AGCO Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results; amounts in U.S. dollars unless stated otherwise.
Business context
AGCO manufactures and distributes agricultural equipment and replacement parts through four regions: North America, South America, Europe/Middle East (EME), and Asia/Pacific/Africa (APA). Results are seasonal and cyclical, influenced by farm income, commodity prices, weather, financing availability, and agricultural demand.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $2,214.7m | $1,986.3m | $6,759.8m | $5,779.1m |
| Gross profit | $473.7m | $428.6m | $1,458.0m | $1,234.3m |
| Income from operations | $111.3m | $97.1m | $329.9m | $261.1m |
| Net income attributable to AGCO | $71.1m | $60.7m | $186.8m | $142.1m |
| Diluted EPS | $0.89 | $0.76 | $2.33 | $1.77 |
| Gross margin | 21.4% | 21.6% | 21.6% | 21.4% |
| Operating margin | 5.0% | 4.9% | 4.9% | 4.5% |
Management attributed higher sales and operating income primarily to acquisition contributions, stronger North American and EME sales, and improved operating margins. Nine-month sales increased 17.0%; management reported approximately 2.0% average price increases for Q3 and 1.3% for the nine-month period. Tractors and combines together represented close to 60% of sales.
Operating cash flow was negative $4.0m for the first nine months, versus negative $29.2m in 2017. Investing cash flow was negative $141.3m, including $138.5m of capital expenditures. Financing cash flow was positive $92.0m. Cash declined $75.0m to $292.7m.
At September 30, cash was $292.7m, current assets were $3,789.0m, and current liabilities were $2,659.1m; reported working capital was $1,129.9m. Long-term debt including its current portion was $1,704.8m, and short-term borrowings were $181.3m. The company reported a 38.1% debt-to-capitalization ratio, versus 35.7% at year-end 2017. It had approximately $771m available under its then-existing credit facility.
Material changes and significant items
- Sales growth was strongest in EME and North America. For the nine months, South American sales fell 8.7% in reported dollars, reflecting a 17.3% adverse currency effect; sales growth excluding currency impacts was attributed primarily to Brazil.
- Q3 gross margin was slightly lower year over year; nine-month gross margin improved modestly. Management cited pricing and higher production as benefits, partly offset by higher material costs and adverse foreign exchange.
- South American nine-month operating results declined, with material-cost inflation and costs of localizing newer technology in Brazilian factories among the factors. Argentina’s economy was designated highly inflationary; AGCO changed its subsidiary’s functional currency to the U.S. dollar effective July 1, 2018.
- In May, AGCO repurchased $185.9m of 5⅞% senior notes for $200.3m plus accrued interest, recording a $15.7m extinguishment loss. It repurchased the remaining $114.1m principal in October 2018, with a further $8.8m loss expected in Q4.
- In August, AGCO borrowed €338m through term loans and used the proceeds to repay revolving-credit borrowings. In October, it entered a new $800m revolving facility maturing in 2023, repaid the former €312m term-loan facility, and terminated its associated interest-rate swap.
- Foreign-currency translation losses were $233.8m for the first nine months, contributing to a $37.2m consolidated comprehensive loss despite net income of $186.1m. Accumulated other comprehensive loss was $1,581.9m at quarter-end.
- Share repurchases included $34.3m in open-market purchases and a $50m accelerated repurchase during the quarter; an additional 197,848 shares were delivered in October upon final settlement.
Outlook, risks, and contingencies
Management expected 2018 sales to increase versus 2017, primarily from higher volumes, pricing, and acquisition-related sales; operating income and net income were expected to exceed 2017 levels through higher sales and margin improvement. Full-year 2018 capital expenditures were estimated at approximately $250m. The filing does not provide numerical full-year sales or earnings guidance.
Management described global demand as mixed. First-nine-month industry retail sales increased in North America and Western Europe for tractors and combines, while South American tractor demand declined; Argentina faced weak economic conditions and lower harvest yields. Risks include farm income and commodity prices, weather and crop yields, raw-material costs, credit availability, tariffs, foreign exchange and interest rates, supply constraints, production disruptions, and acquisition integration.
AGCO reported $28.9m of third-party debt guarantees and $12.1m accrued for minimum residual-value guarantees. A Brazilian tax dispute over disallowed goodwill-amortization deductions was approximately 131.5m reais ($32.9m) before interest and penalties; AGCO contested the assessment and said payment was not likely, but the outcome remained unresolved. An Australian environmental remediation notice had been withdrawn but could be refiled. The company also disclosed that a time-limited U.S. Treasury license affecting joint ventures in the Netherlands and Russia could, if not extended, prevent continued commercial operations and prompt asset impairment assessments.
AGCO said it was in compliance with its financial covenants and believed available cash, internal funds, and financing facilities would meet foreseeable needs. It also identified operating-lease accounting changes expected to have a material balance-sheet effect upon adoption in 2019. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the 2018 sales and earnings outlook was achieved, and how much growth came from underlying demand, pricing, acquisitions, and currency.
- Cash conversion and working-capital trends, particularly inventory levels and the seasonal recovery in operating cash flow.
- Debt and interest costs following the senior-note repurchases, new credit facility, and repayment of the former term loan; confirm covenant headroom.
- Exposure to Argentina’s inflation, currency changes, and economic weakness, and the operating performance of South America.
- Developments in the Brazilian tax appeal, Australian environmental matter, and U.S. Treasury license affecting the Netherlands/Russia joint ventures.
- Warranty reserve adequacy, dealer-financing guarantees, and the effects of adopting the lease standard in 2019.