Business context and reporting period
AGCO Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014. The company manufactures and distributes agricultural equipment and related parts across four geographic segments. Results are seasonal and sensitive to farm income, commodity prices, weather, financing availability and agricultural demand.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,154.8 | $2,475.9 | $7,238.5 | $7,927.2 |
| Gross profit / margin | $421.9 / 19.6% | $556.2 / 22.5% | $1,568.3 / 21.7% | $1,799.6 / 22.7% |
| Operating income / margin | $108.7 / 5.0% | $199.0 / 8.0% | $531.1 / 7.3% | $703.5 / 8.9% |
| Net income attributable to AGCO | $65.0 | $126.2 | $332.8 | $457.9 |
| Diluted EPS | $0.69 | $1.27 | $3.50 | $4.61 |
- Operating cash flow was negative $215.3 for the first nine months, compared with positive $169.0 a year earlier. Capital expenditures were $229.3; operating cash flow less capital expenditures was negative $444.6, calculated from reported figures.
- Cash fell to $320.9 from $1,047.2 at year-end 2013. Working capital was $1,841.8. Receivables and inventories rose together by $442.0 from year-end, reflecting softer orders, seasonal parts needs, emissions-related production transition and seasonality.
- Total debt was $1,421.2, versus $1,250.2 at year-end; stockholders’ equity was $3,793.3. Debt-to-capitalization was 27.3%, up from 23.6%. The company reported approximately $420 of borrowing availability under its credit facility.
- Foreign currency translation reduced Q3 comprehensive income by $243.0 and nine-month comprehensive income by $181.5. Nine-month comprehensive income attributable to AGCO was $156.1.
Material changes versus prior comparable periods
- Sales declined 13.0% in Q3 and 8.7% year to date, primarily amid softer global agricultural equipment markets. Currency translation reduced sales by $17.3 in Q3 and $57.3 year to date.
- Operating income fell 45% in Q3 and 25% year to date. Management attributed the decline mainly to lower sales and production volumes and weaker product mix; gross margin contracted 2.9 percentage points in Q3 and 1.0 point year to date.
- Tractor and combine unit sales decreased approximately 8% in Q3 and 10% year to date. North and South America and EAME reported lower sales; Asia/Pacific sales increased in Q3 but declined for the nine-month period.
- Operating cash flow swung from positive to negative, while cash declined substantially. The company spent $340.9 on share repurchases and paid $201.2 to retire or convert its convertible notes during the nine months.
Outlook, management commentary and risks
- Management expected 2014 sales and net income to be below 2013, citing lower industry demand, reduced farm income, lower production and sales volumes, and weaker product mix. Pricing and market-share gains were expected to partly offset sales declines.
- Full-year 2014 capital expenditures were forecast at approximately $350–$375, primarily for emissions requirements, product development and completion of the China assembly factory.
- Management said available cash, internally generated funds, credit facilities and receivables-sale arrangements should support foreseeable working-capital, capital expenditure and debt-service needs; it reported compliance with debt covenants.
- Industry demand weakened as lower commodity prices and farm income affected major markets. Reported nine-month industry declines included Western Europe tractors 7% and combines 10%; South American tractors 16% and combines 23%. North American combines declined 18%, while tractors were flat.
- Key risks include agricultural cycles and farm economics, credit availability and portfolio performance, weather and crop yields, commodity and input prices, foreign exchange and interest rates, government policies, production disruptions, acquisitions and emerging-market expansion.
Unusual items, transactions and contingencies
- Q3 and nine-month results included $2.9 of restructuring costs, mainly severance and related costs from rationalizing North and South American operations. A $21.0 Q3 SG&A stock-compensation credit reflected reversal of approximately $24.1 of previously recorded long-term compensation expense; the nine-month credit was $9.8.
- AGCO acquired Intersystems for approximately $134.4 gross consideration ($130.3 net of cash acquired) and acquired the remaining 39% of Santal for approximately $3.7, funded with cash and the credit facility as applicable.
- AGCO repurchased $340.9 of its shares in the first nine months. In November 2014 it entered a further $125.0 accelerated repurchase agreement, a subsequent-period event.
- Brazilian tax authorities disputed goodwill-amortization deductions; the amount through September 30 was approximately R$131.5 million ($53.8), excluding interest and penalties. The company believed payment was not likely, but the appeal could take years. An Iraq-related Oil for Food case remained on appeal; potential damages were unspecified.
- AGCO guaranteed approximately $122.1 of third-party debt, primarily dealer and end-user equipment financing. Receivables-sale arrangements were treated as off-balance-sheet transactions; approximately $1.2 billion of cash had been received under North American and European agreements.
Important facts for investors to verify
- Whether weaker farm income, commodity prices and equipment demand continue to reduce sales, production and margins, and whether the 2014 outlook is achieved.
- Whether working-capital investment and negative operating cash flow reverse seasonally, and how cash needs are affected by capital expenditures and share repurchases.
- Debt levels, borrowing availability and covenant compliance following increased credit-facility borrowings and the convertible-note retirement.
- The magnitude and persistence of foreign-exchange effects, including translation losses and exposure to the Brazilian real, euro and other currencies.
- Developments in the Brazilian tax dispute and Oil for Food litigation, as well as credit quality and loss reserves in the Brazilian retail-finance portfolio.