AGCO Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts in U.S. dollars unless noted.
Financial performance and position
- Q3 revenue: $1,761.6 million, up 1.5% year over year. Foreign-currency translation reduced sales by $20.2 million; acquisition sales largely offset that impact.
- Q3 earnings: Operating income was $59.0 million versus $79.1 million; net income attributable to AGCO was $40.0 million versus $67.1 million. Diluted EPS was $0.50 versus $0.77.
- Q3 margins: Gross margin was 20.1% versus 21.1%; operating margin was 3.3% versus 4.6%.
- First nine months: Revenue was $5,316.5 million, down 3.5%; operating income was $197.0 million versus $275.8 million; attributable net income was $98.1 million versus $204.3 million. Diluted EPS was $1.20 versus $2.33. Gross margin was 20.6% versus 21.1%, and operating margin was 3.7% versus 5.0%.
- Cash flow: Operating activities used $127.4 million in the first nine months, compared with $72.2 million provided a year earlier. Investing activities used $528.2 million, including $383.6 million for business acquisitions; financing activities provided $511.8 million. Cash declined $128.9 million to $297.8 million.
- Liquidity and debt: Working capital was $1,271.1 million at September 30. Total indebtedness was $1,985.3 million, compared with $1,231.4 million at December 31, 2015; debt-to-capitalization rose to 40.2% from 30.0%. The revolving facility had $196.9 million available. Management said available facilities, cash and internally generated funds should meet foreseeable needs and reported compliance with financial covenants.
- Other: Nine-month capital expenditures were $132.8 million. Dividends were $0.13 per share in Q3 and $0.39 per share for the nine months. AGCO repurchased $170.0 million of shares during the nine months.
Changes and business drivers
- Q3 revenue increased, but operating income and earnings declined, primarily due to lower production and weaker sales mix. For the nine months, lower sales and production, weaker mix and unfavorable currency translation reduced operating results.
- Lower commodity prices and farm income weakened demand. In the first nine months, North American retail sales fell about 11% for utility and high-horsepower tractors and 20% for combines; South American tractor sales fell about 16%. Western European tractor sales rose about 1%, while combine sales fell about 11%.
- Regional operating results were mixed: EAME improved, while North America and South America declined. Asia/Pacific improved over the nine months, supported by China.
- AGCO acquired Cimbria in September for approximately $337.5 million net of cash acquired, adding grain and seed processing, handling and storage products. It also acquired Tecno Poultry Equipment in February for approximately $63.6 million. Cimbria’s purchase accounting was preliminary.
- The company recorded a $31.6 million non-cash deferred tax charge to establish a valuation allowance against U.S. deferred tax assets. It also recorded $5.5 million of restructuring costs in the first nine months and reported actions involving approximately 350 employee terminations.
Outlook, risks and contingencies
- Management expected 2016 industry demand to weaken in all major markets. It forecast full-year net sales, operating income and net income below 2015 levels, citing lower demand, unfavorable currency effects, lower production volumes and weaker mix; acquisition-related sales and cost reductions were expected to provide partial offsets.
- Full-year 2016 capital expenditures were expected to be approximately $250 million, mainly for product development, systems and factory productivity.
- Key risks include commodity prices and farm income, industry demand, foreign exchange and interest rates, raw-material costs, customer credit availability, production disruptions, and integration of acquisitions. Management also noted potential Brexit-related trade, regulatory and currency uncertainty.
- AGCO is contesting a Brazilian tax assessment concerning disallowed goodwill amortization deductions. The amount disputed was approximately 131.5 million reais ($40.4 million) before interest and penalties. Management believed payment was unlikely, but the appeal could take several years.
- Off-balance-sheet arrangements include approximately $1.1 billion of receivables sold under financing agreements. The company also reported $13.7 million of guarantees of third-party indebtedness. Management considered the guarantees’ credit risk not material.
- After quarter-end, AGCO borrowed €375 million under term loans and used the proceeds to repay revolving-credit borrowings associated with the Cimbria acquisition.
Most important facts for investors to verify
- Whether weak agricultural markets, production volumes and product mix continue to pressure margins and earnings.
- How Cimbria and Tecno perform and whether preliminary acquisition valuations, integration and related borrowing affect returns and leverage.
- Whether the U.S. deferred-tax valuation allowance, tax outlook and Brazilian tax dispute develop as management expects.
- Whether operating cash flow improves as seasonal working-capital needs unwind, given the nine-month cash use and higher receivables and inventories.
- Whether management’s full-year 2016 sales and earnings outlook, capital-spending plan and covenant-compliance expectations are achieved.