AGCO Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; dollar amounts are in millions except per-share data.
Business context and results
AGCO manufactures and sells agricultural equipment and replacement parts through four regions: North America, South America, Europe/Africa/Middle East (EAME), and Asia/Pacific. Results are seasonal and cyclical, influenced by farm income, commodity prices, weather, and financing conditions.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $3,048.2 | $2,690.1 | $5,451.3 | $4,963.8 |
| Gross profit | $710.3 | $611.4 | $1,243.4 | $1,104.4 |
| Income from operations | $327.1 | $264.9 | $504.5 | $434.7 |
| Net income attributable to AGCO | $213.7 | $204.9 | $331.7 | $325.1 |
| Diluted EPS | $2.15 | $2.08 | $3.34 | $3.29 |
| Operating cash flow | — | $65.0 | $(188.2) |
Financial position and liquidity
- At June 30, cash was $680.6, total debt was $1,362.3, and working capital was $1,741.9. Debt-to-capitalization was 27.1%, unchanged from year-end 2012.
- Cash declined $100.7 during the first half, including $46.9 of adverse exchange-rate effects. Operating cash flow improved year over year, but receivables and inventory rose with sales growth, production, and seasonality.
- Credit-facility borrowings were $512.5, with approximately $457.5 available. AGCO also reported approximately $1.3 billion of cash received under North American and European receivables-sale agreements, accounted for as off-balance-sheet transactions.
- First-half capital expenditures were $174.2; management forecast full-year 2013 spending of $400–$425.
Changes versus the prior comparable periods
- Sales rose 13.3% in Q2 and 9.8% for the first half, with growth in all regions. Currency translation reduced sales by $12.5 in Q2 and $73.4 in the first half.
- Operating income increased 23.5% in Q2 and 16.1% for the first half. Gross margin improved to 23.3% from 22.7% in Q2 and to 22.8% from 22.2% for the first half; management cited pricing, factory efficiency, cost controls, and relatively low material-cost inflation.
- Attributable net income and diluted EPS grew more slowly than operating income. The higher effective tax rate reflected tax expense on U.S. income in 2013; prior-year U.S. income tax expense was offset by valuation allowances and net operating loss carryforwards.
- First-half operating cash flow shifted to positive $65.0 from negative $188.2. Capital spending increased to $174.2 from $151.1.
Outlook, risks, and unusual items
- Management expected worldwide industry demand to be relatively flat in 2013 versus 2012, with growth in North and South America and modest declines in Western Europe. It expected full-year net sales and net income to increase year over year; margin improvement could be partly offset by market-expansion and engineering costs.
- Management cited higher engineering costs for new engine-emission requirements and product development, and transition costs at the new German tractor assembly facility. China market-development expenses weighed on Asia/Pacific operating results.
- The $201.3 principal amount of 1.25% convertible notes may be put to AGCO on December 15, 2013; holders were also eligible to convert during Q3 2013. The $196.7 carrying amount was classified as current, creating a near-term refinancing or cash requirement to monitor.
- Brazilian VAT receivables carried a $66.0 reserve. Brazilian tax authorities disputed goodwill-amortization deductions of approximately $59.3, excluding interest and penalties; AGCO said it believed payment was not likely, but the appeal could take years.
- An Iraq-related Oil for Food complaint was dismissed with prejudice, but the plaintiff appealed. A separate third-party complaint seeking unspecified damages remained pending. AGCO said outcomes and potential impacts could not be predicted.
- Other risks include agricultural-market and weather volatility, foreign-exchange movements, customer and dealer credit, input costs, production disruptions, and compliance with debt covenants. AGCO reported covenant compliance and effective disclosure controls at quarter-end.
Important facts for investors to verify
- How the convertible notes’ December 2013 put or conversion is addressed, and the resulting cash, debt, and dilution effects.
- Whether working-capital investment converts to cash in the second half, given the rise in receivables and inventory and the seasonal pattern of operations.
- Progress against the $400–$425 full-year capital-spending plan and the full-year sales and net-income outlook.
- Developments in Brazil’s VAT recovery and tax dispute, and the status of the appealed Iraq-related claims.
- Credit quality and provisions at the retail-finance joint ventures, particularly the Brazilian portfolio; AGCO noted higher credit-loss provisions and continuing monitoring of legacy deferred-payment loans.