AGCO Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Amounts are in U.S. dollars.
Financial results and key metrics
- Revenue: Net sales were $1,995.8 million, down 0.6% from $2,007.5 million. Currency translation reduced sales by about $141.9 million; reported sales growth in Europe/Middle East partly offset that impact.
- Profitability: Gross profit increased to $456.7 million from $428.0 million; gross margin rose to 22.9% from 21.3%. Operating income increased to $92.4 million from $50.5 million, with operating margin of 4.6% versus 2.5%. Net income attributable to AGCO was $65.1 million, or $0.84 diluted per share, compared with $24.3 million, or $0.30 per share.
- Cash flow and investment: Operating cash outflow was $329.9 million, versus $361.3 million, reflecting seasonal working-capital needs. Capital expenditures were $60.9 million, compared with $46.1 million. Cash at quarter-end was $292.8 million, down from $326.1 million at year-end.
- Working capital: Working capital was $906.6 million, compared with $770.7 million at December 31, 2018. Inventories rose to $2,307.6 million from $1,908.7 million.
- Debt and liquidity: The company reported a 37.6% debt-to-capitalization ratio, up from 32.8% at year-end. The balance sheet included $181.5 million of short-term borrowings and $1,697.4 million of long-term indebtedness before current portions. About $592.1 million remained available under the $800 million revolving credit facility. Management said available facilities, cash and internally generated funds should meet foreseeable requirements; the company reported compliance with financial covenants.
- Shareholder returns: AGCO declared and paid a $0.15-per-share dividend. It repurchased $30.0 million of stock under an accelerated share repurchase agreement; the remaining shares were delivered in May 2019.
Material changes and management commentary
- Operating income improved primarily from pricing, higher production, cost-control initiatives and the timing of engineering expenditures. Lower net interest expense also contributed: $3.5 million versus $10.3 million, primarily following 2018 refinancing.
- Regional sales were $1,210.6 million in Europe/Middle East, $496.2 million in North America, $156.1 million in South America and $132.9 million in Asia/Pacific/Africa. Europe/Middle East sales increased 4.0% reported, while South America and Asia/Pacific/Africa declined.
- Management estimated worldwide average price increases of approximately 2.4%. Tractor and combine unit sales decreased approximately 2.9% year over year.
- Equity in earnings of affiliates rose to $10.8 million from $7.7 million, primarily due to higher finance-joint-venture earnings. AGCO’s share of finance-joint-venture earnings was $10.1 million versus $6.7 million.
Outlook, risks and unusual items
- Management expected modest improvement in global industry demand in 2019. It forecast higher annual net sales, with improved volumes and pricing partly offset by unfavorable currency translation, and expected gross and operating margins and net income to improve from 2018. No specific full-year sales or earnings target was provided in the filing text.
- Management expected 2019 capital expenditures of approximately $225 million and full-year engineering expenses above 2018 levels.
- Management described farm economics as challenged and demand as mixed. Risks cited include trade tensions and tariffs, commodity prices and farm income, weather, foreign exchange and interest rates, raw-material and energy costs, credit availability, production disruptions and supply constraints.
- Brazilian tax authorities are challenging deductions related to goodwill amortization. The disputed tax amount before interest and penalties was approximately 131.5 million Brazilian reais, or $33.8 million, at quarter-end. AGCO contests the assessment and said it believes payment is not likely; the appeal may take several years.
- AGCO disclosed approximately $44.3 million of guarantees of third-party indebtedness and $15.0 million of guarantees of minimum residual values. The filing says historical losses on financing guarantees have been insignificant.
- AGCO’s joint ventures in the Netherlands and Russia had a partner operating under a time-limited U.S. Treasury general license. If the license expires without further authorization, commercial operations may be affected and certain related assets may require impairment assessment.
- Q1 restructuring expense was $1.7 million, associated with rationalizations and termination of approximately 30 employees. The company also adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; adoption did not materially affect earnings or cash flows.
Important facts for investors to verify
- Whether currency headwinds, trade conditions and regional demand affect the 2019 sales and margin outlook.
- Whether inventory growth and seasonal working-capital outflows unwind as expected over the remainder of the year.
- Debt maturities, borrowing availability and continued compliance with credit-facility covenants.
- The outcome and potential exposure from the Brazilian tax dispute and the U.S. Treasury license affecting the Netherlands and Russia joint ventures.
- Whether the expected benefits from pricing and cost initiatives offset higher planned engineering spending and other operating costs.