AGCO Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; amounts in U.S. dollars unless stated otherwise. AGCO manufactures and sells agricultural equipment and related parts through four geographic segments.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,879.3 million | $2,006.8 million | $5,258.0 million | $3,935.1 million |
| Gross profit / margin | $692.4 million / 24.0% | $432.7 million / 21.6% | $1,262.9 million / 24.0% | $883.2 million / 22.4% |
| Operating income / margin | $290.3 million / 10.1% | $97.3 million / 4.8% | $485.5 million / 9.2% | $197.7 million / 5.0% |
| Net income attributable to AGCO | $282.8 million | $69.7 million | $433.6 million | $134.4 million |
| Diluted EPS | $3.73 | $0.93 | $5.71 | $1.78 |
| Cash from operating activities | Not separately presented for the quarter | $(124.9) million | $(221.6) million |
- Q2 sales increased 43.5% and six-month sales increased 33.6% year over year. Management attributed growth to stronger demand and a recovery from COVID-related shutdowns in 2020; higher volumes, pricing and favorable currency translation also contributed.
- Operating margin improved on higher production volumes, favorable sales mix and pricing, partly offset by material cost inflation. Global production hours rose about 40% in Q2 and 32% in the first half year over year.
- Q2 income tax provision was $7.7 million, including a $67.8 million benefit from reversing a U.S. deferred-tax valuation allowance. This unusual tax benefit materially affected reported earnings; the filing does not provide a clear normalized tax-rate estimate.
- Operating cash use improved from the prior-year first half but remained negative. Higher earnings and accounts payable were largely offset by a $721.5 million inventory cash outflow and higher receivables. Capital expenditures were $120.6 million; operating cash flow less capital expenditures was approximately $(245.5) million.
- Cash was $500.2 million at June 30, 2021, down from $1,119.1 million at year-end 2020. Current assets were $4,728.2 million and current liabilities $3,619.3 million. Inventories rose to $2,667.0 million from $1,974.4 million at year-end.
- Debt at June 30 comprised $1,206.4 million of long-term debt, $315.7 million current portion and $55.8 million short-term borrowings. The reported debt-to-capitalization ratio was 33.2%, versus 34.8% at year-end. AGCO had $540 million of availability on its $800 million revolving facility; it reported compliance with financial covenants.
- Six-month dividends paid were $328.6 million. The company raised its quarterly dividend to $0.20 per share and paid a $4.00-per-share special dividend in Q2. The income statement reports Q2 cash dividends declared and paid of $4.17 per share; investors should reconcile this reported per-share amount with dividend timing and declarations.
Material changes and business developments
- Sales increased across all four regions. For the first half, Europe/Middle East generated $2,962.4 million, North America $1,345.8 million, South America $518.8 million and Asia/Pacific/Africa $431.0 million.
- Tractors and combines represented 57.5% of first-half sales; their combined sales increased 39.0% year over year. Worldwide average price increases were estimated at 4.2% for the first half.
- Q2 2020 included a $20.0 million non-cash goodwill impairment charge related to a 50%-owned tillage and seeding joint venture. AGCO sold its interest in that venture in Q2 2021.
- First-half reported earnings included a $1.2 million pension curtailment gain following amendments to the executive pension plan. The plan was amended to freeze future salary benefit accruals from year-end 2024 and remove a lifetime annuity feature for certain participants after 2022.
Outlook, risks and contingencies
- Management expected 2021 global farm-equipment demand, AGCO net sales, and gross and operating margins to exceed 2020 levels. It cited stronger forecast demand, pricing and favorable currency translation, with increased profitability supporting engineering, precision-agriculture and digital investments. No specific full-year revenue or earnings-per-share guidance was provided.
- Management forecast approximately $300 million of 2021 capital expenditures, primarily for systems, factory productivity and product and technology development.
- Supply constraints and delays—particularly involving semiconductors, transportation and raw materials—were limiting production despite strong end-market demand. AGCO warned that COVID-related disruption, supplier bottlenecks and capacity constraints could continue to affect production, sales and earnings.
- Other stated risks include agricultural-market cyclicality, farm income and commodity prices, weather, foreign exchange and interest rates, raw-material inflation, customer credit, and changes in trade policy. AGCO also cited a time-limited U.S. Treasury license related to joint ventures in the Netherlands and Russia; loss of authorization could disrupt operations and require asset-impairment assessment.
- A Brazilian tax dispute concerns disallowed goodwill-amortization deductions. The disputed tax amount was approximately 131.5 million Brazilian reais ($26.3 million) before interest and penalties. AGCO contests the assessment and said payment was not considered likely, but the appeal may take years.
- AGCO had $19.3 million of guarantees of dealer and end-user debt, plus residual-value guarantees with a maximum potential payment of $130.6 million; $24.9 million was accrued. It also had approximately $251.1 million of gross unrecognized income-tax benefits and ongoing tax examinations.
Most important facts for investors to verify
- Whether production and deliveries can keep pace with demand as semiconductor, freight and raw-material constraints evolve, and whether pricing continues to offset cost inflation.
- How much reported earnings growth is sustainable after the $67.8 million tax valuation-allowance reversal and the prior-year impairment comparison.
- Whether inventory and receivables convert to cash in the second half, given first-half operating cash outflow and the inventory build.
- Upcoming debt maturities, including approximately $313.4 million net of issuance costs due in August and October 2021, and continued covenant compliance.
- Potential exposure from the Brazilian tax case, tax uncertainties, residual-value guarantees and the Netherlands/Russia joint-venture license.
- The dividend per-share figures and timing, including the Q2 statement amount of $4.17 and the separately described $4.00 special dividend and $0.20 quarterly dividend.