AGCO Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. AGCO manufactures and distributes agricultural equipment and replacement parts across four geographic segments.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,736.4 million | $2,154.8 million | $5,508.3 million | $7,238.5 million |
| Gross profit | $365.7 million | $421.9 million | $1,163.2 million | $1,568.3 million |
| Gross margin | 21.1% | 19.6% | 21.1% | 21.7% |
| Operating income | $79.1 million | $108.7 million | $275.8 million | $531.1 million |
| Operating margin | 4.6% | 5.0% | 5.0% | 7.3% |
| Net income attributable to AGCO | $67.1 million | $65.0 million | $204.3 million | $332.8 million |
| Diluted EPS | $0.77 | $0.69 | $2.33 | $3.50 |
| Operating cash flow | Not stated for quarter | $72.2 million | $(215.3) million |
- Cash was $425.4 million at September 30, 2015, versus $363.7 million at December 31, 2014. Working capital was $1,288.3 million, versus $1,311.0 million at year-end.
- Total indebtedness was $1,541.0 million, up from $1,091.9 million at December 31, 2014. Debt-to-capitalization rose to 34.1% from 23.8%. The company reported $495.4 million of borrowing availability under its credit facility.
- Capital expenditures were $147.1 million for the first nine months, compared with $229.3 million a year earlier. Dividends paid were $31.7 million; share repurchases totaled $187.5 million.
Changes and management commentary
- Sales declined 19.4% in Q3 and 23.9% year to date. Currency translation reduced sales by approximately $323.1 million in Q3 and $976.4 million year to date; weaker markets also contributed.
- Operating income declined in both periods, principally due to lower sales and production, weaker product mix and unfavorable currency effects. Cost reductions, operational efficiencies and new products helped mitigate pressure. Q3 gross margin improved, while year-to-date gross and operating margins declined.
- Market demand weakened across major regions. For the first nine months, industry tractor and combine retail sales fell in North America, Western Europe and South America; reported declines included 33% for North American combines and 35% for South American combines.
- South America was particularly weak, reflecting Brazil’s economic and political uncertainty and changes to government financing. Asia/Pacific operating losses increased, partly because of costs associated with the new China factory.
- Foreign-currency translation drove a substantial year-to-date comprehensive loss: AGCO-attributable comprehensive loss was $306.4 million, versus income of $156.1 million in the prior-year period.
Outlook, risks and unusual items
- Management expected lower 2015 industry demand, sales, gross and operating margins, and earnings per share versus 2014. Lower commodity prices and farm income, weaker volumes and mix, and unfavorable currency were key pressures. Cost initiatives, new products and a lower tax rate were expected to provide partial offsets.
- Full-year 2015 capital expenditures were projected at approximately $250 million to $275 million. Management said available cash, internally generated funds, credit facilities and receivables-sale facilities should cover foreseeable requirements; the company reported compliance with financial covenants.
- Debt changes included replacing a $355 million U.S.-dollar term loan with a €312 million term loan, extending the credit facility maturity to June 2020, and adding interest-rate swaps. A €223.4 million term loan matures in 2016.
- Brazilian tax authorities dispute goodwill-amortization deductions; the disputed amount through September 30 was approximately 131.5 million reais ($33.0 million), excluding interest and penalties. AGCO contests the assessment and stated payment was not considered likely; resolution could take several years.
- AGCO had approximately $60 million of guarantees for third-party debt, primarily dealer and end-user financing. Wholesale receivables sales and related financing arrangements are off-balance-sheet transactions; cash received under receivables sales agreements was approximately $1.1 billion at quarter-end.
- The finance joint ventures’ portfolio was approximately $8.1 billion, down from $8.9 billion at year-end. AGCO disclosed heightened Brazilian portfolio monitoring and warned that significant deterioration in joint-venture credit quality could affect results.
- Other notable items: $14.6 million of restructuring costs year to date, primarily severance; an estimated $15.9 million restructuring accrual remained at September 30. AGCO acquired Farmer Automatic for approximately $17.9 million in April 2015.
Investor verification priorities
- Check whether subsequent results support the 2015 outlook for sales, margins and EPS, and whether production cuts and cost actions offset weak demand.
- Review currency impacts, hedging outcomes and regional performance, especially in Brazil and Europe.
- Track debt levels, 2016 term-loan repayment or refinancing, covenant headroom and liquidity availability.
- Assess Brazilian tax-case developments, finance-joint-venture credit quality and the scale of off-balance-sheet receivables arrangements.
- Reconcile reported cash generation with working-capital movements, planned capital expenditures, dividends and share repurchases.