AGCO Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. AGCO manufactures and distributes agricultural equipment and replacement parts across North America, South America, Europe/Africa/Middle East, and Rest of World. Comparisons are with Q1 2010 unless noted.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net sales | $1,797.7 million | $1,328.2 million | Up 35.3%; up 32.1% excluding favorable currency translation of $43.5 million |
| Gross profit / margin | $355.9 million / 19.8% | $224.6 million / 16.9% | Margin improved 2.9 percentage points |
| Income from operations | $108.7 million | $9.4 million | Operating margin 6.1%, versus 0.7% |
| Net income attributable to AGCO | $80.0 million | $10.1 million | Basic EPS $0.85; diluted EPS $0.81, versus $0.11 and $0.10 |
| Net cash used in operating activities | $167.4 million | $202.3 million | Cash use mainly reflected seasonal working-capital investment |
| Capital expenditures | $36.8 million | $24.1 million | Full-year 2011 estimate: $250–$300 million |
| Cash and cash equivalents | $314.3 million | $719.9 million at Dec. 31, 2010 | Down $405.6 million during the quarter |
| Total indebtedness | $664.5 million | $718.0 million at Dec. 31, 2010 | Debt-to-capitalization ratio 19.5%, down from 21.3% |
| Working capital | $1,109.5 million | $1,208.1 million at Dec. 31, 2010 | Decrease partly reflected convertible notes reclassified as current liabilities |
Current assets were $3,218.0 million and current liabilities were $2,108.5 million at quarter-end. Inventory rose to $1,580.7 million from $1,233.5 million at year-end. AGCO reported $290.0 million of availability under its $300 million revolving credit facility and no borrowings outstanding under it.
Material changes and management commentary
- Sales increased in all four geographic segments. Europe/Africa/Middle East sales rose 51.7% and Rest of World sales rose 77.9%; the latter reflected recovery in Eastern Europe and Russia. North America sales rose 27.0%; South America sales rose 8.8%.
- Management attributed stronger operating results to higher sales and production volumes, improved product mix, and expense control. Gross-margin gains were partly offset by higher material costs. Engineering expense increased, in part to fund new-product development for emissions standards.
- Tractor and combine unit sales increased approximately 17.8%; worldwide average price increases were approximately 2.2%. Favorable currency translation also supported reported sales.
- AGCO acquired the remaining 50% of Laverda for approximately $88.3 million net of cash acquired and consolidated it from March 3. It also formed and consolidated AGCO-Amity JV, in which it acquired a 50% interest for approximately $25.0 million net of cash acquired. These transactions increased assets and contributed goodwill and intangible assets.
- Holders converted $60.4 million principal amount of 1¾% convertible notes; AGCO repaid the principal and issued 1,568,995 shares for the excess conversion value. Both convertible note series were classified as current at March 31 because share-price conditions for conversion were met.
Outlook, risks, and contingencies
- Management expected global industry sales to grow in 2011, with robust growth in Western Europe and the Commonwealth of Independent States, modest North American growth, and healthy South American conditions. AGCO expected full-year sales and earnings to increase from 2010; improved margins from production and cost controls were expected to be partly offset by higher engineering and market-expansion spending.
- After quarter-end, AGCO announced redemption of its €200 million 6⅞% notes on May 2, 2011, funded with a new €200 million Rabobank term loan due May 2016 at a fixed 4.5%. AGCO expected to record about $3.1 million of redemption premium and $1.2 million of deferred issuance-cost write-off in Q2 2011.
- Risks include agricultural-market cyclicality and sensitivity to farm income, commodity prices, weather, credit availability, raw-material and energy costs, foreign exchange, government policies, production constraints, and competition. AGCO does not hedge foreign-currency translation exposure; its reported sensitivity analysis estimated a $24.6 million adverse fair-value impact on currency instruments for a 10% currency move, largely offset by underlying exposures.
- Brazilian finance-portfolio delinquencies and lower collateral coverage remain concerns related to government-directed payment deferrals; management considered reserves adequate but warned that significant deterioration could materially affect the joint ventures and AGCO’s results.
- AGCO reserved $25.7 million against Brazilian VAT receivables due to collection uncertainty. A Brazilian tax dispute involved approximately 90.6 million reais ($55.7 million) of disallowed deductions before interest and penalties; AGCO contested the assessment and believed payment was not likely, but the process could take years. An Iraq civil action relating to the UN Oil for Food Program seeks unspecified damages; outcome and impact were not predictable.
- AGCO guaranteed approximately $106.9 million of third-party dealer and end-user financing obligations. The European receivables securitization facility, with $94.9 million funded at quarter-end, expired in October 2011 subject to renewal. The company stated it was in compliance with facility covenants and expected available funding and internally generated cash to meet foreseeable needs.
Most important facts for investors to verify
- How much of sales and earnings growth reflected underlying volume, pricing and mix versus currency and acquisitions.
- Whether seasonal working-capital outflows and higher inventory convert to cash as the year progresses; Q1 operating cash flow was negative despite higher earnings.
- The ongoing classification, conversion, dilution, and cash-repayment implications of the convertible notes, plus the effect of the post-quarter refinancing and expected Q2 charges.
- Performance and credit quality of the Brazilian finance portfolio, and developments in the Brazilian VAT and tax matters and Iraq litigation.
- Whether the 2011 sales, earnings, margin, and capital-expenditure expectations are achieved, given agricultural-market, input-cost, currency, and production risks.