AGCO Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods unless otherwise noted. AGCO manufactures and distributes agricultural equipment and replacement parts across four reportable regions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $2,750.3 million | $3,048.2 million | $5,083.7 million | $5,451.3 million |
| Gross profit / margin | $631.5 million / 23.0% | $710.3 million / 23.3% | $1,146.4 million / 22.6% | $1,243.4 million / 22.8% |
| Operating income / margin | $266.7 million / 9.7% | $327.1 million / 10.7% | $422.4 million / 8.3% | $504.5 million / 9.3% |
| Net income attributable to AGCO | $168.2 million | $213.7 million | $267.8 million | $331.7 million |
| Diluted EPS | $1.77 | $2.15 | $2.79 | $3.34 |
Cash flow: First-half operating cash flow was a use of $254.2 million, versus $65.0 million provided in 2013. Investing cash flow used $154.1 million, including $155.5 million of capital expenditures; financing cash flow used $323.6 million. Cash fell to $323.3 million at June 30 from $1,047.2 million at year-end, with working-capital investment, share repurchases and debt-note repayments among the significant cash uses. Management described working-capital needs as seasonal.
Liquidity and debt: Current assets were $4,533.6 million and current liabilities $2,790.7 million; working capital was $1,742.9 million. Total indebtedness was $1,225.1 million, compared with $1,250.2 million at December 31, 2013; debt-to-capitalization was 23.2%, versus 23.6%. The amended credit facility provides an $800 million revolving facility and a $355 million term loan, with maturity extended to June 2019; the company reported no revolving borrowings and approximately $800 million available. The filing states the company was in compliance with its financial covenants.
Changes and operating drivers
- Sales declined 9.8% in Q2 and 6.7% in the first half. AGCO attributed the decreases chiefly to softer markets, lower sales and production volumes, and weaker product mix. First-half foreign-currency translation reduced sales by $40 million; Q2 translation increased sales by $9.3 million.
- Operating income declined 18% in Q2 and 16% in the first half. Lower volume and mix were partly offset by pricing, material-cost containment and improved factory productivity. Gross margin was broadly stable, while operating margin fell.
- Tractor and combine unit sales declined approximately 13% in Q2 and 11% in the first half; production declined 19% and 15%, respectively. South America was particularly weak: first-half industry retail sales of tractors and combines fell approximately 18% and 25%.
- Regional operating income weakened in North America and South America; Asia/Pacific moved to an operating loss for the first half, partly reflecting costs at the new China factory. EAME first-half operating income improved slightly.
- Share repurchases totaled $290 million in the first half under accelerated repurchase agreements. AGCO retired shares received; final settlement delivered a further 1.21 million shares in July. Dividends paid were $0.22 per share for the first half.
Outlook, risks and unusual items
- Outlook: Management expected worldwide industry demand and AGCO’s 2014 net sales to decline from 2013, citing lower commodity prices, reduced farm income and weaker equipment demand. It expected full-year gross margins to remain relatively flat, as pricing and cost reductions were expected to offset lower volume and weaker mix. Planned 2014 capital expenditures were approximately $400 million.
- Market risks: Results are sensitive to farm income, commodity prices, weather, crop yields, credit availability, government policies and subsidies, raw-material and energy costs, production disruptions, competition and foreign exchange. The company does not hedge foreign-currency translation exposure. A 10% currency move could reduce the fair value of foreign-exchange instruments by approximately $15.4 million; management expected underlying exposures to largely offset hedge effects.
- Contingencies: AGCO reserved $69.0 million against Brazilian VAT receivables due to collection uncertainty. Brazilian tax authorities disputed goodwill-amortization deductions of approximately $59.5 million before interest and penalties; AGCO contested the assessment and said it did not believe payment was likely, but resolution could take years. Two Oil-for-Food-related claims against subsidiaries had been dismissed with prejudice; appeals remained possible or ongoing, and outcomes were uncertain.
- Other exposures: The company guaranteed approximately $164.5 million of third-party dealer and customer financing. Warranty reserves were $303.9 million. AGCO noted potential credit deterioration in the Brazilian retail-finance portfolio, although the joint venture considered its reserves adequate.
- Subsequent events: In July, holders converted the remaining $151.5 million principal of convertible notes, and AGCO issued shares for the excess conversion value. On August 1, 2014, AGCO acquired Intersystems for approximately $130 million net of cash acquired.
Key facts for investors to verify
- Whether weaker agricultural demand and lower farm income persist, particularly in South America and major row-crop markets.
- Whether management achieves its 2014 sales, gross-margin and capital-expenditure outlook.
- Working-capital and inventory trends, and the path from first-half negative operating cash flow to seasonal cash generation.
- Effects of the convertible-note settlement, buybacks and acquisition on cash, debt and diluted share count.
- Developments in Brazilian VAT collection and tax disputes, and the credit quality of the Brazilian finance portfolio.