AGCO Corporation — Q3 2010 Form 10-Q
Business context and reporting period. AGCO manufactures and sells agricultural equipment and replacement parts globally. This unaudited filing covers the quarter and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Results are seasonal and cyclical, affected by farm income, commodity prices, weather, credit availability, and economic conditions. Prior-period figures were adjusted for the deconsolidation of the GIMA joint venture.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,657.4 million | $1,389.5 million | $4,728.6 million | $4,689.2 million |
| Gross profit | $303.8 million | $243.1 million | $849.5 million | $805.7 million |
| Gross margin | 18.3% | 17.5% | 18.0% | 17.2% |
| Income from operations | $75.9 million | $35.7 million | $181.8 million | $170.9 million |
| Net income attributable to AGCO | $62.3 million | $11.1 million | $135.3 million | $102.2 million |
| Diluted EPS | $0.65 | $0.12 | $1.41 | $1.09 |
Management attributed improved operating performance mainly to higher production volumes and material-cost controls, partly offset by increased engineering spending. Q3 sales rose 19.3%; nine-month sales rose 0.8%. Currency translation reduced Q3 sales by $37.2 million and increased nine-month sales by $100.9 million. Q3 operating margin was 4.6%, versus 2.6%; nine-month operating margin was 3.8%, versus 3.6%.
- Regional trends: South America was the principal growth driver, supported by strong Brazilian and Argentine demand. North America improved in Q3, but nine-month sales declined. Europe/Africa/Middle East sales declined over nine months amid weak markets, while Rest of World faced weakness in Australia and New Zealand and credit constraints in Eastern Europe and Russia.
- Cash flow: Operating cash flow was $4.1 million for the first nine months, compared with an outflow of $158.6 million in 2009. Inventory growth used $277.2 million of cash. Investing cash outflow was $82.3 million, including $82.8 million of capital expenditures; financing cash outflow was $145.0 million, including $58.1 million to repurchase convertible notes and $76.0 million of net debt repayments.
- Liquidity and balance sheet: Cash was $459.2 million, down from $651.4 million at year-end 2009. Working capital was $1,229.0 million. Current assets were $3,008.5 million and current liabilities $1,779.5 million. Total assets were $5,221.7 million; total liabilities were $2,690.5 million.
- Debt: Reported indebtedness was $683.6 million, including $75.4 million under European securitization facilities; long-term debt, less current portion, was $446.1 million. Debt-to-capitalization was 21.3%, versus 21.5% at year-end 2009. The $300 million revolving facility had no borrowings and approximately $290.2 million available.
- Other measures: The effective tax rate was 21.6% for Q3 and 33.6% for the nine-month period. Equity earnings from affiliates were $11.1 million in Q3 and $36.4 million year to date, reflecting stronger retail-finance joint-venture earnings.
Material changes, outlook, and risks
- AGCO adopted new consolidation and transfer-of-financial-assets accounting standards in 2010. GIMA was deconsolidated because the joint venture partners share control; prior periods were retroactively adjusted. The European receivables securitization balance and corresponding $75.4 million liability are now recognized on the balance sheet. North American receivables sales remain off balance sheet.
- During Q3, AGCO repurchased approximately $37.5 million principal amount of its 1.75% convertible notes for $58.1 million, including excess conversion value. The remaining notes were classified as current because the share-price conversion threshold was met; holders may require repurchase on December 31, 2010.
- Management expected full-year 2010 earnings to increase versus 2009, with gross-margin improvement partly offset by higher engineering expenses, including costs for new products and Tier 4 emissions requirements. Full-year capital expenditures were expected to be approximately $175–$200 million.
- Management described farm economics as strong in Brazil and demand for large equipment as supported by expected higher North American farm income. It expected Western European demand to remain weak and Russian and Eastern European demand to remain very low due to credit constraints and drought-affected crops.
- Key risks include agricultural and commodity cycles, weather and crop yields, farm income, customer credit availability, raw-material costs, foreign exchange, production or supply disruptions, and the credit quality of finance portfolios. The Brazilian retail-finance portfolio had elevated delinquencies and weaker collateral coverage associated with government payment deferrals; management considered reserves adequate but noted adverse performance could materially affect the joint ventures and AGCO.
- Contingencies include a Republic of Iraq civil action related to subsidiaries’ participation in the UN Oil for Food Program, a related French investigation, and a Brazilian tax dispute over goodwill-amortization deductions (approximately $53.4 million before interest and penalties). AGCO disputed the Brazilian assessment and said payment was not considered likely, but outcomes remain uncertain. AGCO also guaranteed approximately $95 million of third-party dealer and end-user financing.
- AGCO recorded a $7.4 million reserve against Brazilian VAT receivables at September 30, 2010. Unrecognized tax benefits were $25.5 million; tax years 2003–2009 remained open to examination in the United States and certain foreign jurisdictions.
Most important facts for investors to verify
- Whether Q3 sales and margin improvement can persist, particularly given regional divergence and the cyclical nature of farm-equipment demand.
- Whether working-capital investment, especially the $277.2 million inventory-related cash use, reverses seasonally and supports stronger operating cash flow.
- How AGCO funds or settles the remaining convertible notes that holders may require it to repurchase on December 31, 2010, and the effects of share-price-driven conversion and dilution.
- Whether the Brazilian finance portfolio’s credit quality and reserves remain adequate, and whether the Brazilian tax dispute or Iraq-related proceedings produce material exposure.
- Whether securitization and receivables-sale funding remains available, including renewal of the European facilities expiring in October 2011, and whether management’s earnings and capital-spending outlook is achieved.