AGCO Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. AGCO manufactures and distributes agricultural equipment and replacement parts. First-quarter sales are typically seasonally low.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $1,559.3 million | $1,702.6 million; down 8.4% |
| Gross profit and margin | $314.7 million; 20.2% | $347.9 million; 20.4% |
| Operating income and margin | $19.4 million; 1.2% | $46.8 million; 2.8% |
| Net income attributable to AGCO; diluted EPS | $7.8 million; $0.09 | $30.1 million; $0.34 |
| Cash used in operating activities | $348.2 million | $286.0 million used |
| Capital expenditures | $35.7 million | $62.9 million |
| Cash and cash equivalents | $247.9 million at March 31 | $426.7 million at December 31, 2015 |
| Total indebtedness | $1,578.4 million | $1,231.4 million at December 31, 2015 |
Working capital was $949.8 million, versus $712.9 million at December 31, 2015. The debt-to-capitalization ratio rose to 35.0% from 30.0%. The revolving credit facility had $496.9 million of availability at quarter-end. Operating cash outflow reflected seasonal working-capital investment, including increases in receivables and inventory.
Material changes and operating context
- Management attributed lower sales and operating income to weaker global demand, reduced sales and production volumes, unfavorable product mix, and currency translation. Currency translation reduced sales by approximately $88.2 million.
- Tractor and combine unit sales declined approximately 11%; worldwide average price increases of approximately 1.7% partly offset the decline. Industry retail sales weakened across major markets, particularly in South America, where tractor sales fell approximately 42%.
- Segment sales were $408.4 million in North America, $144.2 million in South America, $924.1 million in Europe/Africa/Middle East, and $82.6 million in Asia/Pacific. Asia/Pacific results improved, primarily on growth in China; South American sales were sharply lower, mainly due to Brazil.
- On February 2, AGCO acquired Italian poultry-equipment maker Tecno for approximately €53.5 million ($57.9 million), including acquired cash of approximately $19.1 million.
- AGCO recorded $1.9 million of restructuring expense and terminated approximately 200 employees during the quarter. It had $16.0 million of accrued severance costs remaining, expected to be paid primarily in 2016.
Outlook, risks, and unusual items
- For full-year 2016, management expected weak equipment demand in all regions, lower net sales than 2015, and gross and operating margins below 2015 levels. Lower volumes, weaker mix, unfavorable currency, and higher engineering expenses were expected to weigh on results; cost reductions were expected to provide a partial offset.
- AGCO estimated 2016 capital expenditures of approximately $250 million. Management said available cash, internal funds, credit facilities, term loans, and receivable-sale facilities should support foreseeable working-capital, capital-spending, and debt-service needs. The company reported compliance with financial covenants.
- After quarter-end, on April 26, AGCO received €300 million under new Rabobank term loans, partly to repay a €200 million loan due May 2, 2016. The new loans mature April 26, 2021 and bear interest at EURIBOR plus a leverage-based margin.
- Brazilian tax authorities are contesting deductions related to goodwill amortization. The disallowance was approximately 131.5 million Brazilian reais ($36.6 million), before interest and penalties. AGCO contests the assessment and said it did not believe payment was likely; the appeal could take several years.
- Other exposures include $49.0 million of guarantees, foreign-exchange and interest-rate risk, and approximately $143.5 million of unrecognized tax benefits. Management highlighted sensitivity to farm income, commodity prices, currencies, credit availability, weather, raw-material costs, and political and economic conditions.
Important facts for investors to verify
- Whether the expected 2016 sales and margin declines, and the $250 million capital-expenditure estimate, remain consistent with subsequent company guidance and results.
- How quickly working capital converts to cash, particularly given the quarter’s $348.2 million operating cash outflow and inventory increase.
- The effect of higher borrowings, covenant terms, and the April refinancing on interest expense and liquidity.
- Tecno’s integration, contribution to results, and final purchase-price allocation, which was preliminary at quarter-end.
- Developments in the Brazilian tax dispute and changes in tax reserves or other contingencies.