AGCO Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless otherwise stated.
Business context
AGCO manufactures and distributes agricultural equipment and replacement parts under brands including Fendt, Massey Ferguson, Valtra, Challenger and GSI. It sells through about 3,275 dealers and distributors in approximately 140 countries. Tractors represented 57% of 2019 sales; replacement parts 15%; grain storage and protein systems 11%. Retail and wholesale financing is provided through joint ventures with Rabobank.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $9,041.4 million | $9,352.0 million |
| Gross profit / margin | $1,984.3 million / 21.9% | $1,996.7 million / 21.4% |
| Operating income / margin | $348.1 million / 3.9% | $489.0 million / 5.3% |
| Net income attributable to AGCO / diluted EPS | $125.2 million / $1.63 | $285.5 million / $3.58 |
| Operating cash flow | $695.9 million | $595.9 million |
| Capital expenditures | $273.4 million | $203.3 million |
| Cash and cash equivalents | $432.8 million | $326.1 million |
| Working capital | $844.6 million | $770.7 million |
- Sales declined 3.3%; currency translation reduced reported sales by $389.2 million, while worldwide average price increases were approximately 1.9%. Tractor and combine unit sales fell about 9.5%.
- Gross margin improved due mainly to pricing above material-cost increases, partly offset by lower production. Reported operating income included $176.6 million of non-cash impairment charges.
- At year-end, long-term debt, net of issuance costs and current portion, was $1,191.8 million; short-term borrowings were $150.5 million and current debt was $2.9 million. Debt-to-capitalization was 30.4%, down from 32.8%. The $800 million revolving facility had no borrowings and was available, subject to its terms. AGCO reported compliance with financial covenants.
- Finance joint ventures generated $41.5 million of AGCO equity earnings. Their total finance portfolio was approximately $9.6 billion, including $7.7 billion of retail and $1.9 billion of wholesale receivables.
Material changes versus 2018
- Net income attributable to AGCO fell to $125.2 million from $285.5 million. Fourth-quarter results included an $88.3 million attributable net loss, principally reflecting the impairment charges.
- The $176.6 million impairment comprised $173.6 million related to the Europe/Middle East grain storage and protein production reporting unit and $3.0 million for North American intangible assets. No impairment was recorded in 2018.
- South American sales fell 16.4% and APA sales fell 13.2%; North American sales rose 0.5%. EME sales declined 1.0% as reported, but increased excluding currency translation.
- South American operating losses widened to $39.4 million from $10.1 million, reflecting weak demand and production and costs associated with newer Brazilian product technology. EME and North American operating results improved, before consolidated-level items.
- Interest expense, net decreased to $19.9 million from $53.8 million, partly because 2018 included debt-refinancing and extinguishment costs. The 2019 income tax provision rose to $180.8 million from $110.9 million, including a $53.7 million non-cash Brazilian deferred-tax valuation allowance, partly offset by a $21.8 million Swiss tax-related gain.
- Operating cash flow increased by $100.0 million. Inventory rose to $2,078.7 million from $1,908.7 million, with management citing weaker markets and inventory for the transition to European emissions-compliant products.
Outlook, risks and contingencies
- Management expected 2020 sales to increase, with relatively flat volume and positive pricing, and gross and operating margins to improve through pricing and cost controls. The outlook assumed the coronavirus outbreak would not significantly affect the business.
- Management cited challenged farm economics, low commodity prices, trade tensions, weather and financing availability as demand factors. Risks also include currency movements, tariffs and other policy changes, supplier interruptions, emissions requirements, seasonal working-capital needs, and competition.
- The filing specifically warned that coronavirus-related factory, supplier, freight or demand disruptions could affect operations. AGCO had factories and suppliers in China and Italy and had restricted some employee travel. The 2020 outlook was therefore subject to substantial uncertainty.
- AGCO reported $206.3 million of underfunded defined-benefit pension obligations and expected approximately $33.6 million of 2020 pension contributions. It also disclosed $210.7 million of gross unrecognized tax benefits.
- AGCO is contesting a Brazilian tax assessment concerning historic goodwill amortization deductions. The disallowed amount through year-end, excluding interest and penalties, was approximately 131.5 million reais ($32.6 million); the company said payment was not considered likely, but the appeal could take years.
- Other notable commitments include $47.6 million of third-party financing guarantees and up to $26.7 million of potential minimum-residual-value payments. Receivable-sale programs are accounted for as off-balance-sheet transactions and generated $42.4 million of losses in 2019.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; three critical audit matters concerned sales incentives, uncertain tax benefits and the EME goodwill impairment.
Important facts for investors to verify
- Whether 2020 sales, pricing and margin expectations remained achievable as coronavirus and market conditions evolved after the February 28, 2020 filing date.
- The assumptions and sensitivity behind the $173.6 million EME impairment, and whether the smaller reporting unit with $20.0 million of goodwill could require a future impairment.
- Inventory levels, production alignment and the impact of weaker demand on dealer inventories and cash conversion.
- The realizability of deferred tax assets, especially in Brazil, and developments in the Brazilian tax appeal and other tax examinations.
- Debt maturities, covenant headroom, pension funding requirements and the continuing availability of Rabobank-backed financing for AGCO customers and dealers.