AGCO Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results; dollar amounts are in millions except per-share data. AGCO manufactures and sells agricultural equipment and related parts through four geographic segments.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3,121.6 | $2,725.1 | $8,752.5 | $7,983.1 |
| Gross profit | $738.9 | $626.7 | $2,060.7 | $1,889.6 |
| Gross margin | 23.7% | 23.0% | 23.5% | 23.7% |
| Operating income | $332.1 | $251.9 | $799.6 | $737.4 |
| Operating margin | 10.6% | 9.2% | 9.1% | 9.2% |
| Net income attributable to AGCO | $237.9 | $181.3 | $567.4 | $614.9 |
| Diluted EPS | $3.18 | $2.40 | $7.58 | $8.11 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(295.1) | $41.5 |
Q3 sales rose 14.5% year over year, with management attributing growth to strong demand and pricing; currency translation reduced sales by $321.0 million, or 11.8%. For the nine-month period, sales increased 9.6%, while currency translation reduced sales by $657.0 million, or 8.2%. Estimated average price increases were 13.2% in Q3 and 10.0% year to date.
Q3 operating income and margin improved, reflecting higher sales and production, favorable pricing and mix. Nine-month operating income increased, but margin edged down as material and production costs and weaker mix weighed on gross margin. Nine-month attributable net income and EPS declined, in part because 2021 included a $67.8 million U.S. deferred-tax valuation allowance reversal; 2022 also included Russia-related impairment and other costs.
Cash, debt and liquidity
- Cash and restricted cash were $607.0 at September 30, 2022, down from $889.1 at December 31, 2021. Current assets were $5,701.5 and current liabilities $3,617.9; reported working capital was $2,083.6.
- Nine-month operating cash use was $295.1, primarily reflecting increased receivables and inventories. Inventory rose to $3,324.7 from $2,593.7 at year-end. Investing cash use was $380.9, including $270.5 of capital expenditures and $111.3 for acquisitions. Financing provided $469.6, including $386.4 of dividends paid.
- Total debt, including short-term borrowings and current maturities, was approximately $2.21 billion, versus approximately $1.50 billion at December 31, 2021. The debt-to-capitalization ratio rose to 38.5% from 29.7%. The $800 million revolving facility due October 2023 was fully drawn; a separate $240 million short-term facility remained outstanding and matures March 31, 2023. A €100 million uncommitted facility was undrawn.
- Management said it was complying with debt covenants and believed available cash, facilities and internally generated funds would meet foreseeable requirements. Full-year 2022 capital expenditures were expected to be approximately $325 million.
Material developments and unusual items
- AGCO recorded a $36.0 million first-quarter impairment charge on Russian joint-venture assets and a $4.8 million write-down of its Russian finance-joint-venture investment. Sanctions-related licenses expired May 25, 2022; AGCO said it blocked its interest in one venture and was working to conclude its interests in compliance with law.
- A May 5 ransomware attack temporarily closed most production sites and parts operations; most affected locations resumed within about two weeks. Some data was exfiltrated and later released publicly. AGCO could not reliably quantify lost revenue or operating income, expected to mitigate a considerable portion by year-end, and planned to file an insurance claim.
- In Q3, AGCO revised assumptions for certain pension plans, recording a $24.4 million pre-tax prior-service-cost revision in other comprehensive income. It contributed $26.3 million to defined-benefit plans through September and estimated minimum 2022 contributions of $34.2 million.
- AGCO acquired Appareo Systems for approximately $62.1 million in January and JCA Industries for approximately $49.2 million in May. Their pro forma impact was not material, according to the filing.
Outlook, commentary and risks
Management expected 2022 global farm-equipment demand to remain strong overall, with improved demand in South America, relatively flat demand in North America and declining demand in Europe versus 2021. It expected full-year sales to increase and operating margins to improve from 2021, supported by demand, pricing and production volumes, partly offset by unfavorable currency translation and input-cost inflation. The filing does not provide a specific numerical full-year sales or margin forecast.
Management cautioned that supply-chain and logistics disruption, component shortages (including semiconductors), labor and material inflation, and energy availability could constrain production, sales and margins. Other identified risks include agricultural and economic cycles, commodity prices and farm income, foreign exchange and interest rates, the Ukraine conflict and consequences of the Russian joint ventures, cyberattacks, and COVID-19-related uncertainty.
Contingencies include a Brazilian tax dispute over goodwill-amortization deductions: the disallowed amount was approximately 131.5 million reais (about $24.4 million), excluding interest and penalties. AGCO contested the assessment and said it did not believe payment was likely; the appeal could take several years. A jury found AGCO and Precision Planting did not infringe Deere patents in July 2022; post-trial procedures and possible appeals remained. AGCO also disclosed maximum potential residual-value guarantee payments of $184.3 million, against which $19.8 million was accrued.
The Board increased the quarterly dividend 20% to $0.24 per share beginning in Q2 and declared a $4.50-per-share special dividend paid in Q2. No shares were repurchased in the first nine months of 2022.
Investor verification points
- Assess whether pricing and demand can continue to offset inflation, currency headwinds and supply constraints, particularly in Europe.
- Track inventory, receivables and operating cash conversion, given the substantial working-capital build and nine-month operating cash outflow.
- Review refinancing and covenant exposure as the fully drawn $800 million revolver approaches its October 2023 expiration and the $240 million borrowing approaches maturity.
- Monitor the operational and financial consequences of the cyberattack and the Russia joint-venture wind-down, including any insurance recovery or further impairment.
- Follow developments in the Brazilian tax appeal, Deere litigation, and residual-value guarantees.
- Compare subsequent full-year results with management’s qualitative 2022 outlook and the approximately $325 million capital-expenditure expectation.