AGCO Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing, not a standalone fourth-quarter filing. AGCO manufactures and distributes agricultural equipment and replacement parts worldwide through roughly 3,150 dealers and distributors.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $9,962.2 million | $8,773.2 million |
| Gross profit / margin | $2,123.2 million / 21.3% | $1,776.1 million / 20.2% |
| Income from operations / margin | $693.2 million / 6.9% | $610.3 million / 7.0% |
| Net income attributable to AGCO | $522.1 million | $583.3 million |
| Diluted earnings per share | $5.30 | $5.95 |
| Cash provided by operating activities | $666.4 million | $725.9 million |
| Cash and cash equivalents at year-end | $781.3 million | $724.4 million |
| Working capital at year-end | $1,489.9 million | $1,457.3 million |
Sales rose 13.6%; acquisitions added approximately $774.3 million while currency translation reduced sales by about $672.7 million. Operating income increased, but operating margin edged down. Attributable net income declined, reflecting higher interest and other expense and a substantially higher tax provision than in 2011. Capital expenditures were $340.5 million; operating cash flow less capital expenditures was approximately $325.9 million.
Total indebtedness was approximately $1.296 billion; the debt-to-capitalization ratio improved to 26.9% from 32.7%. The company reported $515 million of borrowing availability under its credit facility. Its $201.3 million principal amount of 1.25% convertible notes was classified as current because holders could require repurchase on December 15, 2013.
Material changes and unusual items
- Gross margin improved on pricing, production volumes, product mix and cost controls. SG&A and engineering expenses increased; operating results also included a $22.4 million non-cash impairment charge for the Chinese harvesting business.
- The impairment followed weaker-than-expected acquired-business results and forecasts. Fourth-quarter operating income was $118.9 million versus $185.7 million in the prior-year quarter; quarterly attributable net income was $102.5 million versus $285.2 million. The prior-year comparison includes a significant tax benefit associated with GSI acquisition accounting.
- Acquisitions included 61% of Brazil-based Santal in January 2012. GSI, acquired in late 2011, contributed to higher sales, particularly in North America.
- The 2012 income tax provision was $137.9 million versus $24.6 million in 2011. The 2011 comparison benefited from a $149.3 million valuation-allowance reversal related to the GSI acquisition. In 2012, AGCO also reversed $13.8 million of U.S. valuation allowance and recognized $13.1 million of U.S. R&D tax credits.
- The Board initiated a quarterly cash dividend of $0.10 per common share, with the first payment scheduled for March 15, 2013, subject to future Board approval and debt-agreement restrictions.
Outlook, risks and contingencies
Management expected worldwide industry demand to be relatively stable in 2013 and AGCO net sales to increase modestly, supported by pricing and market-share improvements, with currency impacts expected to be relatively neutral. Management anticipated gross-margin improvement from cost controls, partly offset by product-development, emissions-compliance and market-expansion spending. These are forward-looking expectations, not guarantees.
- Key business risks include agricultural cyclicality, weather and commodity-price changes, seasonal demand, customer and dealer financing availability, receivable collectability, competition, foreign-exchange exposure, supplier and raw-material costs, labor interruptions, and increasingly stringent emissions rules.
- Rabobank-controlled retail finance joint ventures had an $8.3 billion finance portfolio at year-end; AGCO’s share of their 2012 earnings was $48.6 million. Credit deterioration, particularly in Brazil, could affect results. The joint ventures’ portfolio is not AGCO’s consolidated debt.
- AGCO disclosed $177.9 million of guarantees, primarily related to dealer and end-user equipment financing. The company also reported approximately $342.2 million of unfunded or underfunded pension and postretirement obligations in its risk discussion.
- Brazilian authorities disputed goodwill-amortization tax deductions totaling approximately 131.5 million reais ($64.2 million) before interest and penalties. AGCO is contesting the assessment and said payment was not considered likely; resolution may take years. A separate $59.6 million reserve was recorded against Brazilian VAT receivables because collection is uncertain.
- A U.S. court dismissed the Iraq Oil-for-Food-related complaint with prejudice in February 2013, but the plaintiff appealed; French authorities were also investigating AGCO’s subsidiary. The ultimate outcome and financial impact were not clear in the filing.
Investor verification priorities
- Check whether modest 2013 sales growth and margin improvement were achieved, and assess the contribution of pricing, acquisitions and market share.
- Review cash conversion, inventory growth and capital spending; operating cash flow declined year over year and inventory was a significant cash use.
- Confirm the outcome and funding of the convertible notes’ December 2013 put, alongside debt covenants and liquidity.
- Track impairment and operating performance of the Chinese harvesting business, as well as costs and production ramp at the new German tractor facility.
- Monitor Brazilian tax and VAT disputes, pension funding needs, and credit quality in AGCO Finance joint ventures.