AGCO Corporation — Q3 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2011, compared with the same 2010 periods. AGCO manufactures and distributes agricultural equipment and replacement parts globally. Results are seasonal and sensitive to farm income, commodity prices, weather, credit availability, and broader economic conditions.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $2,099.1 million | $1,657.4 million | $6,255.4 million | $4,728.6 million |
| Gross profit; margin | $407.8 million; 19.4% | $303.8 million; 18.3% | $1,252.0 million; 20.0% | $849.5 million; 18.0% |
| Operating income; margin | $114.3 million; 5.4% | $75.9 million; 4.6% | $424.6 million; 6.8% | $181.8 million; 3.8% |
| Net income attributable to AGCO | $84.4 million | $62.3 million | $298.1 million | $135.3 million |
| Diluted EPS | $0.87 | $0.65 | $3.04 | $1.41 |
| Operating cash flow | Not separately presented for the quarter | $270.5 million | $4.1 million |
Q3 sales grew 26.7% and nine-month sales grew 32.3%. Currency translation contributed $120.9 million (7.3%) and $390.0 million (8.2%), respectively; acquisitions and higher sales also contributed. For the first nine months, tractor and combine unit sales increased about 9%, while worldwide price increases averaged approximately 2.7%.
For the nine months, investing cash outflow was $307.9 million, including $187.2 million of capital expenditures and $88.3 million for businesses acquired. Financing cash outflow was $211.6 million. Cash declined $264.7 million to $455.2 million from year-end 2010.
At September 30, cash was $455.2 million, working capital was $1,323.0 million, and total current assets and liabilities were $3,222.2 million and $1,899.2 million. Total indebtedness was $535.8 million, including securitization funding; debt-to-capitalization was 15.8%, down from 21.3% at December 31, 2010. The $300 million revolving credit facility had no borrowings and approximately $290 million available. Inventories increased to $1,603.2 million from $1,233.5 million at year-end.
Material changes versus prior period
- Higher sales and improved gross margins lifted operating income; management cited higher production in Europe and North America, pricing, and product mix, partly offset by material costs and increased engineering and marketing expenses.
- EAME sales and operating income rose substantially. South America operating income declined amid material and labor inflation, higher engineering and product introduction costs, and less favorable geographic mix.
- Q3 SG&A was $221.2 million versus $170.3 million, while nine-month SG&A as a share of sales improved to 10.0% from 10.4%. Engineering spending increased, partly for new emissions standards.
- AGCO acquired the remaining 50% of Laverda in March and acquired 50% of AGCO-Amity JV in January, consolidating the latter. The 2011 results also include the prior December 2010 Sparex acquisition.
- Holders converted $161.0 million principal of the 1.75% notes; AGCO repaid the principal and issued 3.93 million shares for the excess conversion value. AGCO also redeemed its €200 million 6.875% notes, replacing them with a €200 million, 4.5% term loan due 2016.
Outlook, risks, and unusual items
- Management expected 2011 global farm-equipment demand, sales, and earnings to exceed 2010, supported by strong farm fundamentals and order backlogs. Expected margin benefits from higher production and cost control were partly offset by engineering and market-expansion spending. Full-year capital expenditures were estimated at $250–$300 million.
- On September 30, AGCO agreed to acquire GSI Holdings for approximately $940 million, subject to regulatory approval and expected to close before year-end 2011. The company planned to use a new bank facility and available cash. GSI reported 2010 sales of approximately $713.1 million.
- Key risks include agricultural cyclicality; commodity prices, farm income, weather and credit conditions; raw-material and energy costs; foreign exchange; production and supply constraints; and integration of acquisitions. The Brazilian retail finance portfolio was about $2.0 billion and subject to government payment deferrals, higher delinquencies, and reduced collateral coverage.
- AGCO had $132.4 million of third-party financing guarantees, generally extending through 2015. It recorded a $34.0 million reserve against Brazilian VAT receivables. A Brazilian tax dispute involved approximately $48.8 million of disallowed deductions before interest and penalties; management believed payment was not likely, but the outcome remained unresolved. The Iraq Oil-for-Food action and a related French investigation also remained unresolved, with potential damages unspecified.
- Other notable items: Q3 effective tax rate was 30.4% versus 21.6% in 2010; nine-month results included a $3.1 million debt-redemption premium and $1.2 million write-off of debt issuance costs in interest expense. Foreign-currency translation reduced equity by $152.6 million for the nine months.
Important facts for investors to verify
- Whether the GSI acquisition closed as expected, its final financing terms, and resulting leverage and integration costs.
- Whether sales and margin growth persist after separating currency, acquisition, pricing, and volume effects.
- Inventory growth, seasonal working-capital needs, capital expenditures, and cash generation.
- Credit quality and reserve adequacy in the Brazilian finance portfolio, and the status of receivable-sale and securitization facilities.
- Developments in the Brazilian VAT and tax matters, Iraq-related proceedings, and the $132.4 million of guarantees.