Alamo Group Inc. (ALG) Q4 2016 Earnings Report, Transcript and Summary

Please standby. Good day, ladies and gentlemen. Welcome to the Alamo Group Fourth Quarter 2016 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. [Operator Instructions] Please note, this conference is being recorded today, Wednesday, March 8, 2017. I would now like to turn the conference over to Mr. Bob George, Vice President of Alamo Group. Please go ahead, Mr. George.

Thank you, Helen. By now you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at 212-827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay will be available until Wednesday, March 15, 2017, by dialing 888-203-1112 or 719-457-0820 internationally, passcode 6077346. Additionally, the call is being webcast on the company's website at www.alamo-group.com under Investor Relations Events and Presentation link and a replay will be available for 60 days. On the line with me today are Ron Robinson, Chief Executive Officer and President; Dan Malone, Executive Vice President and Chief Financial Officer; Richard Wehrle, Vice President and Corporate Controller; and Ed Rizzuti, Vice President and General Counsel. Management will make some opening remarks and then we'll open up the line for your questions. Before turning the call over to Ron, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Among those factors, which could cause actual results to differ materially are the following; market demand, competition, weather, seasonality, currency-related issues and other risk factors listed from time-to-time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I also like you to know that we filed our 10-K yesterday evening. I would now like to introduce Ron. Ron, please go ahead.

Thank you, Bob. And we want to thank all of you to joining us here today. Dan will begin our call with the review of our financial results for the fourth quarter and year-end of 2016. I will then provide a little more detail on the performance and outlook of our operations and following which we will have some formal remarks, we look forward to taking any questions you may have. So, Dan, please go ahead.

Thank you, Ron. Fourth quarter 2016 sales were $205.5 million, down 8.4% from record fourth quarter 2015 sales of $224.4 million. Full year 2016 sales were $844.7 million, down 4% to record full year 2015 sales of $879.6 million. Industrial division fourth quarter 2016 sales of $122.5 million were 9.9% lower than the prior year fourth quarter and full year 2016 Industrial division sales of $484.1 million were down 2.9% from prior year. These shortfalls were primarily due to a weak non-governmental vacuum truck margin. Agriculture division fourth quarter 2016 sales were $48.9 million, an increase of 2.1% over the prior year quarter. Full year 2016 Agriculture division sales of $205.8 million were 1.2% lower than full year 2015. Fourth quarter sales in this division improved despite continued weakness in the demand for most agricultural equipment. European division fourth quarter 2016 sales were $34.2 million compared to $40.6 million for fourth quarter of 2015. Excluding an unfavorable currency translation effect of $3.3 million, this division's local currency sales were down about 7.6% to the prior year fourth quarter. Full year 2016 European division sales were $154.8 million compared to $172.6 million in 2015. Excluding an unfavorable currency translation effect of $9.1 million, this division's local currency sales were down about 5% to prior year. The local currency results continue to reflect the softer market conditions particularly in the U.K. stemming from uncertainty surrounding Brexit, as well as continued general weakness in European and agricultural equipment markets. In my following comments regarding margins and earnings, I will provide results either as reported or as adjusted. The adjusted numbers exclude the impact of certain gains, losses and other charges which we listed in the non-GAAP financial reconciliations on page 10 of yesterday’s earnings press release. These items included the 2016 non-cash charge related to our pension plan termination, as well as prior year charges stemming from a plant closure, our major systems conversion, the purchase accounting effects of the specialized inventory step up and a large gain on the sales of U.K. excess land. And also as a reminder, we compute EBITDA by adding back depreciation and amortization to adjusted operating income and free cash flow by subtracting the net of capital expenditures on retirements from net cash provided by operating activities. The components for all of these calculations can be found in yesterday’s earnings press release or 10-K file. Due to lower sales, fourth quarter 2016 gross margin of $47.9 million was 1.6% lower than the prior year fourth quarter results. As a percent of sales fourth quarter 2016 gross margin was 23.3% which compares favorably to 21.7% of net sales in the prior year quarter. The improvements in percentage gross margins were sustained as favorable production efficiencies and lower material costs continue to more than offset unfavorable volume leveraging effects. Fourth quarter 2016 adjusted operating income of $15.2 million was 12.5% lower than adjusted -- the adjusted prior year quarter. Full year 2016 adjusted operating income of $70.5 million was 3.7% lower than the adjusted full year 2015 results. As a percent of net sales adjusted fourth quarter 2016 operating income was 7.4% which is lower than the adjusted 7.7% of net sales for the prior year quarter. Full year 2016 adjusted operating income was 8.3% of sales which is up slightly adjusted results for the full year 2015. Adjusted net income for the fourth quarter was $9.4 million or $0.81 per diluted share which compares to adjusted 2015 fourth quarter net income of $10.8 million or $0.95 per diluted share. Full year 2016 adjusted net income was $41.9 million or $3.62 per diluted share was unfavorably compares to the prior year adjusted net income of $45.1 million or $3.93 per diluted share. Fourth quarter 2016 adjusted EBITDA was $20.2 million, down 11.5% from the prior year quarter adjusted result. Full year adjusted -- full year 2016 adjusted EBITDA of $91.5 million decreased 4.2% from prior adjusted EBITDA of $95.5 million. These fourth quarter and full year earnings compares primarily reflect the impact of lower sales volume that could not be fully offset by improved production efficiencies and cost reductions. Though we were able to sustain full year percentage operating margins and improved percentage gross margins both in the quarter and for the full year results. Despite lower earnings, our cash generation continued to strengthen. As of the end of the fourth quarter 2016, our trailing 12-month free cash flow totaled $67.1 million which is a 62% increase over the comparable prior year result. This comes on the heels of 114% improvement in 2015. It also represents a free cash conversion rate of 160% of trailing 12-month net income. As a result our net debt and cash position improved by about $64 million in 2016. Our backlog ended the fourth quarter 2016 at $147 million which is up about $10 million or which is about a $10 million improvement over the third quarter end, but down about 9.6% from the prior year fourth quarter. This is mainly due to factors previously discussed in our net sales comparisons. While still down to prior year, backlogs are moving in a favorable direction and year-to-year comparisons are improving. In summary, our fourth quarter and full year 2016 results were highlighted by a continued sales shortfall due to weak vacuum truck, agricultural and U.K. market conditions, as well as unfavorable currency translation, and unfavorable earnings impact from lower sales volume, continued year-over-year productivity improvements and material cost reductions which drove higher percentage gross margins despite unfavorable volume leveraging, a $10 million billed and order backlog during the quarter and a 62% full year free cash flow -- 62% increase in full year free cash flow despite lower earnings resulting in a $64 million .improvement in our net debt position. I would now like to turn the call back over to Ron.

