AGCO Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. AGCO manufactures and sells agricultural equipment and replacement parts through four reporting regions. Results are unaudited; the company notes that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,995.6 million | $2,069.3 million | $3,554.9 million | $3,771.9 million |
| Gross margin | 21.4% | 21.7% | 20.9% | 21.1% |
| Operating income / margin | $118.6 million / 5.9% | $149.9 million / 7.2% | $138.0 million / 3.9% | $196.7 million / 5.2% |
| Net income attributable to AGCO | $50.3 million | $107.1 million | $58.1 million | $137.2 million |
| Diluted EPS | $0.61 | $1.22 | $0.70 | $1.55 |
- For the six months, operating cash flow was an outflow of $64.6 million, versus an inflow of $28.0 million in 2015. Investing cash outflow was $121.3 million; financing cash inflow was $70.2 million.
- Cash was $324.7 million at June 30, down from $426.7 million at year-end 2015. Working capital was $1,160.1 million. Inventory rose to $1,764.1 million from $1,423.4 million at year-end, consistent with seasonal working-capital needs.
- Total indebtedness was $1,472.4 million, compared with $1,231.4 million at December 31, 2015; debt to capitalization increased to 33.1% from 30.0%. AGCO reported approximately $690 million available under its credit facility and compliance with its financial covenants.
- Six-month capital expenditures were $72.0 million. Management estimated full-year 2016 capital expenditures of approximately $250 million.
Changes and management commentary
- Sales declined 3.6% in Q2 and 5.8% for the first half, reflecting weaker global demand and unfavorable currency translation. Currency translation reduced sales by $51.7 million in Q2 and $139.9 million year to date.
- Lower sales and production, weaker product mix, and higher engineering expense contributed to reduced operating income. Cost containment and productivity initiatives partly offset these effects.
- Market conditions were challenging: first-half industry tractor and combine retail sales declined in North America and Western Europe; South American tractor and combine sales fell approximately 30% and 15%, respectively. China-supported growth improved Asia/Pacific results.
- AGCO expects 2016 industry demand to weaken in all regions. It expects full-year sales to decrease from 2015 and gross and operating margins and net income to be below 2015 levels. Cost-reduction benefits are expected to partially offset lower volume. No precise full-year sales or earnings forecast was provided.
- The company acquired Italian poultry-equipment maker Tecno for approximately €58.4 million (about $63.4 million), including acquired cash of about $19.1 million. It recorded $20.7 million of goodwill and $27.5 million of identifiable intangible assets.
Unusual items, risks and contingencies
- A non-cash $31.6 million deferred tax charge in Q2 increased the valuation allowance against U.S. deferred tax assets. AGCO said it expects to realize its remaining deferred tax assets, net of the allowance.
- AGCO is contesting a Brazilian tax assessment concerning disallowed goodwill-amortization deductions. The amount in dispute was approximately 131.5 million Brazilian reais ($40.9 million), before interest and penalties. Management said payment was not likely, but the outcome depends on a tax appeal that could take several years.
- AGCO cited lower commodity prices and farm income, foreign-exchange movements, economic and political uncertainty, and possible effects of Brexit as risks to performance. It also identified weather, financing availability, raw-material costs, production disruptions, and acquisition integration among relevant risks.
- Restructuring expense was $4.0 million for the first half; actions included terminating approximately 300 employees across the United States, South America, and Europe.
- AGCO had $13.9 million of third-party financing guarantees outstanding. It also used off-balance-sheet receivables sales; cash received under specified sales agreements was approximately $1.3 billion at June 30. The company reported no material change in market-risk exposure and effective disclosure controls.
Key facts for investors to verify
- Whether farm-equipment demand, especially in North and South America, tracks management’s weaker-market outlook.
- Whether inventory, receivables, and operating cash flow improve as seasonal working capital unwinds.
- The effect of the U.S. deferred-tax valuation allowance on future tax expense and realization of remaining deferred tax assets.
- Developments in the Brazilian tax dispute, including interest and penalties and the eventual appeal outcome.
- Debt levels, credit-facility availability, covenant compliance, and the planned $250 million 2016 capital expenditure program.