AGCO Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated results; comparisons are with Q1 2012 unless otherwise noted. AGCO manufactures and sells agricultural equipment and replacement parts across four regions. The business is seasonal, with sales historically lowest in the first quarter.
Key financial results
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $2,403.1 million | $2,273.7 million; up 5.7% |
| Gross profit / margin | $533.1 million / 22.2% | $493.0 million / 21.7% |
| Income from operations / margin | $177.4 million / 7.4% | $169.8 million / 7.5% |
| Net income attributable to AGCO | $118.0 million | $120.2 million |
| Diluted EPS | $1.19 | $1.21 |
| Net cash used in operating activities | $261.3 million | $280.5 million used |
| Capital expenditures | $94.0 million | $87.1 million |
| Cash and cash equivalents | $551.7 million at March 31 | $781.3 million at December 31, 2012 |
| Total indebtedness | $1,435.0 million at March 31 | $1,286.8 million at December 31, 2012 |
Net sales benefited from growth in most regions, while unfavorable currency translation reduced sales by approximately $60.9 million (2.7%). Worldwide average price increases were estimated at about 2%; tractor and combine unit sales rose approximately 3%. Gross margin improved on higher volume, pricing and cost reductions, partly offset by weaker mix and German facility transition costs. Operating margin declined slightly as SG&A and engineering expenses grew faster than sales. Net income and diluted EPS declined despite higher sales and operating income, reflecting a higher tax provision and lower equity earnings from affiliates.
Cash, debt and liquidity
- Operating cash use reflected seasonal working-capital investment: receivables and inventories increased by a combined $500.2 million from year-end. Working capital was $1,691.5 million at March 31, 2013.
- Investing cash use was $92.5 million; financing provided $141.4 million. Cash decreased $229.6 million during the quarter.
- Debt to capitalization increased to 28.9% from 27.1% at December 31, 2012. Borrowings under the credit facility were $591.9 million, with approximately $383.1 million available, versus $465.0 million outstanding and $515.0 million available at year-end. Management said available facilities, cash and internally generated funds should support foreseeable requirements and reported compliance with financial covenants.
- The $201.3 million principal amount of 1¼% convertible notes is classified as current. Holders may require repurchase on December 15, 2013, and the stock-price condition for conversion was met for Q2 2013. The company may therefore face conversion or repayment needs; the filing does not state which holders will elect.
- Approximately $1.1 billion of receivables-sale proceeds were outstanding under North American and European arrangements at both March 31 and year-end. These sales are accounted for as off-balance-sheet transactions.
Regions and material developments
- North America sales rose 10.2% to $624.2 million; segment operating income increased to $72.1 million from $50.2 million.
- South America sales rose 12.1% to $465.7 million, despite a $59.4 million unfavorable currency-translation impact; segment operating income increased to $48.3 million from $23.9 million.
- Europe/Africa/Middle East sales were nearly flat at $1,193.2 million; segment operating income fell to $99.7 million from $135.8 million, reflecting weaker mix, higher engineering costs and German facility transition costs.
- Asia/Pacific sales increased 30.4% to $120.0 million; segment operating income rose to $5.5 million from $0.9 million.
- Comprehensive income attributable to AGCO fell to $76.1 million from $199.7 million, including a $44.4 million foreign-currency translation loss versus a $74.8 million gain in Q1 2012.
- The company declared and paid $0.10 per common share in dividends. It repurchased 19,510 shares for approximately $1.0 million under its $50 million repurchase authorization.
Outlook, risks and contingencies
- Management expected 2013 global industry demand to be relatively flat versus 2012: growth in South America, stable North America and modest declines in Western Europe. It expected full-year net sales and net income to increase versus 2012; gross-margin improvement was expected to be partly offset by engineering and market-expansion costs.
- Expected 2013 capital expenditures were $400 million to $425 million, including spending for emissions requirements, product development, systems, factory productivity and assembly capabilities in China.
- Key sensitivities include farm income and commodity prices, weather and crop yields, credit availability, raw-material and energy costs, foreign exchange and interest rates, competition, supply constraints, production disruptions, and political or economic uncertainty. A 10% currency move could negatively affect derivative fair values by approximately $51.5 million, with underlying exposures expected to substantially offset much of the impact; a 10% increase in interest rates was estimated to raise quarterly interest and other expense by about $0.7 million.
- Brazilian VAT receivables were subject to a valuation allowance of $67.4 million at March 31, 2013. Brazilian tax authorities also disputed goodwill-amortization deductions of approximately 131.5 million reais ($65.0 million before interest and penalties); AGCO contested the assessment and said its advisers considered its position allowable.
- A Republic of Iraq Oil-for-Food-related complaint was dismissed with prejudice in February 2013, but an appeal was filed; a French government investigation continued. A separate third-party complaint involving subsidiaries was served in May 2013. Outcomes and potential financial effects were not predictable. AGCO also guaranteed approximately $187.7 million of third-party dealer and end-user financing; the company described historical losses as insignificant.
Important facts for investors to verify
- Whether holders convert or require repayment of the $201.3 million convertible notes, and the resulting cash, debt-classification and dilution effects.
- Whether sales growth and margin trends persist, particularly in EAME, and whether management achieves its 2013 sales, earnings and capital-spending outlook.
- Working-capital needs, cash generation and available credit as seasonal inventory and receivables fluctuate.
- Developments in Brazilian VAT recovery and tax disputes, Oil-for-Food-related proceedings, and dealer/end-user financing guarantees.
- Credit quality and provisions at retail-finance joint ventures, especially Brazil, where the filing notes legacy deferred-payment exposures.