017 and R.P.M. Tech, which was completed in August 2017. Together these three acquisitions contributed $13.9 million in net sales and $0.6 million in net income in the fourth quarter and $25.5 million in net sales and $1 million in net income for the full year of 2017.

Net income, excluding the U.S. tax reform related charge referenced previously, and net sales for both the fourth quarter and full year of 2017 were at record levels for Alamo Group, both including and excluding the effects of the acquisitions.

Results by Division

Alamo Group's Industrial Division net sales in the fourth quarter of 2017 were $147.2 million compared to $122.5 million in the fourth quarter of 2016, an increase of 20.2%. For the full year net sales in 2017 were $522.7 million compared to $484.1 million in 2016, an increase of 8.0%. The Division's income from operations for the full year 2017 was $51.9 million, compared to $36.0 million in 2016 which included the previously mentioned non-cash pension termination charge. The Industrial Division's results included the effects of the acquisitions of Old Dominion Brush Co. and R.P.M. Tech, which combined contributed $11.8 million in net sales and $1.3 million in income from operations in the fourth quarter of 2017 and $19.8 million in net sales and $2.0 million in income from operations for the full year.

The Company's Agricultural Division recorded net sales of $56.5 million in the fourth quarter of 2017 compared to $48.9 million in the fourth quarter of the prior year, an increase of 15.5%. For the full year of 2017 net sales were $227.4 million versus $205.8 million in 2016, an increase of 10.5%. Full year income from operations for the Division was $24.1 million compared to $20.7 million in 2016. The Agricultural Division results include the effects of the acquisition of Santa Izabel, which contributed $2.1 million in net sales and a $0.2 million loss from operations in the fourth quarter of 2017 and $5.7 million in net sales and a $0.3 million loss from operations for the full year.

Alamo Group's European Division net sales in the fourth quarter of 2017 were $39.6 million. This was an increase of 16.0% compared to net sales of $34.2 million in the fourth quarter of 2016. For the full year the Division's net sales were $162.3 million in 2017 compared to $154.8 million in 2016, an increase of 4.8%. Income from operations for the full year was $12.8 million, compared to the $10.9 million achieved in 2016.

Comments on Results

Ron Robinson, Alamo Group's President and CEO commented, "Our fourth quarter results nicely capped off a very strong year for Alamo Group and we are proud of our total organization that delivered these results. Starting in 2015 and throughout most of 2016 we commented on a variety of headwinds that were constraining our results. These included weak overall agricultural market conditions; the negative effects on our snow removal products due to consecutive mild winters; declines in sales of certain Industrial Division products, mainly vacuum trucks to non-governmental end-users; generally soft economic conditions in our European markets; and, the negative effects of the strong U.S. dollar on the translation of our non-U.S. dollar denominated sales and earnings. Throughout 2017, we saw improvement in all five of these areas. The agricultural market is strengthening, further aided by lower dealer inventory levels; snow removal products are benefiting from more normal winter weather conditions; non-governmental sales and rentals of vacuum truck equipment have rebounded; European markets have strengthened considerably; and, even the U.S. dollar developed into more of a tailwind as it softened during the second half of 2017. As a consequence, our results for the year showed considerable improvement, albeit versus weaker comparables in 2016. We feel well positioned to see continued growth in both sales and operating income in 2018, although, at more modest rates than achieved in 2017. While there is always a degree of economic uncertainty, we are optimistic that our markets should continue to improve in 2018. And, we are hopeful external factors such as currency exchange rates will not move too dramatically either way throughout the year. Certainly, in 2017 we benefited from fairly low inflation in both labor and purchased components used in our production. We feel in 2018 we will experience moderate inflation as labor availability tightens and our commodity costs of items such as steel and energy have been rising, but as long as these increases remain reasonable, it should not have a material impact on our results.

"Acquisitions also helped our results for the year and should do so even more in 2018 as we get the full year benefit. While each of these was modest, together they should provide a nice bump to our results. They are good strategic fits in some of the niche markets in which we participate. We were also pleased that we were able to complete these acquisitions at reasonable prices, particularly given the challenges valuations are creating in the mergers and acquisition markets today. Acquisitions remain a key element in Alamo Group's ongoing development and while in the near term high expectations are likely to remain an issue, we feel we will still be able to complete deals without compromising our long term return objectives.
"Lastly, we believe the recently enacted Tax Cuts and Jobs Act of 2017 will have a meaningful impact on our results in the future. In 2017, our results were negatively impacted by the one-time transition tax on mandatory deemed repatriation of cumulative foreign earnings. This resulted in a gross increase in income tax expense in 2017 of $13.1 million, offset somewhat by a $2.9 million benefit from the re-measurement of deferred tax assets and liabilities to reflect the effects of the reduction of the U.S. federal tax rate to 21% as of the enactment date. The net result was a negative impact to our net income of $10.2 million in 2017. The charges related to the deemed repatriation will be paid out in installments over the next eight years beginning in 2018. As a result of this one-time tax, we will now be able to more economically repatriate cash being held in our international operations without being subject to significant incremental taxation. While we are still evaluating our options, we will repatriate some portion of the cash held by our international subsidiaries, though we will leave sufficient balances to meet our working capital needs, support anticipated capital expenditure requirements and other growth oriented initiatives. The cash we do repatriate will initially be used to pay down outstanding debt under our revolving line of credit, however, over time we anticipate it will be deployed to support our growth and acquisition initiatives.

"Another feature of the new tax act is a reduction in the corporate tax rate from 35% to 21% in our U.S. operations. The new rate takes effect in 2018 and should have a meaningful impact on our net earnings going forward since Alamo Group's overall effective tax rate has averaged around 35% annually over the last several years. The exact amount will ultimately be affected by a number of factors including the amount of U.S. earnings compared to our earnings from operations outside the U.S. Still, we believe this will enable us to increase our development expense going forward and to accelerate our various operation improvement initiatives, which should make us more competitive in the international markets in which we participate.

"All in all, we are encouraged by the record results we achieved for the full year of 2017 and feel the positive developments in both our internal operations and externally in our markets should provide a solid platform for continued growth in 2018. Our markets show signs of stability and the outlook is improving as evidenced by our record backlog at year-end of over $218 million. While this will certainly benefit us as we move forward, we are somewhat concerned by the effect this is having on some of our production lead times. This is being partially addressed by our ongoing operational improvement initiatives, which we are accelerating and will result in an increased level of capital expenditures in 2018 compared to the averages in recent years.

"Improving markets, further improvements in operating efficiencies, contributions from acquisitions and a more competitive tax structure all should contribute to continued growth for Alamo Group in 2018. We like where our Company is positioned today. Still we remain cautious about factors that could impact our business negatively and certainly the headwinds we faced in 2015 and 2016 remain fresh in our memories. We are pleased with our demonstrated ability to deal with changing conditions and keep Alamo Group moving forward."