AGCO Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. AGCO manufactures and distributes agricultural equipment and replacement parts through four regions. First-quarter sales are typically seasonally lower than later quarters. Dollar amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $2,007.5 | $1,627.6 |
| Gross profit / margin | $428.0 / 21.3% | $330.3 / 20.3% |
| Operating income / margin | $50.5 / 2.5% | $15.7 / 1.0% |
| Net income (loss) attributable to AGCO | $24.3 | $(10.1) |
| Diluted EPS | $0.30 | $(0.13) |
| Net cash used in operating activities | $(361.3) | $(251.4) |
| Capital expenditures | $46.1 | $57.1 |
Revenue increased 23.3%, reflecting acquisitions, favorable currency translation, and higher sales in North America, Europe/Middle East (EME), and Asia/Pacific/Africa (APA). Management estimated worldwide average price increases of approximately 1%; tractor and combine unit sales rose approximately 2%. Gross margin improved with pricing and higher production, partly offset by material costs and foreign-exchange effects. SG&A and engineering expenses together declined as a percentage of sales, primarily due to higher revenue.
Regional and operating developments
- North America sales rose to $502.9 from $382.6; the Precision Planting acquisition contributed approximately $61.2 of sales in the quarter.
- EME sales rose to $1,163.7 from $892.5, with acquisition and currency benefits and growth in Germany, the United Kingdom, and France.
- South America sales fell to $182.1 from $222.2; operating results declined amid lower sales and production, material-cost inflation, and transition costs for Tier 3 emission technology products.
- APA sales rose to $158.8 from $130.3, primarily on growth in Australia and China.
- Consolidated restructuring expense was $5.9, including severance and related costs for approximately 110 employees. The company reported a total restructuring liability of $13.2 at quarter-end.
Cash, debt, and liquidity
- Cash and equivalents were $348.2 at March 31, 2018, down from $367.7 at year-end. Current assets were $4,061.3 and current liabilities $2,715.5. Working capital was $1,345.8, compared with $977.1 at December 31, 2017.
- Operating cash outflow was $361.3, principally reflecting a $398.2 inventory build and a $108.4 decline in accrued expenses. Management described working capital investment as seasonal.
- Total indebtedness was $2,118.7, versus $1,713.5 at December 31, 2017; the debt-to-capitalization ratio increased to 40.5% from 35.7%. Approximately $360.7 remained available under the credit facility.
- AGCO reported compliance with its financial covenants and expects available facilities, cash, and internally generated funds to meet foreseeable working capital, capital spending, and debt-service needs. It forecast 2018 capital expenditures of approximately $250.
- Finance joint ventures had an approximately $8.9 billion finance portfolio; AGCO’s investment in them was $384.8. These ventures are jointly owned with Rabobank, and AGCO stated it does not guarantee their debt.
Outlook, risks, and notable items
Management expected 2018 net sales to increase versus 2017, driven by pricing, acquisition-related sales, and improved volumes, and expected operating income and net income to exceed 2017 levels through higher sales and margin improvement. No specific full-year earnings or revenue figures were provided.
- Management cited a slow global farm-equipment recovery. First-quarter industry demand was mixed: North American tractor sales were generally flat and combine sales fell; Western European tractor and combine sales increased; South American tractor and combine sales declined.
- Weather and agricultural conditions were notable uncertainties: dry conditions reduced production expectations in Argentina and parts of Brazil, while cold, wet U.S. weather delayed planting. Other cited risks include farm income and commodity prices, raw-material and energy costs, credit availability, foreign exchange and interest rates, supply and production constraints, and acquisition integration.
- AGCO disclosed $90.2 of outstanding guarantees, primarily tied to dealer and end-user equipment financing, and approximately $1.3 billion of receivables sold under its receivables-sale agreements. These arrangements are accounted for as off-balance-sheet transactions.
- A Brazilian tax dispute concerns disallowed goodwill-amortization deductions of approximately 131.5 million reais ($39.6), excluding interest and penalties. AGCO contests the assessment and said it believes payment is not likely, but the appeal may take several years. An Australian environmental remediation notice was withdrawn in March 2018 but could be refiled.
- Unrecognized tax benefits were $170.2 at quarter-end. AGCO said the final impact of U.S. tax reform could differ from provisional estimates; it made no adjustment to those estimates in Q1.
- In May 2018, after quarter-end, AGCO repurchased approximately $185.9 principal amount of its 5⅞% senior notes for approximately $200.3 plus accrued interest. The company expected to record a $15.7 debt-extinguishment loss and $3.0 accelerated amortization of a deferred gain in Q2 2018.
- AGCO adopted the new revenue-recognition standard using the modified retrospective method; the opening retained-earnings adjustment was approximately $0.4, and Q1 effects on operations and cash flow were not material. Disclosure controls were reported effective as of March 31, 2018.
Key facts for investors to verify
- How much of reported sales growth and margin improvement is sustainable excluding currency translation and acquisitions.
- Whether inventory and other seasonal working-capital investments convert into operating cash flow in later quarters.
- Debt changes, facility availability, covenant compliance, and the Q2 accounting and cash impact of the senior-note tender.
- Progress against 2018 outlook and capital-spending expectations, particularly given regional demand and weather uncertainty.
- Developments in the Brazilian tax appeal, Australian environmental matter, and U.S. tax-reform estimates.