AGCO Corporation — FY 2018 Form 10-K
Business context and reporting period. AGCO manufactures and distributes agricultural equipment and replacement parts through approximately 4,050 dealers and distributors in about 140 countries. Its brands include Fendt, Massey Ferguson, Valtra and GSI. This filing covers the fiscal year ended December 31, 2018; quarterly figures below are unaudited. Unless otherwise stated, financial amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $9,352.0 million | $8,306.5 million |
| Gross profit; gross margin | $1,996.7 million; 21.4% | $1,765.3 million; 21.3% |
| Income from operations; operating margin | $489.0 million; 5.3% | $404.4 million; 4.9% |
| Net income attributable to AGCO | $285.5 million | $186.4 million |
| Diluted earnings per share | $3.58 | $2.32 |
| Cash provided by operating activities | $595.9 million | $577.6 million |
| Capital expenditures | $203.3 million | $203.9 million |
| Cash and cash equivalents at year-end | $326.1 million | $367.7 million |
| Total indebtedness at year-end | $1,459.5 million | $1,713.5 million |
| Working capital at year-end | $770.7 million | $977.1 million |
Fourth-quarter 2018 net sales were $2,592.2 million, operating income was $159.1 million, net income attributable to AGCO was $98.7 million and diluted EPS was $1.26.
AGCO had $1,275.3 million of long-term debt, excluding current maturities and debt issuance costs, and $184.2 million of current debt at year-end. Its $800 million revolving credit facility had $114.4 million drawn, leaving approximately $685.6 million available. Debt to capitalization was 32.8%, down from 35.7% in 2017. The company received $284.6 million under a European Investment Bank term loan in January 2019, after year-end.
Changes versus the prior year
- Sales increased 12.6%, reflecting growth in all regions, acquisitions and currency translation. Acquisitions contributed $237.0 million, or 2.9 percentage points, to reported sales growth; currency translation contributed $6.4 million, or 0.1 percentage point.
- Tractor and combine unit sales rose approximately 7.6%; worldwide average price increases were estimated at 1.4%.
- Gross margin rose 0.1 percentage point and operating margin rose 0.4 percentage point. Management cited higher volumes, pricing and cost controls, partly offset by material-cost inflation and currency effects.
- Operating cash flow increased modestly, while year-end working capital fell by $206.4 million. Combined accounts receivable and inventory were $103.3 million lower year over year; inventory nevertheless increased excluding currency effects, partly due to acquisitions, higher production and emissions-standard transitions.
- AGCO repurchased $184.3 million of shares and paid $47.1 million in dividends. The company also repurchased all remaining 5⅞% senior notes, recording a $24.5 million loss on extinguishment of debt, partly offset by accelerated recognition of a deferred swap gain.
Regional results were mixed: Europe/Middle East and North America operating income improved, while South America operating income declined by approximately $25.5 million, primarily due to material-cost inflation and costs of localizing newer product technology in Brazil. Robust global crop production kept commodity prices relatively low and pressured farm income.
Outlook, risks and unusual items
- 2019 outlook: Management projected modest improvement in global industry demand and expected AGCO sales to increase, driven by volumes and pricing, partly offset by unfavorable currency translation. Gross and operating margins were expected to improve through pricing and cost-reduction efforts. The filing provides no specific numerical sales or EPS guidance.
- Market and financing exposure: Results depend on cyclical farm income, commodity prices, weather, government support and customer access to financing. Rabobank controls AGCO’s finance joint ventures and is also a principal lender; weaker customer credit or reduced financing availability could pressure sales and joint-venture earnings.
- Currency, trade and operations: Foreign exchange volatility, tariffs and changing trade policies may affect costs and competitiveness. Argentina was treated as a highly inflationary economy from July 2018, and the subsidiary changed its functional currency to the U.S. dollar. The filing also identifies Brexit, supplier, manufacturing, labor, emissions-regulation and cybersecurity risks.
- Goodwill risk: The GSI Europe/Middle East reporting unit had less than 10% fair-value headroom over carrying value. Weak market conditions and manufacturing inefficiencies could lead to a future impairment; allocated goodwill was approximately $243.9 million.
- Contingencies: AGCO is contesting a Brazilian tax assessment involving disallowed goodwill-amortization deductions of 131.5 million reais, approximately $33.9 million before interest and penalties. Management believes payment is not likely, but the appeal may take several years. Other legal claims were described as not material in aggregate.
- Other notable exposures: Pension and executive-plan obligations were underfunded by approximately $206.0 million; AGCO contributed $36.8 million in 2018 and expected to fund approximately $30.5 million in 2019. The company also disclosed a time-limited U.S. Treasury license affecting joint ventures in the Netherlands and Russia; preliminary analysis indicated any impairment would not be material.
- Accounting and audit: AGCO adopted the new revenue-recognition standard in 2018; the reported impact on 2018 operating results and cash flows was not material. It expected adoption of the lease standard in 2019 to add approximately $195 million to $215 million of right-of-use assets and lease liabilities. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether 2019 volume and pricing growth can offset unfavorable currency movements and continued cost inflation.
- Progress in improving GSI Europe/Middle East operations and the reporting unit’s limited goodwill headroom.
- Cash conversion and inventory trends, including the cost and timing of emissions-standard transitions.
- Debt maturities, covenant headroom and the effect of the January 2019 EIB borrowing on leverage and interest costs.
- Developments in the Brazilian tax appeal, pension funding requirements, and the Russia/Netherlands license matter.