AGCO Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. AGCO manufactures and distributes agricultural equipment and replacement parts, with operations reported across North America, South America, Europe/Middle East, and Asia/Pacific/Africa.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $2,537.6 million | $2,165.2 million | $4,545.1 million | $3,792.8 million |
| Gross profit | $556.3 million | $475.4 million | $984.3 million | $805.7 million |
| Gross margin | 21.9% | 22.0% | 21.7% | 21.2% |
| Operating income | $168.1 million | $148.3 million | $218.6 million | $164.0 million |
| Operating margin | 6.6% | 6.9% | 4.8% | 4.3% |
| Net income attributable to AGCO | $91.4 million | $91.5 million | $115.7 million | $81.4 million |
| Diluted earnings per share | $1.14 | $1.14 | $1.44 | $1.02 |
Cash flow and liquidity: Operating cash flow was a use of $204.3 million in the first half, versus a use of $66.4 million in 2017, primarily reflecting seasonal working-capital investment, including a $396.3 million inventory cash outflow. Investing cash flow was a use of $92.9 million; capital expenditures were $89.8 million. Financing provided $220.5 million. Cash was $280.6 million at June 30, down from $367.7 million at year-end. Working capital was $1,143.4 million.
Debt: Long-term debt, including current portion and debt issuance costs, was $1,745.9 million; short-term borrowings were $197.7 million. Debt-to-capitalization was 38.3%, up from 35.7% at year-end. The company reported approximately $363.4 million of remaining availability under its credit facility. In August, after quarter-end, AGCO borrowed approximately $394.7 million under new euro term loans and used the proceeds to repay revolving-credit borrowings.
Material changes and drivers
- Sales rose 17.2% in Q2 and 19.8% in the first half. Management attributed growth to acquisitions, favorable currency translation, and stronger North American and Europe/Middle East sales. Precision Planting contributed $82.9 million of first-half sales.
- First-half operating income increased, supported by higher sales and production. Six-month gross margin improved to 21.7% from 21.2%, benefiting from pricing and production levels, partly offset by material costs and transactional foreign-exchange impacts. Q2 gross margin was nearly flat year over year.
- South America weakened: lower volumes, material-cost inflation, costs of localizing product technology, and the Brazilian trucking strike reduced regional operating results. The segment recorded a $33.3 million operating loss for the first half.
- Q2 net income was essentially unchanged despite higher sales and operating income. Higher interest expense included a $15.7 million loss on extinguishing senior notes; other expense also rose, including foreign-exchange losses associated in part with the Argentine peso.
- Foreign-currency translation produced a $180.7 million first-half comprehensive-income loss, substantially reducing reported equity through accumulated other comprehensive loss.
Outlook, risks and unusual items
- Management expected 2018 sales, operating income, and net income to exceed 2017, citing pricing, acquisition-related sales, improved volumes, and margin improvement. Planned full-year capital expenditures were approximately $250 million.
- Demand is cyclical and depends on farm income, commodity prices, crop conditions, weather, credit availability, and government support and trade policies. The filing described mixed market conditions, including dry weather affecting crops in Europe and parts of South America.
- Argentina was deemed highly inflationary; AGCO planned to change the subsidiary’s functional currency from the peso to the U.S. dollar effective July 1, 2018. The subsidiary had first-half sales of approximately $49.2 million and June 30 assets of approximately $118.8 million.
- Contingencies include a Brazilian tax dispute over goodwill-amortization deductions of approximately 131.5 million reais (about $34.0 million before interest and penalties). Management said it believed payment was not likely, but the appeal could take several years. An Australian environmental remediation notice had been withdrawn but could be refiled.
- Other exposures include $48.5 million of guarantees of third-party indebtedness, off-balance-sheet receivables sales, foreign-exchange and interest-rate risks, and uncertainty around tariffs, raw-material costs, supply constraints, and agricultural markets. Management said it was assessing potential effects of U.S. sanctions involving certain Russian-connected parties and did not believe the impact would be material.
Most important facts for investors to verify
- Whether the expected full-year sales and earnings growth is achieved, and how much is attributable to acquisitions and currency rather than underlying demand.
- Whether operating cash flow recovers as seasonal inventory and receivables unwind; monitor inventory, working capital, and cash balances.
- Debt levels, credit-facility utilization, covenant compliance, and the effect of the August 2018 refinancing on interest costs and maturities.
- South American performance and exposure to the Brazilian market, Argentine inflation and currency changes, and related foreign-exchange effects.
- Developments in the Brazilian tax dispute, Australian environmental matter, and other disclosed contingencies.