Thank you, Dan. Certainly, as Dan said and as we said in our earnings release we were a little disappointed with our sales in the fourth quarter 2016 and obviously this impacted our earnings for the quarter. But in general we were pleased with the ongoing operational improvements we had in the fourth quarter and really for the full year that resulted in higher gross margins and strong level of cash flow. The sales shortfall was reflection of the soft market conditions that we have been facing really for several years now. Certainly, the global Agricultural market has been weak and farm incomes were down again in 2016. We have -- while we have performed a little bit than the overall Ag market has, our sales were still down into 2016, though, actually they were up 2% in the fourth quarter. So those good end to the year for our Ag group which had a strong year in total. In our Industrial division, our infrastructure, maintenance equipment markets for governmental and related end-users actually held up well and held up well over the years and did so again 2016, though there was a little weakness in the fourth quarter from our snow removal products. However, our sales as Dan has pointed out, but our sales to non-governmental end-users mainly vacuum trucks which is while a minor part of our total sales of our Industrial division, this sector was very soft in 2016 particularly for vacuum trucks which had experienced nice growth for the previous few years. And our European markets which have been weak in general were further impacted in 2016 by the Brexit vote in the U.K., which created uncertainty and delays in market activity, plus the value of our European results have been further diluted when translated into U.S. dollar due to the continued strength of the strong U.S. dollar. But half of our sales decrease in European for the quarter and for the full year was due to changes in exchange rates. Despite these negative market conditions, we believe our results held up better than many of our peers and we still maintain good going -- good profitability and growing margins, despite lower sales. And our cash flow was also strong both from operations as well as improved asset management which allowed us to reduce our total debt net of cash by over $63 million during 2016, which is a lot of improvement for a company our size that level of debt reduction. So while 2016 was up from the record results we achieved in 2015, it was still the second best year in our company’s history. And looking ahead, while we remain concerned about the challenging market conditions that have impacted us for the last year few years, we feel we are starting to see some evidence of improvement. For instances, I mentioned earlier in our Agricultural division while the market is still soft, our sales in the fourth quarter were actually up 2% and we feel this is carrying through to 2017 which is off to a good start for Alamo Group. It’s too early to know for sure, but the current indications are definitely positive. There are also signs of improvement in our Industrial division and while snow removal products are still a little weak as it’s been a fairly mild winter, the rest of our infrastructure related products are showing good stability and we are very pleased that there even signs our non-governmental sales which is where we were hurt the most in 2016 are starting to rebound. In this area our quotation activity is up, backlog is improving, the rental fleet utilization rates are up and we're actually starting to increase our battery production in these products -- vacuum truck products to meet this pickup in demand. Again, it’s still too early to know this is a trend or just a blip, but the outlook does seem to be improving. And Europe is even seeing some positive signs. Inquiry activity there is up as well. Some of the uncertainty following the Brexit vote is starting to settle down, though the situation is not yet fully played out, but we think people are sort of kind of returning to little bit more normalcy and our French operations are also moving in a positive direction. Actually our sales from our French manufacturing facilities were actually up even in 2016 in local currency but they were down in U.S. dollars and we feel we are poised to show even further growth in 2017 locally, but how this will end up translated into U.S. dollars is still uncertain, because there are certainly not much indication that the dollar is likely to weaken in the near-term, I just hope that strengthen any further. And we are also concerned a little bit about European political situation as there are several important elections coming up beginning with just in April and May the Presidential election in France that, I think, this is going to be a fairly important one for them because their candidates are about far part as the election in November in the U.S. were last year. So, I think, there are some political winds flowing in Europe as well. But, all-in-all, we feel positive about the outlook for Alamo Group in 2017. We are pleased we are off to as I said a good start and signs of improved market activity. Again, too early to know how this will fully develop, given that that there are certainly some ongoing headwinds, but we feel optimistic that we could benefit nicely from this activity and we feel even more confident that any uptick in sales could result in a nice improvement in our bottomline as well. And on top of all this, last quarter’s conference call, I indicated we were seeing more M&A activity and as we announced recently we are in a process of closing on one such opportunity already in 2017. This is the purchase of Old Dominion Brush Company. They are -- this is a good company. They will be a nice incremental addition for our Industrial division and so we are very pleased to look forward to getting that close here shortly. And I am pleased that M&A activity in general continue to be good without seeing many large opportunities, but we are certainly seeing a steady stream of prospects, which we feel our potentially actionable, I mean, that the economics are something that we feel we can do something with these opportunities. In addition to all that, I think, we have also benefited from some good product -- some product development efforts and that will -- we have some fairly exciting things coming up in 2017 as well there which we think will continue to benefit our company. So, as a result, we continue to believe Alamo Group is well-positioned now and for long-term growth, but for short-term improvements as well. So -- and we want to thank you all for your continued support of our company. And with that, I would like to open the floor for any questions you may have. Thank you.

