AGCO Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial statements are unaudited; amounts are in U.S. dollars unless stated otherwise. AGCO manufactures and distributes agricultural equipment and replacement parts across four geographic segments.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $2,358.6 million | $1,743.0 million | $4,156.3 million | $3,071.2 million |
| Gross profit | $488.3 million | $321.1 million | $844.2 million | $545.7 million |
| Gross margin | 20.7% | 18.4% | 20.3% | 17.8% |
| Operating income | $201.6 million | $96.5 million | $310.3 million | $105.9 million |
| Operating margin | 8.5% | 5.5% | 7.5% | 3.4% |
| Net income attributable to AGCO | $133.7 million | $62.9 million | $213.7 million | $73.0 million |
| Diluted earnings per share | $1.36 | $0.66 | $2.17 | $0.76 |
- Six-month operating cash flow was $101.5 million, versus $13.5 million in 2010. Investing cash outflow was $230.9 million, including $112.4 million of capital expenditures and $88.3 million for business acquisitions. Financing cash outflow was $45.3 million.
- Cash and cash equivalents were $573.1 million at June 30, 2011, compared with $719.9 million at year-end 2010. Working capital was $1,428.8 million, versus $1,208.1 million at year-end.
- Total indebtedness was $727.6 million, including $150.7 million under securitization facilities; long-term debt less current portions was $475.6 million. The reported debt-to-capitalization ratio was 19.1%, down from 21.3% at December 31, 2010. No borrowings were outstanding under the $300 million revolving facility.
Material changes versus the prior comparable period
- Sales rose 35.3% in Q2 and the first half. Favorable currency translation contributed $225.6 million in Q2 and $269.1 million in the first half; acquisitions also contributed. At 2010 exchange rates, reported sales growth was 22.4% in Q2 and 26.6% in the first half.
- Management attributed higher operating income and gross margins principally to increased production in Europe and North America, pricing, and favorable product mix, partly offset by higher material costs. Engineering expenses increased with product development for new emissions standards.
- Regional performance varied: Europe/Middle East/Africa and North America operating income improved substantially; South America operating income declined, reflecting material costs, engineering and product introduction spending, and less favorable geographic sales mix.
- AGCO acquired the remaining 50% of Laverda in March and consolidated it; it also formed and consolidated AGCO-Amity JV in January. Acquisition-related goodwill and intangible assets increased. The 2011 results therefore include acquired operations not fully represented in the 2010 comparison.
- AGCO redeemed €200 million of 6⅞% notes and replaced them with a €200 million, 4½% fixed-rate term loan due 2016. The redemption generated approximately $4.3 million of premium and deferred issuance-cost charges in interest expense. Holders also converted $60.7 million principal of 1¾% convertible notes during the first half, with 1,577,889 shares issued for the excess conversion value.
Outlook, commentary, and risks
- Management expected global farm-equipment demand to grow in 2011 versus 2010, with robust growth in Western and Eastern Europe, modest North American growth, and continued healthy South American conditions. AGCO expected full-year sales and earnings to increase year over year; margin improvement from production and cost controls was expected to be partly offset by engineering and market-expansion spending.
- Full-year 2011 capital expenditures were expected to be approximately $250–$300 million. The European securitization facilities, with $150.7 million funded, expire in October 2011 and are subject to annual renewal.
- Working capital and inventory needs are seasonal. Inventories were $1,658.2 million at June 30, up from $1,233.5 million at year-end, and receivables and inventory growth contributed to operating cash demands.
- Key risks include cyclical farm-equipment demand, farm income and commodity prices, weather and crop conditions, raw-material and energy costs, customer credit availability, foreign exchange, government policies, competition, and supply or production disruptions. AGCO disclosed approximately $1,027 million of outstanding foreign-exchange contracts; a 10% currency move could negatively affect their fair value by approximately $25.3 million, with underlying exposures expected to offset much of the effect.
- Contingencies include a $35.8 million reserve against Brazilian VAT receivables; a Brazilian tax dispute over goodwill amortization deductions of approximately 90.6 million reais ($58 million before interest and penalties); and an Iraq-filed Oil for Food civil action seeking unspecified damages, alongside a French government investigation. Outcomes and potential impacts were not determinable for the litigation and Brazilian tax appeal.
- AGCO guaranteed approximately $113.6 million of third-party dealer and end-user financing obligations. Management considered the associated credit risk not material, noting historical losses had been insignificant and underlying equipment could provide recovery.
Most important facts for investors to verify
- How much sales and earnings growth was organic, excluding currency translation and acquisitions, and whether production, pricing, and product mix gains are sustainable against higher material costs.
- Whether the October 2011 European securitization facility was renewed and how working-capital growth affected cash generation in the second half.
- Progress toward the $250–$300 million capital-spending plan and the resulting cash and debt position.
- Developments in the Brazilian VAT reserve, Brazilian tax appeal, and Oil for Food-related legal matters.
- Credit quality and reserve adequacy in the Brazilian retail-finance portfolio, where prior government payment deferrals had raised delinquencies and reduced collateral coverage.
- Conversions and classification of the convertible notes: additional $66.5 million principal was converted in July 2011, after quarter-end, with 1,642,648 shares issued for excess conversion value.