AGCO Corporation — Q3 2017 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2017. AGCO manufactures and distributes agricultural equipment and parts; results are seasonal and sensitive to farm income, commodity prices, weather, and industry demand.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,986.3 million | $1,761.6 million | $5,779.1 million | $5,316.5 million |
| Gross profit | $428.6 million | $353.5 million | $1,234.3 million | $1,095.2 million |
| Income from operations | $97.0 million | $59.0 million | $261.0 million | $197.0 million |
| Net income attributable to AGCO | $60.7 million | $40.0 million | $142.1 million | $98.1 million |
| Diluted EPS | $0.76 | $0.50 | $1.77 | $1.20 |
- Sales increased 12.8% in Q3 and 8.7% for the nine-month period. Management attributed growth to acquisitions and stronger sales in South America, Europe/Middle East, and Asia/Pacific/Africa.
- Gross margin improved to 21.6% from 20.1% in Q3 and to 21.4% from 20.6% year to date. Operating margin increased to 4.9% from 3.3% in Q3 and to 4.5% from 3.7% year to date.
- For the first nine months, operating cash flow was a use of $29.2 million, versus a use of $127.4 million in 2016. Investing cash flow used $325.3 million, including $188.4 million for the Precision Planting acquisition and $139.4 million in capital expenditures. Financing provided $210.8 million.
- At September 30, cash was $312.7 million; current assets were $3,839.2 million and current liabilities $2,547.8 million. Reported working capital was $1,291.4 million.
- Total indebtedness was $2,058.2 million, compared with $1,695.4 million at December 31, 2016. Debt to capitalization was 40.0%, up from 37.5%. AGCO reported $587.4 million outstanding under its credit facility and approximately $580.7 million of remaining borrowing availability.
- Dividends paid were $0.14 per share in Q3 and $0.42 per share year to date. No common stock repurchases were reported during the first nine months of 2017.
Material changes and management commentary
- Q3 sales were positively affected by $47.6 million of currency translation and $39.9 million from acquisitions; year-to-date sales were affected by negative $6.1 million from currency and positive $130.6 million from acquisitions.
- Management cited higher sales, production, favorable mix, pricing, improved productivity, and cost initiatives as drivers of stronger operating results. South American results also faced material-cost inflation and costs related to transition to Tier 3 emissions technology.
- Other expense was $18.4 million in Q3, compared with other income of $0.2 million in Q3 2016; year-to-date other expense rose to $49.1 million from $27.1 million. Management cited foreign-exchange losses and higher losses on receivables sales. Receivables-sale losses were $10.3 million in Q3 and $27.5 million year to date.
- On September 1, AGCO acquired Precision Planting for approximately $188.4 million, net of cash acquired, to expand precision-farming technology. On October 2, after quarter-end, it acquired Lely’s forage division net assets for approximately €88.7 million ($104.1 million), funded through the credit facility.
Outlook, risks, and contingencies
- For full-year 2017, management expected industry demand to be relatively flat in Europe, weaker in North America, and stronger in South America. AGCO expected sales, operating income, and net income to exceed 2016 levels, citing pricing, acquisitions, improved sales volumes, and margin improvement. Full-year capital expenditures were projected at $200 million to $225 million.
- Management said available cash, internally generated funds, and credit facilities should support foreseeable working-capital, capital-expenditure, and debt-service needs; AGCO was in compliance with its financial covenants. The company cautioned that results are exposed to agricultural cycles, commodity and farm-income conditions, raw-material costs, foreign exchange and interest rates, credit availability, weather, production and supply constraints, and acquisition integration.
- Outstanding guarantees of third-party indebtedness were approximately $75.2 million, primarily for dealer and end-user equipment financing. Approximately $1.1 billion of receivables sold under specified finance-joint-venture agreements were treated as off-balance-sheet transactions.
- AGCO’s Australian subsidiary is challenging a remediation notice concerning contamination at a property owned and divested before the subsidiary was acquired; liability and potential remediation cost were not determinable. Brazilian tax authorities disputed goodwill-amortization deductions of approximately 131.5 million reais ($41.5 million), excluding interest and penalties. AGCO was contesting the assessment and believed payment was not likely; resolution could take several years.
- AGCO recorded $8.5 million of restructuring expense year to date, mainly severance associated with workforce and facility rationalizations. It also reported $151.2 million of unrecognized tax benefits at quarter-end.
Investor verification priorities
- Check whether sales and margin improvements persist after separating acquisition and currency effects, and monitor regional demand—especially North America and South America.
- Track inventory, receivables, and operating cash flow: working capital and seasonal inventory needs contributed to cash use despite higher earnings.
- Review the rise in debt, credit-facility utilization, covenant headroom, and the financing impact of the post-quarter Lely acquisition.
- Assess the outcome and potential cost of the Australian remediation matter and Brazilian tax dispute, including interest and penalties.
- Compare full-year guidance and capital-spending plans with subsequent results, and monitor the integration and contribution of Precision Planting and Lely.