Thank you. [Operator Instructions] Our first question will come from Joe Mondello with Sidoti & Company.

Hi, guys. Good morning.

Good morning.

Good morning, Joe.

I was wondering if I could ask about the gross margin, could you just talk about the biggest factors that that drove the gross margin in the fourth quarter, despite seeing the large decline in volume? And regarding 2017, how are you looking at, if you're hypothetically sort of seeing flat gross -- flat volume in 2017, sort of what are the factors that you’re maybe worried about and also things that you are doing to try to expand your gross margins?

Okay. Yeah. I mean, probably the biggest contributor to the increase gross margins in the fourth quarter was our Ag division. I mean, not like France, there were certain units that moved in positive, but Ag was the biggest and they’ve benefit, like I said, sales were actually up slightly and I think they've benefited from a good product mix. Dan, you may want to even…

Like they, overall for the total company we have pointed to improve production efficiencies and some good material cost reductions. The Ag division has done extremely well like actually enhance that, because they’ve come out with a lot new products this year and those have been margin enhancing products introductions. They’ve done a good job in terms of the cost and the price points that they were trying to. Also the product mix favored, some of them were higher margin, we had better products this year and they had a favorable mix with respective product sales. They also realized some pretty significant material cost reductions during the year and they even got some pricing in the down markets. So it was a combination of several factors, but they were all going in the direction. Yeah, going forward, I think, that we should see continued trend.

