AGCO Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. AGCO designs, manufactures and distributes agricultural equipment and related parts through four geographic segments.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $1,928.3 million | $1,995.8 million; down 3.4% |
| Gross profit / margin | $450.5 million / 23.4% | $456.7 million / 22.9% |
| Operating income / margin | $100.4 million / 5.2% | $92.4 million / 4.6% |
| Net income attributable to AGCO | $64.7 million; diluted EPS $0.85 | $65.1 million; diluted EPS $0.84 |
| Cash from operations | $(435.3) million | $(329.9) million |
| Capital expenditures | $60.6 million | $60.9 million |
| Cash and cash equivalents | $386.7 million at March 31 | $432.8 million at December 31, 2019 |
Gross margin improved on pricing, material costs and product mix, partly offset by lower production. Operating income rose with improved margins and cost control. Higher income tax provision ($29.4 million versus $19.4 million) largely offset those gains, leaving net income slightly lower. Foreign-currency translation reduced reported sales by $71.9 million, more than the total year-over-year sales decline.
Working capital was $1,247.9 million, reflecting the business’s seasonal build. Total liquidity at March 31 was $682.7 million: cash of $386.7 million plus $296.0 million available on the revolving facility. The debt-to-capitalization ratio increased to 39.4% from 30.4% at year-end; management said the company was in compliance with debt covenants. The filing reports a $504.0 million revolving-facility balance and $166.2 million of short-term borrowings at quarter-end.
Operating cash outflow increased year over year, reflecting seasonal working-capital needs and COVID-related factory shutdowns, production cuts and supply constraints. Inventory rose to $2,187.5 million from $2,078.7 million at year-end. Comprehensive loss attributable to AGCO was $131.5 million, principally reflecting $209.1 million of foreign-currency translation losses.
Material changes and business trends
- Sales declined in Europe/Middle East and Asia/Pacific/Africa, with pandemic-related production disruption and currency translation among the factors. North American sales grew 11.2%; South American reported sales declined 1.4%, but increased excluding currency effects.
- Tractor and combine unit sales fell approximately 8.7%; worldwide average prices were relatively flat. Segment operating income increased in North America, declined in Europe/Middle East and Asia/Pacific/Africa, and South America continued to report an operating loss.
- At March 31, long-term debt, net of issuance costs and current portion, was $1,669.5 million; short-term borrowings were $166.2 million. A new revolving-facility draw contributed to higher debt versus year-end.
- AGCO repurchased $55.0 million of shares in Q1 under accelerated repurchase agreements. It subsequently suspended future repurchases until business visibility improves; management said it currently expects to maintain the quarterly dividend.
Outlook, risks and unusual items
- Management expected COVID-19 to continue to negatively affect sales and production. April factory closures were expected to significantly reduce Q2 sales and earnings; preliminary April sales were approximately 30% below April 2019. Management cautioned that the remainder of 2020 remained highly uncertain and that April’s decline appeared largely production-driven.
- Most major facilities had resumed operations by the filing date, but full-time production remained uncertain due to component availability, workforce and safety constraints, and government restrictions. Management cited cost-saving measures and active cash-flow and capital management.
- On April 9, AGCO amended its credit facility to add up to approximately $524.4 million of incremental term loans. On April 15, it borrowed approximately $261.5 million and used approximately $108.7 million to repay revolving borrowings. April 30 liquidity was approximately $967.8 million, including $406.0 million cash and $561.8 million available borrowing capacity. Management’s liquidity confidence was conditional on pandemic impacts not exceeding current estimates.
- Key pandemic-related exposures include weaker equipment demand and commodity prices, supply interruptions, receivable collection and finance-joint-venture performance, possible inventory write-downs and asset impairments, pension asset values, and deferred tax asset realization. AGCO reported no goodwill or intangible-asset impairment indicators at March 31.
- A Brazilian tax dispute concerns disallowed goodwill-amortization deductions; the disputed amount before interest and penalties was approximately 131.5 million reais ($25.3 million). AGCO is contesting the assessment and believes payment is unlikely, but the appeal may take years. The filing also describes potential joint-venture operational and impairment risk if a time-limited U.S. Treasury license is not extended.
Important facts for investors to verify
- Subsequent quarterly disclosures on COVID-related production capacity, orders, sales, margins and cash generation.
- Liquidity usage, incremental term-loan borrowings, covenant headroom and debt maturities, particularly if operating conditions worsen.
- Inventory levels and valuation, receivable collections, and performance and credit quality of AGCO Finance joint ventures.
- Whether currency movements, lower commodity and protein prices, or weaker farm income materially affect demand and reported results.
- Developments in the Brazilian tax appeal and the time-limited license affecting the Netherlands and Russia joint ventures.