AGCO Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited; amounts are in U.S. dollars, generally millions except per-share data.
Business context and operating results
AGCO manufactures and sells agricultural equipment and replacement parts through four regions. Sales are seasonal and the first quarter is typically the weakest. Results remain exposed to farm income, commodity prices, weather, credit availability and agricultural equipment demand.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,627.6 | $1,559.3 |
| Gross profit / margin | $330.3 / 20.3% | $314.7 / 20.2% |
| Income from operations / margin | $15.6 / 1.0% | $19.4 / 1.2% |
| Net income (loss) attributable to AGCO | $(10.1) | $7.8 |
| Diluted EPS | $(0.13) | $0.09 |
| Cash dividends per share | $0.14 | $0.13 |
| Cash used in operating activities | $(251.4) | $(348.2) |
| Capital expenditures | $57.1 | $35.7 |
Financial position and liquidity
- At March 31, cash was $289.9, down from $429.7 at year-end 2016. Current assets were $3,359.5 and current liabilities $2,165.2; reported working capital was $1,194.3.
- Total indebtedness was $1,889.3, compared with $1,695.4 at December 31, 2016. Debt to capitalization increased to 39.7% from 37.5%. The company reported $615.1 of borrowing capacity under its credit facility.
- Operating cash outflow reflected seasonal working-capital needs, including a $234.4 increase in inventories. Cash from financing activities was $162.7, including $1,057.1 of debt proceeds and $880.3 of repayments.
- Capital expenditures were $57.1; management expected full-year 2017 spending of approximately $200–$225.
- Finance joint ventures had an approximately $8.0 billion portfolio; AGCO’s investment in those ventures was $395.0. About $1.1 billion of receivables sold to finance joint ventures was treated as off-balance-sheet.
Material changes versus Q1 2016
- Sales rose 4.4%, helped by acquisitions and growth in South America and Asia/Pacific/Africa; foreign-currency translation reduced sales by approximately $13.3.
- Operating income declined to $15.6 from $19.4 despite higher sales. Management cited lower production, weaker sales mix, and higher SG&A and engineering costs. Gross margin was broadly stable.
- AGCO moved from $7.8 of attributable net income to a $10.1 loss. The quarter included an $11.1 tax provision versus a $0.4 tax benefit in the prior-year period. Management said the provision reflected the U.S. deferred-tax-asset valuation allowance established in 2016, so no tax benefit was being recorded against U.S. losses.
- Restructuring expense increased to $5.1 from $1.9; Q1 2017 actions included termination of approximately 200 employees. Stock compensation expense increased to $12.0 from $5.5, including $4.8 of accelerated expense related to a stock award declined by the CEO.
- Receivable-sale losses rose to $8.3 from $4.8. Equity earnings from affiliates decreased to $11.0 from $12.2.
- Operating cash outflow narrowed from $348.2 to $251.4, while capital expenditures increased. Inventory was $1,775.4, up from $1,514.8 at year-end.
Outlook, commentary and risks
Management expected 2017 equipment demand to weaken in Europe and North America and strengthen in South America. It expected full-year sales to increase versus 2016, primarily from pricing and acquisition-related sales, partly offset by unfavorable currency translation. Operating income and net income were expected to exceed 2016 levels, supported by higher sales and cost-reduction initiatives, partly offset by weaker mix. No specific full-year sales or earnings figures were provided.
Q1 industry retail sales were mixed: North American tractor and combine sales declined approximately 5% and 2%, respectively; Western European tractor and combine sales declined approximately 3% and 15%; South American tractor and combine sales increased approximately 49% and 35%. Management attributed weak demand in many markets to lower farm income and commodity prices amid high grain inventories.
- Key business risks include agricultural and commodity cycles, weather, customer credit, financing availability, foreign exchange and interest rates, raw-material and energy costs, competition, production or supply disruption, acquisitions, and political and economic uncertainty.
- Contingencies include a potential Australian environmental remediation matter for which AGCO could not estimate liability or cost, and a Brazilian tax dispute over goodwill-amortization deductions. The disputed tax amount was approximately 131.5 million Brazilian reais ($41.5) before interest and penalties; AGCO said it was contesting the assessment and did not expect it to be paid, but the appeal could take years.
- AGCO had $66.6 of outstanding guarantees, primarily related to dealer and end-user financing. It said historical losses were insignificant and expected equipment collateral to offset a substantial portion of any payments.
- Unrecognized tax benefits were $144.2; accrued interest and penalties on these positions were $17.6. The company also disclosed ongoing tax audits in multiple jurisdictions.
- Management reported compliance with debt covenants and effective disclosure controls as of March 31, 2017. It stated there had been no material change in market-risk exposure during the quarter.
Important facts for investors to verify
- Whether sales growth and the full-year earnings outlook materialize despite weak North American and European demand, currency headwinds and softer sales mix.
- Whether seasonal inventory and working-capital investment unwind as expected and operating cash flow improves later in the year.
- How debt levels, borrowing capacity and covenant compliance evolve, especially given the quarter’s increase in indebtedness and lower cash balance.
- The eventual cost and resolution of the Australian environmental matter and Brazilian tax dispute, including potential interest and penalties.
- The sustainability of the tax expense and the effect of the U.S. deferred-tax valuation allowance on future reported earnings.