Yeah. No. I think, we feel good, like I said, that’s what impacted 2016. In 2017 as we look forward, we actually think we could see a little volume pick up. But what we worry about, there is no shortage of things to worry about. We -- there is certainly, Ag, I think, they will bottom up and I mean, I think, we could do a little bit in Ag, but I think, the overall Ag market is still going to be fairly soft in 2017. Just mentioned, I am worried everything from European elections, currencies, that U.S. economy, I mean, like I say, there is no shortage of things to worry about. I think, specific, but I think, we believe we could still not only have some sales increase, but I think, even in a fairly flat scenario that we could still inch our margins up, even though, I worry little bit, I think, steel prices are probably going to go up a little bit this year, but I mean, I think, we showed that even we got a little some of the margin improvement last year was from pricing and I think, we can get a little this year even this steel prices go up. So cost increases, I think, things like that. But I think, we have shown a good ability to manage our costs even in -- even -- when there is some inflationary activity. So, yeah, like I say, I worry about the markets, I worry about costs and all, but I mean, I think, we can do well in ’17 and I mean, I am optimistic that I think we even get a little more volume in ’17 and we can control the some of these things, but there is less to worry about, there is less to worry about in 2016 as well.

All right. Fair enough. In terms of the Industrial segment itself, its sounds like you are seeing some small signs that things may be starting to pick up, just -- it seems like you look at the volume growth and we saw an acceleration on the decline throughout 2016. So can you give us a little more color on what, I guess, is it just order flow in January and February that has cause you to get a little more positive regarding that, but any more color regarding that, because your decline is actually accelerated throughout the entire year there?

Yeah. That’s right. Especially in the Industrial division and as you said, and -- I think, the thing is we actually entered the year, entered ’16, we finished ’15 with the fairly good backlog in our -- not in our Industrial division, but in our vacuum truck in particular. So, I mean, it was the vacuum trucks that was the hardest hit that, like we say, we -- the backlog carried actually the first quarter and then it started really softening in the second and third quarters, which I mean, impacted our sales in that and that’s why we say we are fairly optimistic about ’17, because that we are seeing that backlog starting to pick up. We are seeing our rental fleet utilization starting to improve. So, I think, like I said, there was also some little bit of softness in, excuse me, in some snow removal. But in general the big issue was vacuum trucks. They have started with the good backlog. They weakened throughout the year and so, like I say, we are starting to see some signs that strengthening almost things that the whole vacuum trucks sector cannot overreacted on the downside and we are seeing some improvements there. So like I say, that’s the major product area that we are really watching that right now.

Right. Okay. I imagine the first quarter and maybe even the second quarter, two are going to be still maybe a tough comp. I want to get into the back half of the year, you are going up against the much easier comp and hopefully things continue to improve throughout the year. That’s number one. And number two, can you remind us how much non-governmental vacuum makes up, I believe it’s roughly maybe 10%, but could you verify that? And if you are seeing 10% decline in the fourth quarter in terms of volume, I'd imagine these vacuum trucks are up 40 plus percent, is that sort of the type of declines that you are seeing in this category?

We don’t break out the sales within the category like that. And but, I mean, yeah, vacuum trucks sales were up, up like it was 40%, but it was in that order of magnitude, yeah, right not quite that but certainly big numbers.

Okay. And regarding sort of play through the year, you probably still going to have a tough comp in the first quarter I would think?

Yeah. I am not, I think, you are right. First quarter last year was a record, but like I said, I mean, I feel good that we are off to a good start this year and so, yeah, hitting the record, but you are absolutely right, the comp says as the year goes on get better and so that we start off good, I feel even better about the rest of the year.

Okay. Great. I will hop back in queue. Thanks a lot. Appreciate it.

Thank you, Joe.

Thank you. Our next question will come from Mike Shlisky with Seaport Global.

Good morning. This is Jordan Bender on for Mike this morning. You’ve touched on the snow product that you have now and now that the winters on the [ph] stabilized (28:11) I was wondering you’re your inventories for the snow products are looking like?

That’s -- the inventory is not a problem, they are actually in better shape. I mean, we have -- in fact, as I said earlier, big part of our debt reduction was asset management and our inventories came down good bit in 2016 and so we have responded and especially in lot of our snow removal products since they are custom made we don’t build them for stock, we build them for order, so the order is not there, we don’t build them and…

And other thing, if you compare us like a Douglas Dynamics I am sure because of they build a more standard product and it’s more smaller products is widely distributed. They are not -- they are building stock. They might have a stock issue with it. We wouldn’t have because we built on order.

