AGCO Reports Improved Second Quarter Results
AGCO reported net sales of approximately $2.5 billion for the second quarter of 2018, an increase of approximately 17.2% compared to the second quarter of 2017. Reported net income was $1.14 per share for the second quarter of 2018, and adjusted net income, excluding restructuring expenses and costs associated with an early retirement of debt, was $1.32 per share. These results compare to a reported net income of $1.14 per share and adjusted net income, excluding restructuring expenses, of $1.15 per share for the second quarter of 2017. Excluding favorable currency translation impacts of approximately 3.3%, net sales in the second quarter of 2018 increased approximately 13.9% compared to the second quarter of 2017.
Net sales for the first six months of 2018 were approximately $4.5 billion, an increase of approximately 19.8% compared to the same period in 2017. Excluding favorable currency translation impacts of approximately 5.9%, net sales for the first six months of 2018 increased approximately 13.9% compared to the same period in 2017. For the first six months of 2018, reported net income was $1.44 per share, and adjusted net income, excluding restructuring expenses and costs associated with an early retirement of debt, was $1.68 per share. These results compare to reported net income of $1.02 per share and adjusted net income, excluding restructuring expenses and a non-cash expense related to waived stock compensation, of $1.13 per share for the first six months of 2017.
Second Quarter Highlights
“AGCO delivered solid sales and earnings growth in the second quarter,” stated Martin Richenhagen, Chairman, President and Chief Executive Officer. “Healthy industry conditions in Western Europe and improved market demand in North America supported sales and margin improvement in those regions offsetting weak results in South America. Our sales performance and customer response to AGCO’s new product line-up confirms our additional investments in product development are paying off. We continue to focus on innovative products like our new Rogator C-series high performance sprayers and our expanding line-up of platform designed tractors that deliver productivity on the farm and expand our market position.”
“Global crop conditions were mixed through the first half of 2018,” continued Mr. Richenhagen. “Crop production estimates in the U.S. have recovered following a cold wet spring, and forecasts are now calling for another solid harvest. The lack of spring rain across much of Eastern Europe and parts of Western Europe is negatively impacting crop development. A dry weather pattern across Argentina and southern Brazil has resulted in decreased 2018 crop production expectations. Global industry sales of farm equipment in the first half of 2018 were also mixed across AGCO’s key markets, with future demand dependent on factors such as crop conditions, commodity price development and government trade and farm support policy. North American industry retail sales were up in the first six months of 2018 compared to the same period in 2017 as row crop farmers are beginning to replace their equipment after years of weaker demand. Overall, we project industry retail tractor sales to increase modestly in 2018 with improved retail sales in the row crop segment and flat retail sales of small tractors compared to last year. Industry retail sales in Western Europe increased slightly in the first half of 2018, following a year of improved profitability by the arable farming segment as well as healthy economics for dairy producers. Industry sales growth in the United Kingdom and Italy was partially offset by declines in France. For the full year of 2018, industry demand in Western Europe is expected to be relatively flat compared to 2017. Industry retail sales in South America decreased during the first six months of 2018. Industry demand in Brazil softened in advance of improvements in the government financing program, which started on July 1. In addition, industry sales declined in Argentina in response to a weak first harvest. Industry demand in South America is expected to improve in the second half of the year and be relatively flat for the full year compared to 2017. Higher retail sales in Brazil are expected to be offset by lower sales in Argentina due to the impact of lower crop production on farm income. Longer term, we are optimistic about the fundamentals supporting commodity prices and farm income as well as healthy growth in our industry.”
Net sales in the North American region increased 26.9% in the first six months of 2018 compared to the same period of 2017, excluding the positive impact of currency translation. Precision Planting, which was acquired in the fourth quarter of 2017, contributed sales of approximately $82.9 million in its seasonally strong first half. Excluding the impact of acquisitions and currency translation, sales grew approximately 16.2% compared to the first six months of 2017. The largest increases were in sprayers, high horsepower tractors and hay tools. Income from operations for the first six months of 2018 improved approximately $37.8 million compared to the same period in 2017. The benefit of the Precision Planting acquisition and higher sales and production volumes contributed to the increase.
AGCO’s South American net sales decreased 5.5% in the first six months of 2018 compared to the first six months of 2017, excluding the impact of unfavorable currency translation. Sales declined in both Argentina and Brazil. Income from operations dropped approximately $38.5 million for the first six months of 2018 compared to the same period in 2017. Lower sales and production volumes, the impact of material cost inflation, costs associated with transitioning to new products with tier 3 emission technology, as well as the impact of the Brazilian trucking strike on sales and production, all contributed to the decrease in income from operations.
