AGCO Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results; amounts are in U.S. dollars. Comparatives reflect the filing’s retrospective deconsolidation of the GIMA joint venture.
Key financial results
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $1,743.0 million | $1,767.0 million | $3,071.2 million | $3,299.7 million |
| Gross profit / margin | $321.1 million / 18.4% | $291.8 million / 16.5% | $545.7 million / 17.8% | $562.6 million / 17.1% |
| Operating income / margin | $96.5 million / 5.5% | $78.1 million / 4.4% | $105.9 million / 3.4% | $135.2 million / 4.1% |
| Net income attributable to AGCO | $62.9 million | $57.4 million | $73.0 million | $91.1 million |
| Diluted EPS | $0.66 | $0.61 | $0.76 | $0.98 |
Q2 sales declined 1.4%, while operating income rose, primarily on improved gross margins from lower material costs and higher production volumes. First-half sales fell 6.9% and operating income fell 21.7%, mainly due to lower sales. Q2 gross margin improved despite lower revenue; first-half operating margin declined.
Cash flow and liquidity: First-half operating cash flow was $13.5 million, versus cash used of $265.8 million a year earlier. Capital expenditures were $45.3 million, compared with $97.8 million. Cash was $575.0 million at June 30, down from $651.4 million at year-end; working capital was $1,120.4 million. Management expected full-year 2010 capital expenditures of $185–$210 million.
Debt: Reported indebtedness was $735.8 million, including $122.4 million of European securitization funding recognized on the balance sheet following new accounting rules. The $300 million revolving facility had no borrowings and approximately $290.2 million available. Debt-to-capitalization was 24.3%, versus 21.5% at December 31, 2009. The $197.1 million carrying amount of 1.75% convertible notes was classified as current after the stock-price conversion threshold was met; holders may require repurchase on December 31, 2010.
Changes, outlook and risks
- Regional trends: South American sales and operating income increased substantially, supported by strong demand in Brazil and Argentina, higher production and favorable product mix. North American and Europe/Africa/Middle East sales declined; Western European tractor industry sales were down about 19% in the first half. Rest-of-World sales also weakened.
- Costs and earnings: Lower material costs and South American production supported margins. SG&A and engineering expenses rose as a percentage of sales; engineering spending included new products and emissions requirements. First-half effective tax rate increased to 42.9% from 29.2%, primarily due to losses in jurisdictions where no tax benefit was recorded.
- Outlook: Management expected higher full-year 2010 earnings than in 2009. It anticipated continued strength in South America, stable North American demand, and weak but stable Western Europe. Margin improvements were expected to be partly offset by engineering and pension costs. No specific earnings-per-share guidance was provided.
- Accounting and financing items: Adoption of receivable-transfer and consolidation standards resulted in recognition of $122.4 million of European receivables and an equivalent liability. GIMA was deconsolidated because joint control was shared; prior periods were restated. On August 2, 2010, the European securitization facility was reduced by €30 million.
- Contingencies and exposures: AGCO guaranteed approximately $100.7 million of third-party dealer and end-user financing. The filing describes an unresolved Brazilian tax dispute over goodwill deductions (about $50.3 million before interest and penalties), an Iraq Oil-for-Food-related lawsuit and French investigation, and uncertainty over collection of Brazilian VAT receivables. Foreign exchange, agricultural cycles, farmer income, credit availability, weather, commodity prices and financing-market conditions are material risks.
Most important facts for investors to verify
- Whether South American growth can offset continued weakness in North America and Europe, and whether improved Q2 margins persist.
- Liquidity and refinancing plans for the convertible notes subject to a December 2010 holder repurchase right, including whether the stock-price trigger continues to affect classification.
- Cash conversion and working-capital needs as seasonal inventory and receivables build; the effect of recognized securitization funding on reported debt and liquidity.
- Full-year earnings and capital-spending expectations, including the impact of engineering, emissions-compliance and pension costs.
- Developments in the Brazilian tax assessment and VAT recovery, the Oil-for-Food legal matters, and credit quality at the Brazilian retail-finance joint venture.