So, yeah, inventory is in good shape even though sales are little soft, like I said, it’s -- in fact there is almost not as much wholegood -- new equipment was down when winter soft it’s the spare parts that don’t get consumed at the same level. And so -- and that’s probably more the issue than the capital good sales.

Got it. Okay. And then the Wausau equipment production line, I don’t want a pretty big overhaul there last year outside your efforts on purchasing. How did that going now that presumably it’s completed at this point. And then, I was wondering that if you guys are going to see good margin expansion in 2017 from Wausau facility despite a broader market trends?

Well, again, we don’t break it out by individual units like that. But you are right, the Wausau, like, the organization effort is pretty well behind this. They have -- and I mean, we are looking for them to have a much better year in 2017 than they had in 2016.

Okay. And then one area that we have Alamo healthy grow [inaudible] (30:23) is the Bush Hog. It looks like you guys have about seen your products this year. I was wondering if you could give us some insight to how these products have been received so far?

It’s still, I mean, we sort of the pre-introduction, but the big introduction just happened two weeks ago at the National Farm Machinery Show in Louisville, Kentucky and so, I mean, it was well received. It was -- there was lot of interest and activity there and we are -- the orders are starting to flow. But like I said, it’s been two weeks so that’s a little too soon to. But Bush Hog in general have benefited, our whole Ag division is benefited from new product developments and we feel this is -- this one is off to a good start but I can’t really say if it’s have, we would like to say it’s just very too soon, because…

Okay.

… expose it, as I went home and now they are starting to, the order is starting to come in.

All right.

And you can see improvement in 2017 just because we will have a full year product from this introduction.

Yeah. I mean, I guess, yeah, it will be a positive effect this year. How big a positive effect, I mean, we don’t know yet.

All right. Well, I will pass it off. Thank you.

Thank you, Jordan.

Thank you. [Operator Instructions] Our next question will come from Tyler Etten with Piper Jaffray.

Good morning, guys, and thanks for taking my questions.

Good morning.

No problem.

I think, I would just like to hear your stake on time selections, I think, that’s pretty well know that’s the far left tend to -- would have negative impacts ultimately on farm incomes. I was just want to hear your thoughts around the other key investments what it sees for Alamo?

Well, the other two candidates are both to the right, one sort of sooner right and the other sort of way right. And I mean, I think, the -- we kind of, yeah, I would like to see the sooner right and I think would be the best for our -- for I think our products and our outlook. Yes, I think, we will be okay pretty well under any of them, but now like I said, the sooner right one, but I mean, he is got some issues right now, I guess, they’ve got its own little scandal going on on the side. And so, I -- last I heard, it’s the far right candidate looking who is probably leading and while like her platform is very French, very, I mean, she wants to take France out of the EU, she got elected now, like I say, so I mean, I think, there is two things, will she get elected and would she get the authority even she got elected to remove France from the EU. Because, like I say, I don’t, certainly, in the short-term that would to me -- that would have the most disruptive effect everything whether it’s right for French to not act, I am not want say, but I can’t say, but no, that, she would actually probably the most disruptive. But, I think, we will be okay under any of them. But like I say, yeah, certainly, I think, the -- for us and I think for France in general, the smoothes one and then that would move in the right direction would be that the sooner right one.

Got it. Thanks for that. Maybe switch gears a little bit, can we talk about the hydrovac market in North America. Just what you are seeing in terms of volume and pricing in the industry and what your expectations are going into 2017?

I mean, we are seeing an improving situation, I mean, we are seeing demand now for trucks the demand has been fallen off sharply. As we are looking and as Ron have mentioned earlier, we are looking to push more trucks into the fleet and so we are seeing marginal improvements in that market. And I think it fell that things like petroleum prices has stabilized and we are seeing some activity -- increasing activity up in the oil field. But, all-in-all, we just see moderately improvement in the market.

Yeah. As Dan said, I mean, we are seeing a little improvement in oil field activity, I mean, I think, there is just some stabilization and like I said, everybody kind of cut back last year and maybe even cut back a little too much. We are looking -- so we are seeing a little bit in oil field even little bit in mining and construction fairly steady. So and like you said, I mean, yeah, that’s one area where we do have a little -- a small rental operation of our own and we had cut back on work down the rental fleet last year whereas by the fourth quarter our rental utilization was up considerably and in fact we were turning down too much business, although, we are actually going to sort of build the fleet back up a little bit and that’s where we are actually increasing production in that right now. So it’s a -- like I said, last year was a year of flux thereby was cutting back and I think we are seeing a little stability and stabilization and a little bit of return to like some market pick up just as people get back to sort of business as usual, it’s certainly not even, I mean, I don’t think at all it’s going to be where it was back in like 2014 or something which was a very strong. So if I take couple of years to get back to those levels. But I think, we’ll at least see as I said earlier that was a market that was declining every quarter for last year and actually like I said, in the fourth quarter we finally saw some bottling out and the tied turning in the other direction.

