AGCO Corporation — FY 2011 Form 10-K
Business context and reporting period. This is AGCO’s audited annual report for the fiscal year ended December 31, 2011; it is not a quarterly filing. AGCO manufactures and distributes agricultural equipment and replacement parts through a global dealer network. The year included the November acquisition of GSI, expanding the business into grain storage and protein production systems.
Financial performance and liquidity
- Revenue: Net sales were $8.77 billion, up 27.2% from $6.90 billion in 2010. Growth reflected stronger markets, acquisitions and $343.8 million of favorable currency translation. Tractor and combine sales rose about 26%; unit sales rose about 8%.
- Profit and margins: Gross profit was $1.78 billion, with gross margin of 20.2% versus 18.2%. Operating income was $610.3 million (7.0% margin), compared with $324.2 million (4.7%). Net income attributable to AGCO was $583.3 million, or $5.95 diluted EPS, versus $220.5 million, or $2.29. Net margin increased to 6.6% from 3.2%.
- Cash flow and investment: Operating cash flow was $725.9 million, up from $438.7 million. It included a $126.7 million benefit from increased European receivables sold to AGCO Finance. Capital expenditures were $300.4 million; cash used in investing activities was $1.36 billion, including $1.02 billion for business acquisitions. Year-end cash was $724.4 million.
- Liquidity and debt: Working capital was $1.46 billion, compared with $1.21 billion. Total indebtedness was approximately $1.49 billion, and debt to capitalization rose to 32.7% from 21.3%, primarily due to GSI financing. The new $1.0 billion credit facility had $665 million drawn and approximately $335 million available at year-end. AGCO reported compliance with debt covenants and expects available cash, facilities and operating funds to meet foreseeable needs.
- Other metrics: Assets were $7.26 billion and stockholders’ equity $3.03 billion. AGCO had $1.46 billion of total current liabilities against $3.66 billion of current assets. Its 49%-owned finance joint ventures reported a $7.4 billion finance portfolio; AGCO’s share of their earnings was $43.6 million.
Material changes versus 2010
- Sales rose in all geographic regions; Europe/Africa/Middle East was the largest contributor, with sales of $4.68 billion versus $3.36 billion. Segment operating income increased particularly in that region and North America; South American segment operating income declined.
- Higher pricing, production volumes and material-cost controls supported margin improvement, partly offset by higher material costs and increased engineering and marketing spending. Engineering expense increased to $275.6 million from $219.6 million.
- Acquisitions materially expanded the asset base: goodwill rose to $1.19 billion from $632.7 million and net intangible assets to $666.5 million from $171.6 million. Acquired businesses contributed $249.4 million of sales and $2.5 million of net income from their respective acquisition dates.
- Income tax provision fell to $24.6 million from $104.4 million. The 2011 result included a $149.3 million deferred-tax valuation-allowance reversal associated mainly with GSI acquisition accounting; reported earnings therefore benefited substantially from this non-recurring tax item.
- Fourth-quarter 2011 sales were $2.52 billion and AGCO-attributable net income was $285.2 million, versus $2.17 billion and $85.2 million, respectively, in fourth-quarter 2010. The annual filing does not separately quantify the quarter’s tax benefit impact.
Outlook, risks and unusual items
- Outlook: Management expected worldwide industry demand in 2012 to be stable versus 2011. It forecast higher net sales, primarily from favorable pricing, market-share gains and acquisitions, partly offset by unfavorable currency translation. Gross-margin improvement was targeted, with higher product-development and market-expansion spending expected to offset some gains.
- Acquisitions and financing: GSI was acquired for $932.2 million net of cash acquired; AGCO also acquired the remaining interest in Laverda, acquired 80% of Dafeng, and formed the AGCO-Amity joint venture. The GSI purchase was funded with $300 million of 5⅞% senior notes and the new credit facility. Integration, execution and realization of expected acquisition benefits remain uncertain.
- Operating and market risks: Results are exposed to agricultural cycles, commodity prices and farm income, weather, seasonal demand, customer financing availability, dealer and receivable credit quality, competition, supplier and raw-material costs, and foreign exchange. AGCO derives about 84% of sales outside the United States. Most retail customers rely on financing; Rabobank-controlled joint ventures financed about 50% of tractor and combine retail sales in the markets where they operate.
- Debt, pensions and other exposures: Debt agreements impose financial and other covenants and restrict certain payments, including dividends; AGCO paid no dividend. Underfunded pension and postretirement obligations totaled approximately $307.9 million, with about $35.6 million expected pension funding in 2012. Brazilian VAT receivables carried a $37.4 million reserve. Brazilian tax authorities disputed goodwill-amortization deductions of about 90.6 million reais ($48.6 million before interest and penalties); AGCO contests the assessment. An Iraq Oil-for-Food civil action seeks unspecified damages, and French authorities are investigating related conduct; outcomes could not be predicted.
- Unusual accounting and market items: AGCO recorded a $3.1 million loss and wrote off $1.2 million of deferred debt costs when redeeming its former senior subordinated notes. Currency translation reduced accumulated equity by $204.5 million in 2011. The audit opinion on the consolidated financial statements was unqualified; management and the auditor reported effective internal control, while acquired entities were excluded from the year-end control assessment.
Important facts for investors to verify
- How much of the earnings increase and 2012 outlook depends on the non-recurring $149.3 million tax valuation-allowance reversal, currency translation and acquired businesses.
- GSI integration progress, acquired-business profitability and whether expected strategic benefits materialize; reported 2011 results include only partial-year acquisition contributions.
- Debt repayment capacity, covenant headroom, scheduled 2016 maturities and the cash-flow impact of seasonal working capital and capital spending.
- Farm-equipment demand and customer credit conditions, including the quality and reserves of the Brazilian finance portfolio and continued availability of Rabobank-linked financing.
- Developments in the Brazilian tax dispute and VAT recovery, the Iraq-related litigation and investigation, and pension funding requirements.