AGCO Corporation — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2015. AGCO manufactures and distributes agricultural equipment and replacement parts through four regions. Results are cyclical and seasonal, and the company cited softer global farm-equipment demand and unfavorable foreign-currency translation.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $2,069.3m | $2,750.3m | $3,771.9m | $5,083.7m |
| Gross profit / margin | $449.6m / 21.7% | $631.5m / 23.0% | $797.5m / 21.1% | $1,146.4m / 22.6% |
| Operating income / margin | $149.9m / 7.2% | $266.7m / 9.7% | $196.7m / 5.2% | $422.4m / 8.3% |
| Net income attributable to AGCO | $107.1m | $168.2m | $137.2m | $267.8m |
| Diluted EPS | $1.22 | $1.77 | $1.55 | $2.79 |
Revenue fell 24.8% in Q2 and 25.8% for the six-month period. Currency translation reduced sales by $380.5m (13.8%) in Q2 and $653.3m (12.9%) year to date. Six-month operating cash flow was $28.0m, versus cash used of $254.2m a year earlier; capital expenditures were $101.3m versus $155.5m. The cash-flow statement reports operating cash provided of $28.0m, although the MD&A narrative calls it cash used, an apparent inconsistency. Cash and equivalents were $498.2m at June 30, up from $363.7m at year-end. Working capital was $1,416.3m.
Total indebtedness was $1,515.9m, compared with $1,091.9m at December 31, 2014; debt-to-capitalization rose to 32.1% from 23.8%. The company had $535.0m available under its credit facility. Current assets were $3,789.6m and current liabilities $2,373.3m. Dividends paid were $0.12 per share in Q2 and $0.24 per share for the first half.
Changes and management commentary
- Lower sales and production, weaker product mix, and currency effects reduced operating income. Cost and headcount actions partly offset these pressures. SG&A and engineering expenses fell in dollars but increased as a percentage of sales.
- Tractor and combine unit sales declined 13% in Q2 and 12% for the first half. First-half industry retail sales also weakened across major markets: North American combines fell about 37%, Western European combines 15%, and South American combines 32%.
- Foreign-currency translation contributed to a $275.4m first-half other comprehensive loss, including a $278.3m currency-translation loss.
- Restructuring expenses were $14.6m for the first half. The company said rationalization plans initiated in 2014–2015 targeted approximately 1,950 employee reductions; $19.7m of severance and related costs remained accrued at June 30, primarily payable in 2015–2016.
- AGCO acquired German poultry-equipment maker Farmer Automatic in April for approximately $18.6m net of cash acquired.
Outlook, risks, and contingencies
Management expected worldwide industry demand and AGCO’s 2015 net sales to decline versus 2014, citing lower commodity prices, reduced farm income, softer markets, and unfavorable currency translation. Gross and operating margins were expected below 2014 levels; restructuring, cost reductions, and a lower tax rate were expected to partly offset volume and mix pressures. Full-year 2015 capital expenditures were estimated at approximately $300m. The filing provides no numerical full-year sales, earnings, or margin guidance.
Risks include commodity and farm-income conditions, foreign-exchange and interest-rate movements, customer credit, government policies and subsidies, weather, production disruptions, and political and economic uncertainty. The Brazil finance joint venture had a $1.2bn portfolio and a history of elevated delinquencies in a legacy government payment-deferral program; AGCO said reserves were considered adequate but portfolio deterioration could materially affect joint-venture and AGCO results.
AGCO guaranteed approximately $88.3m of third-party debt, primarily dealer and end-user equipment financing. A Brazilian tax dispute involved disallowed goodwill-amortization deductions of about 131.5m reais ($42.4m), before interest and penalties. Management said it believed payment was not likely, but the appeal could take years. The Iraq Oil-for-Food case was dismissed, the dismissal was affirmed, and the Supreme Court denied review in June 2015. The company reported compliance with its debt covenants and effective disclosure controls.
The June 2015 credit-facility amendment extended maturity to June 2020 and adjusted interest margins. A €200m senior term loan due May 2016 remained outstanding. The company also had $300m of senior notes due 2021. Share repurchases totaled $125m in the first half, and approximately $406.7m remained authorized.
Key facts for investors to verify
- Reconcile the filing’s inconsistent description of first-half operating cash flow: the cash-flow statement reports $28.0m provided, while MD&A says $28.0m used.
- Track sales, production, product mix, and currency effects against management’s expectation of lower 2015 sales and margins.
- Assess debt growth, the 2016 term-loan maturity, credit-facility availability, and continued covenant compliance.
- Monitor the Brazilian tax assessment and the credit quality of the Brazil finance-joint-venture portfolio.
- Evaluate restructuring execution, remaining severance obligations, warranty reserves, and the use of cash for repurchases and capital spending.