AGCO Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited and prepared under U.S. GAAP. AGCO manufactures and distributes agricultural equipment and replacement parts. Results are seasonal, with first-quarter sales historically lower than in later quarters.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $2,273.7 million | $1,797.7 million; up 26.5% |
| Gross profit / margin | $493.0 million / 21.7% | $355.9 million / 19.8% |
| Income from operations / margin | $169.8 million / 7.5% | $108.7 million / 6.1% |
| Net income attributable to AGCO | $120.2 million | $80.0 million |
| Diluted earnings per share | $1.21 | $0.81 |
| Operating cash flow | $(280.5) million | $(167.4) million |
| Capital expenditures | $87.1 million | $36.8 million |
| Cash and cash equivalents | $426.7 million at March 31 | $724.4 million at December 31, 2011 |
| Total indebtedness | $1,585.1 million | $1,469.8 million at December 31, 2011 |
Working capital was $1,509.4 million at March 31, 2012. Credit-facility borrowings were $758.0 million, with approximately $237.0 million available. Debt-to-capitalization, including temporary equity, was 33.2%, versus 32.7% at year-end 2011. Management said it was in compliance with debt covenants.
Changes versus the prior comparable period
- Sales growth reflected higher sales in most regions and acquisitions, partly offset by unfavorable currency translation. Acquisitions contributed approximately $204.5 million (11.4%) to sales; currency translation reduced sales by approximately $77.1 million (4.3%).
- Management attributed improved gross margin mainly to higher production in Europe and North America, favorable pricing and product mix, and cost controls; higher material costs partly offset those benefits. Unit production of tractors and combines increased approximately 12%.
- Operating income rose despite higher SG&A, engineering and amortization expenses. Interest expense increased to $13.0 million from $5.5 million, primarily reflecting debt used to fund acquisitions.
- Operating cash use increased, mainly from seasonal working-capital needs. Receivables and inventory increased, with inventory rising to $2,024.7 million from $1,559.6 million at December 31, 2011.
- Q1 sales included accelerated production and dealer shipments of certain European tractors ahead of a planned assembly-facility transition in Germany in Q3 2012.
Outlook, risks and unusual items
- For full-year 2012, management expected sales and earnings to increase versus 2011. It anticipated modest global industry sales growth, with growth in Western and Eastern Europe and strong market conditions in North and South America. Expected gross-margin improvement was partly offset by higher engineering and market-expansion spending.
- Management forecast approximately $350 million of 2012 capital expenditures, primarily for manufacturing expansion, productivity and product development.
- Industry conditions varied: North American tractor retail sales increased about 1%, while combine sales declined about 40%; Western European tractor and combine sales rose about 1% and 23%, respectively. South American tractor and combine sales fell about 7% and 3%, respectively, with drought affecting southern Brazil and Argentina.
- AGCO acquired 60% of Brazilian sugar-cane equipment maker Santal in January for approximately $20.1 million net of cash acquired. It recorded $26.5 million of related goodwill and $2.6 million of identifiable intangible assets. The remaining 40% is subject to put/call options.
- The $201.3 million principal amount of 1.25% convertible notes was classified as current because the share-price conversion condition was met. Classification in future periods depends on the share price; holders may require repurchase on specified dates, including December 15, 2013.
- Brazilian VAT receivables carried a $38.6 million reserve. A Brazilian tax dispute concerned disallowed goodwill-amortization deductions of approximately $49.6 million before interest and penalties; AGCO said it was contesting the matter and did not believe payment was likely. An Iraq-related Oil for Food civil action and a French government investigation remained unresolved; outcomes were not predictable.
- Other risks include agricultural commodity prices and farm income, weather, raw-material and energy costs, foreign exchange and interest rates, customer credit availability, acquisition integration, production disruptions, and retail-finance portfolio quality. AGCO noted elevated historic delinquencies and weaker collateral coverage in part of the Brazilian finance portfolio.
Important facts for investors to verify
- Whether sales and earnings growth persists after accounting for acquisitions, currency effects, and accelerated European shipments.
- Working-capital conversion and inventory levels, given Q1 operating cash outflow and the seasonal build.
- Debt, covenant headroom, available credit, and the potential cash or share impact of the convertible notes.
- Progress and costs associated with the German facility transition, planned capital spending, and integration of recent acquisitions.
- Exposure to the Brazilian VAT and tax matters, the Iraq-related claims, dealer/end-user financing guarantees of $143.9 million, and credit quality at finance joint ventures.