AGCO Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. Comparisons are with the corresponding 2018 periods. Amounts are in millions of dollars except per-share data.
Business context and results
AGCO manufactures and distributes agricultural equipment and replacement parts through four regions: North America, South America, Europe/Middle East (EME), and Asia/Pacific/Africa (APA). The business is seasonal and sensitive to farm income, commodity prices, weather, financing availability, and trade conditions.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $2,422.6 | $2,537.6 | $4,418.4 | $4,545.1 |
| Gross profit | $563.9 | $556.3 | $1,020.6 | $984.3 |
| Gross margin | 23.3% | 21.9% | 23.1% | 21.7% |
| Operating income | $199.6 | $168.1 | $292.0 | $218.6 |
| Operating margin | 8.2% | 6.6% | 6.6% | 4.8% |
| Net income attributable to AGCO | $140.8 | $91.4 | $205.9 | $115.7 |
| Diluted earnings per share | $1.82 | $1.14 | $2.66 | $1.44 |
Financial position, cash flow, and liquidity
- Cash and working capital: Cash was $279.9 at June 30, versus $326.1 at year-end 2018. Working capital was $932.7, up from $770.7 at December 31, 2018. Current assets were $4,161.6 and current liabilities $3,228.9.
- Cash flow: First-half operating cash flow was negative $212.9, compared with negative $188.6 in 2018, primarily reflecting seasonal working-capital investment. Receivables and inventory used $143.5 and $513.7 of cash, respectively. Capital expenditures were $114.9, versus $89.8.
- Debt: Total balance-sheet borrowings were approximately $1,844.7, including short-term borrowings of $238.7 and a $227.7 term loan classified as current because it matures in January 2020. AGCO reported a debt-to-capitalization ratio of 35.5%, compared with 32.8% at year-end 2018.
- Available credit: The $800.0 revolving credit facility had $96.8 outstanding and approximately $703.2 available. Management said it was in compliance with facility covenants and expected available resources and internally generated funds to meet foreseeable requirements.
- Other balance-sheet items: Inventories rose to $2,424.8 from $1,908.7 at year-end, including higher production and inventory for transitions to products meeting new emissions standards. Lease accounting adoption added operating right-of-use assets of $203.3 and operating lease liabilities of $163.3 at June 30.
Material changes versus the prior period
- Q2 sales declined 4.5%; first-half sales declined 2.8%. Currency translation reduced reported sales by $117.2 in Q2 and $259.1 in the first half. Management attributed the overall sales declines mainly to currency effects.
- Despite lower reported sales, operating income increased in both periods. Management cited improved pricing, higher production, cost controls, productivity initiatives, and the timing of engineering costs. Worldwide average price increases were estimated at 1.8% in Q2 and 2.1% in the first half.
- Tractor and combine unit sales fell 10.4% in Q2 and 7.1% in the first half; corresponding sales values declined 6.4% and 4.0%.
- Regional operating performance improved in North America, EME, and APA; South America continued to record operating losses, although losses narrowed year over year. South American demand and production were weak, with additional costs associated with localizing newer technology in Brazilian factories.
- Net interest expense fell to $6.0 in Q2 and $9.5 in the first half, from $21.2 and $31.5, respectively, mainly reflecting lower-cost refinancing. The 2018 comparison included a $15.7 debt-extinguishment loss.
Outlook, risks, and contingencies
- 2019 outlook: Management expected global farm-equipment demand and AGCO net sales to be roughly flat versus 2018. Positive pricing and modest sales growth were expected to be offset by unfavorable currency translation. Gross and operating margins, and net income, were expected to improve year over year. Full-year capital expenditures were estimated at approximately $225.0.
- Market conditions: Management described farm economics as challenged and international trade tensions as weighing on farmer sentiment. Wet planting conditions and lower harvest forecasts pressured North American demand; interruptions in Brazil’s subsidized financing program and weak Argentine macroeconomic conditions affected South America. Risks include weather, farm income, commodity prices, credit availability, tariffs, raw-material and energy costs, currency and interest rates, supply constraints, and production disruptions.
- Legal and tax matters: Brazilian tax authorities disputed deductions related to goodwill amortization. The disputed tax amount through June 30 was approximately 131.5 million reais ($34.3), excluding interest and penalties. AGCO contested the assessment and said payment was not likely, but the appeal may take several years. Unrecognized tax benefits totaled $176.8.
- Other exposures: AGCO had $40.4 of guarantees of third-party indebtedness and $16.4 of minimum-residual-value guarantees. The filing also disclosed that joint ventures in the Netherlands and Russia depend on a time-limited U.S. Treasury license; expiration without further authorization could disrupt operations and prompt asset impairment testing.
- Capital returns: AGCO repurchased $70.0 of shares through accelerated repurchase agreements during the first half; an additional 80,227 shares were received in July upon settlement. The quarterly dividend was $0.16 per share.
Key investor verification points
- Whether the projected 2019 sales and demand stability, and margin and earnings improvement, were achieved despite currency and market pressures.
- Inventory and receivables growth, seasonal cash use, and the company’s ability to convert earnings into operating cash flow in the second half.
- Debt maturity and refinancing plans, particularly the $227.7 term loan due in January 2020, and continued covenant compliance.
- Actual demand, pricing, production, and profitability trends by region, especially persistent South American operating losses.
- Developments in the Brazilian tax dispute and the U.S. Treasury license affecting the Netherlands and Russia joint ventures.