AGCO Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. AGCO manufactures and distributes agricultural equipment and replacement parts across four regions. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,109.4 | $2,214.7 | $6,527.8 | $6,759.8 |
| Gross profit | $450.2 | $473.7 | $1,470.8 | $1,458.0 |
| Gross margin | 21.3% | 21.4% | 22.5% | 21.6% |
| Operating income | $105.9 | $111.3 | $397.9 | $329.9 |
| Operating margin | 5.0% | 5.0% | 6.1% | 4.9% |
| Net income attributable to AGCO | $7.6 | $71.1 | $213.5 | $186.8 |
| Diluted EPS | $0.10 | $0.89 | $2.77 | $2.33 |
For the nine months, operating cash flow was negative $80.2, versus negative $4.0 in 2018. Capital expenditures were $188.1, up from $138.5. Cash and cash equivalents were $282.0 at quarter-end, down from $326.1 at December 31, 2018. Working capital was $928.9.
At September 30, total debt was approximately $1,780.5, including short-term borrowings; debt to capitalization was 35.4%, compared with 32.8% at year-end 2018. The $800 million revolving credit facility had $109.0 outstanding and approximately $691.0 available. Current liabilities were $3,027.7 and current assets were $3,956.6. The balance sheet also reported $193.5 of operating lease right-of-use assets and $197.0 of operating lease liabilities, current and noncurrent combined.
Changes versus prior year
- Q3 sales declined 4.8%; management attributed the decrease primarily to currency translation, with lower sales and production volumes also weighing on operating income. Worldwide average price increases partly offset these pressures.
- Nine-month sales declined 3.4%, including a negative currency translation impact of $327.0. Operating income rose 20.6% and operating margin improved, reflecting pricing and cost controls; gross margin also improved.
- Q3 net income attributable to AGCO fell sharply, principally due to a non-cash $53.7 Brazilian deferred-tax valuation allowance charge. Q3 income tax provision was $83.2, versus $23.9 a year earlier.
- Regional results were uneven: Europe/Middle East operating income increased, while South America reported operating losses that widened year over year. South American weakness reflected low demand and production and costs associated with transitioning to newer product technology.
- Inventory rose to $2,311.3 from $1,908.7 at year-end. Management cited emissions-standard product transitions, weak Brazilian demand and European supplier delays.
Outlook, risks and contingencies
Management expected 2019 sales to decline modestly from 2018, with relatively flat volumes and unfavorable currency translation partly offset by pricing. It expected gross and operating margins to improve and net income to increase year over year. Full-year 2019 capital expenditures were expected to be approximately $225.0. Management expected global equipment demand to be relatively flat; its regional outlook was level demand in North America and Western Europe and lower demand in South America.
Management cited challenging farm economics and trade tensions, as well as weather, commodity prices, farm income, tariffs, foreign exchange, raw-material costs, credit availability, government policies, production disruptions and supply constraints as risks to results. A Brazilian tax dispute concerns disallowed goodwill-amortization deductions; the company contested the assessment and said it did not believe payment was likely, but the appeal could take several years. AGCO also noted that its Netherlands and Russia joint ventures depended on a time-limited U.S. Treasury license; expiration without further authorization could halt commercial operations and prompt asset-impairment assessment.
Other notable items include a $61.1 repayment of term loans at maturity in October 2019, a $30.0 million share repurchase agreement entered into in November, and $27.5 of guarantees of third-party indebtedness plus $17.2 of minimum residual-value guarantees. AGCO reported compliance with its debt covenants and said available facilities, cash and internally generated funds should meet foreseeable needs.
Most important facts for investors to verify
- Whether the Brazilian deferred-tax valuation allowance, tax outlook and any further valuation adjustments affect reported earnings.
- Whether inventory unwinds as expected and seasonal working-capital needs convert to stronger operating cash flow.
- Whether sales, margins and net income meet management’s full-year outlook amid weaker South American demand, trade uncertainty and currency headwinds.
- Upcoming debt maturities, liquidity and covenant compliance, including the company’s use of its revolving facility.
- Progress and potential outcomes of the Brazilian tax dispute and the U.S. Treasury license affecting the Netherlands and Russia joint ventures.