Got it. We are seeing some improvement but -- got it. Okay. Thanks. And last one for me, with the Old Dominion acquisition first one in a while. Have valuations for, say, like companies that you look at keeps and not as elevated that they were say six months or 12 months ago? And is there -- is that -- is what Old Dominion an isolated opportunity or have valuations come down across the space? Thanks.

Yeah. I wouldn’t say, valuations have come down, I think, valuations are still fairly high and especially for bigger opportunities. I mean, we are still seeing some pretty pricy valuations. So I think we, like I say, Old Dominion, yeah, but the, yeah, economics of the deal were little bit more favorable then I think some of the other deals we have looked at. But that’s what -- we haven’t done the other deal. I mean, I think, being selective, we are able to find some, we are actually finding more deal that as I said we are actionable that I think that the economics make sense that we can actually get a return on the deals, realistic opportunity to make a reasonable return and we are finding more of those. I mean, like I say, they tend to be sort of the small to midsize companies. We are not finding too many large opportunities and it’s interesting some of the large opportunities that we kind of missed that on a year or two ago that never closed on, some of those deals have never really closed due to like some people have kind of backed off on some of the pricing. But certainly pricing is still fairly strong. I think interest rates are still cheap enough and there is a lot of money in private equity and so I have a feeling pricing on some of these opportunities is still going to be a challenge. But something like Old Dominion where we have some true synergies operationally that would them and we can -- we bought products from their competitors that we can put into them, so it’s -- there is some, like I say, real hard synergies that we are going to achieve from this. So that’s what we will be looking for. So the unique situations where we can make the economics work and not just chase price.

Got it. Thanks. I will let someone.

Thank you. [Operator Instructions] We’ll take a follow-up from Joe Mondello with Sidoti & Company.

Hi, guys. Thanks for taking the follow-up. Just wondering on your SG&A, last couple years, it seems like your SG&A costs have outpaced your revenue, including in the fourth quarter, where we saw 4% increase year-over-year. Just wondering what is going on there and do you think that trend is going to change at all or any comments on that would be helpful?

I don’t see a lot of change, yeah, I mean, I think, there has been some small movements and sometimes it’s been like there were a couple of like one-time or some one-time events. But now we think as a percent of sales our SG&A should be staying about the same. It’s a little tougher in the down market, I mean, like I say, when sales are actually down and it did creep up, but I mean, I think, now SG&A as a percent of sales should come down a little bit as sales pick up a little.

Yeah.

Was there anything in the fourth quarter that stands out unusual because SG&A was up 4%, revenue was up 8%, was there anything unusual or is that sort of maybe bonuses or something?

Joe, if you look at the -- in the SG&A we have made a comment about that pension expense has been actually a loss of $2.9 million, so if you factor that out we are below 16%. Our range usually is between 15% to 15.5%.

Okay. Right. Now that…

Yeah. That was a non-cash event that pension loss, I mean, it was just as we closed out a pension plan, there were some…

There has been loss that didn’t previously charged off as a comprehensive income as we bring in, yes.

Okay. Yeah. I was offset...

That’s where it was.

Yeah. That was, yeah, right.

Back that out and looks a…

$2.9 million or $1.9 million after-tax effect of that on that non-cash charge.

Okay.

Yeah. If you look at the non-GAAP financial reconciliation numbers in there in the operating income…

Okay. And on the European segment, just is that segment -- was that segment profitable in the fourth quarter and going forward if we continue to see adverse effects or declines depreciation in the euro and other currencies. Is there any other measure that you can take to top up profitable there or is it just sort of a volume game?

