AGCO Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated financial statements; amounts below are in U.S. dollars. AGCO manufactures and distributes agricultural equipment and related parts across four geographic segments.
Financial performance and position
- Q2 revenue: $2.007 billion, down 17.2% from $2.423 billion a year earlier. Lower production and COVID-19 disruptions, along with adverse currency translation, were key factors.
- Q2 earnings: Income from operations was $97.3 million versus $199.6 million; operating margin was 4.8% versus 8.2%. Gross margin was 21.6% versus 23.3%. Net income attributable to AGCO was $69.7 million, or $0.93 diluted EPS, versus $140.8 million, or $1.82.
- First-half revenue and earnings: Revenue was $3.935 billion, down 10.9%. Operating income was $197.7 million versus $292.0 million, with operating margin of 5.0% versus 6.6%. Net income attributable to AGCO was $134.4 million, or $1.78 diluted EPS, versus $205.9 million, or $2.66.
- Cash flow: First-half operating cash flow was negative $221.6 million, compared with negative $212.9 million. Capital expenditures were $117.5 million versus $114.9 million. Cash and cash equivalents were $404.4 million at June 30, versus $432.8 million at year-end.
- Debt and liquidity: Long-term debt, including its current portion, was approximately $1.654 billion; short-term borrowings were $102.6 million. Debt to capitalization rose to 38.7% from 30.4% at year-end. Management reported $1.269 billion of available funding: $399.7 million unrestricted cash and $869.3 million available borrowing capacity. AGCO said it was compliant with its financial covenants.
- Working capital: $1.263 billion at June 30, compared with $844.6 million at December 31, 2019; management cited seasonal working-capital needs and pandemic-related disruption.
Material changes and notable items
- Q2 net sales fell across North America, Europe/Middle East, and Asia/Pacific/Africa. South American sales increased excluding currency impacts. Europe and South America production sites were closed from late March through most of April; all facilities had resumed operations by the filing date.
- Global production hours declined 19.2% in Q2 and 14.0% in the first half year over year. First-half tractor and combine unit sales declined 14.7%.
- AGCO recorded a noncash $20.0 million goodwill impairment in Q2 for a tillage and seeding joint venture reporting unit. The filing reports an approximately $10.0 million offset through net loss attributable to noncontrolling interests.
- Foreign currency translation reduced first-half other comprehensive income by $245.1 million. This contributed to lower total stockholders’ equity, which was $2.718 billion at June 30 versus $2.907 billion at year-end.
- First-half restructuring expense was $4.6 million, including costs associated with approximately 300 employee terminations. AGCO also recorded a $173.6 million goodwill impairment in its Europe/Middle East grain storage business in Q4 2019 and warned further impairment could occur if weak conditions persist.
Outlook, risks, and contingencies
- For 2020, AGCO expected net sales to decline from 2019 and operating margins, excluding goodwill impairment charges in both years, to be below 2019 levels. Lower demand and production were expected to be partly offset by pricing and expense reductions. The filing gives no specific full-year revenue or EPS forecast.
- Management cited COVID-19 uncertainty, supply-chain and component availability, possible factory restrictions or workforce limitations, softer commodity prices and farmer sentiment, foreign exchange movements, and collection risks. Further disruption could materially reduce sales and earnings and prompt additional asset or inventory impairments.
- AGCO expected 2020 capital expenditures of approximately $225 million. It expected to maintain its quarterly dividend but had suspended share repurchases until business visibility improved.
- Brazilian tax authorities are challenging deductions related to goodwill amortization. The disputed tax amount was approximately 131.5 million reais ($24.0 million) before interest and penalties; AGCO said it believes payment is not likely, but the appeal may take several years.
- Other exposures include $25.4 million of third-party debt guarantees and residual-value guarantees with a maximum potential payment of $56.3 million, against which $21.5 million was accrued. AGCO stated that other legal claims were not material to the company as a whole.
- Management cautioned that available funding was considered sufficient provided the pandemic’s duration and severity were not materially worse than estimated.
Important facts for investors to verify
- Whether production, supply-chain availability, and end-market demand recovered as assumed in the 2020 outlook.
- Progress in operating margins and cash generation, including seasonal working-capital movements and planned capital spending.
- Debt levels, borrowing capacity, covenant compliance, and the continuation of the dividend amid pandemic uncertainty.
- Potential further goodwill or inventory impairments, and developments in the Brazilian tax dispute and guarantee exposures.