Yeah. I think we are pretty much tied, euro was profitable in the fourth quarter and all last year. I mean, that like so Europe is profitable and we think it will be more so in ’17. Yeah, I mean, I think, we are -- the good and the bad foreign currency is, I mean, I think, even though the sales and earnings are worked less in dollars, they will bring some way for more competitors there but and really in the end of the year it wasn’t a euro was much it was dropping, it was a pound and actually euro held fairly steady but the pound continued to drop after following the Brexit vote and so and then even Ag, I mean, since like half our sales in Europe are made in pounds and half are made in euro, we are even more competitive in the pounds selling into euro. So I mean, yeah, you try to take it, like I say, pass on is that you try to, you think you are more competitive, we -- maybe there is a little bit more pricing elasticity in the situation like that we are trying to take advantage. So, yeah, we think there are some things we can do to enhance profitability and volume even with the weak currencies.

Joe to add to that, if you look at in our 10-K we filed yesterday in footnote in with segment reporting it will show that European sales are down $18 million compared to $15 million but the profits are up almost $3.9 million over 2015 levels.

Okay. Great. And then also I just wanted to ask on the core governmental aspect of the Industrial segment. At this point in time in the cycle where maybe age of equipment has maybe hit the lowest point in seven years or eight years, you can correct me if I am wrong if that is not the case. Is there any sort of slowing at this point in time in the cycle with how stake in the small government continue to invest in this type of equipment after investing over last seven years to eight years and this type of stuff, I think, tax revenues we heard have slowed, is there any sort of fear that part of the business slowing?

Not particularly, I mean, I think, this business is going to be fairly stable over a long period of time. Certainly, tax, I mean, there are, let’s say, with oil fields down and mining down and I mean, things like that are down, were they consume big capital equipment. In our stuff, I mean, our stuff is it gets consumed, I mean, I don’t see that the fleet has -- the aging of the fleet has come down, because I mean, like I say, five years to seven years, you have got to remember that, things like owning equipments for highways, street sweepers for highways, snow removals. I mean, those things they -- like -- their whole lifecycle for government is only about five years to six years. So I mean, like I think and governmental budgets especially at the city, county and state level are in reasonably good shape. I mean, the only times we’ve really seen softness in sales of that type of equipment is when those budgets were being challenged heavily like in downturns like 2008 and 2009 when revenues were state, I mean, governmental revenues were down, tax revenues were down. So, yeah, we are not seeing, I mean, like we are still seeing some good stability there. I think, the fleet is, I mean, is turning over at a fairly normal rate and governmental budgets are in reasonable shape. So we are not -- so we are seeing good stability there. We are not seeing any -- you’ve indicated.

Okay. Good. And then just lastly for me, the work -- just wondering working capital and CapEx expectations for 2017, I think, working capital is maybe a source of cash I think in 2016, was sort of wondering what your outlook on both working capital and CapEx?

Yeah. Our working capital should, I would say about flat, I mean, like the sales increase a little, it could go up slightly, but you are right, I mean, we had good mainly reduction of inventory and a little bit on receivables and like I say, certainly sales go up receivables in cap as well. So I think that’s. As far as CapEx, CapEx was probably not, I mean, like it was down a fair bit, I think, from $14 million and $16 million to $9 million and on -- this on property, plant and equipment. And in the year before we actually bought the land and building in Milwaukee and so that was part of the upgrade. The $9 million are actually lower than it should have been, because we actually approve more CapEx than that. So I mean, like I say, some of that just didn’t get spend, it kind of over flowed into 2017, so ’17 will be up a little from that. And but, I mean, I wouldn’t say huge, still we reach kind of plus or minus depreciation, but when we say depreciation we mean depreciation of the property, plant and equipment, not counting the rental fleet ups and downs. So with that, yeah, I think, like I say, CapEx will still be up -- will be up a little just because certainly some of the stuff we approved this year flow into next -- if we approved in ’16 will flow into ’17. But I don’t see big changes in the CapEx and I don’t see big changes in the, we probably won’t get the contribution we got from inventory in ’16 again in ’17, but so fairly flat there.

Okay.

Yeah. We closed ODB acquisition that will bump up obviously, but…

Right. Right.

…excluding the acquisition.

Yeah.

Okay. Great. Thanks a lot guys. I really appreciate it.

Thank you.

Thank you. And at this time we have no further questions in our queue. I will turn the conference back over to management for any additional or closing remarks.

Well, thank you for joining us today and appreciate. If anybody has any follow-up things, don’t hesitate to contact us and we look forward to speaking with you on our first quarter conference in May. Have a good day. Thank you.

Thank you. And again ladies and gentlemen, that conclude our conference for today. We thank you for your participation.