Net sales in the AGCO’s EME region increased 14.3% in the first six months of 2018 compared to the same period in 2017, excluding favorable currency translation impacts. Acquisitions benefited sales by approximately 3.7% during the first six months compared to the same period last year. Higher sales in Germany, the United Kingdom and France produced most of the increase. Income from operations improved approximately $73.8 million for the first six months of 2018, compared to the same period in 2017, due to the benefit of higher sales and margin improvement partially offset by higher engineering costs.
Asia/Pacific/Africa net sales increased 5.1%, excluding the positive impact of currency translation, in the first six months of 2018 compared to the same period in 2017. Higher sales in Australia were partially offset by lower sales in Asia. Acquisitions benefited sales by approximately 2.2% during the first six months of 2018 compared to the same period last year. Income from operations improved approximately $1.5 million in the first six months of 2018, compared to the same period in 2017, due to higher sales and production levels.
AGCO’s net sales for 2018 are expected to reach $9.3 billion, reflecting improved sales volumes, positive pricing as well as acquisition and foreign exchange impacts. Gross and operating margins are expected to improve from 2017 levels due to higher sales as well as the benefits resulting from the Company’s cost reduction initiatives, partially offset by increased engineering expenses. Based on these assumptions, 2018 earnings per share are targeted at approximately $3.46 on a reported basis, or approximately $3.70 on an adjusted basis, which excludes restructuring expenses and costs associated with debt retirement.
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AGCO will be hosting a conference call with respect to this earnings announcement at 10:00 a.m. Eastern Time on Tuesday, July 31, 2018. The Company will refer to slides on its conference call. Interested persons can access the conference call and slide presentation via AGCO’s website at www.agcocorp.com in the “Events” section on the “Company/Investors” page of our website. A replay of the conference call will be available approximately two hours after the conclusion of the conference call for twelve months following the call. A copy of this press release will be available on AGCO’s website for at least twelve months following the call.
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Safe Harbor Statement
Statements that are not historical facts, including the projections of earnings per share, sales, industry demand, market conditions, commodity prices, currency translation, farm income levels, margin levels, investments in product and technology development, new product introductions, restructuring and other cost reduction initiatives, production volumes, tax rates and general economic conditions, are forward-looking and subject to risks that could cause actual results to differ materially from those suggested by the statements. The following are among the factors that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statements.
Further information concerning these and other factors is included in AGCO’s filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2017. AGCO disclaims any obligation to update any forward-looking statements except as required by law.
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AGCO (NYSE: AGCO) is a global leader in the design, manufacture and distribution of agricultural solutions and supports more productive farming through its full line of equipment and related services. AGCO products are sold through five core brands, Challenger®, Fendt®, GSI®, Massey Ferguson® and Valtra®, supported by Fuse® precision technologies and farm optimization services. Founded in 1990, AGCO is headquartered in Duluth, GA, USA. In 2017, AGCO had net sales of approximately $8.3 billion. For more information, visit http://www.AGCOcorp.com. For company news, information and events, please follow us on Twitter: @AGCOCorp. For financial news on Twitter, please follow the hashtag #AGCOIR.
Please visit our website at www.agcocorp.com
AGCO CORPORATION AND SUBSIDIARIES
1. STOCK COMPENSATION EXPENSE
The Company recorded stock compensation expense as follows:
2. RESTRUCTURING EXPENSES
From 2014 through 2018, the Company announced and initiated several actions to rationalize employee headcount at various manufacturing facilities and administrative offices located in Europe, South America, China and the United States in order to reduce costs in response to softening global market demand and lower production volumes. The aggregate headcount reduction was approximately 3,370 employees between 2014 and 2017. The Company had approximately $10.9 million of severance and related costs accrued as of December 31, 2017. During the three and six months ended June 30, 2018, the Company recorded an additional $2.7 million and $8.6 million, respectively, of severance and related costs associated with further rationalizations associated with the termination of approximately 340 employees, and paid approximately $8.7 million of severance and associated costs. The remaining $10.1 million of accrued severance and other related costs as of June 30, 2018, inclusive of approximately $0.7 million of negative foreign currency translation impacts, are expected to be paid primarily during 2018.
Long-term debt at June 30, 2018 and December 31, 2017 consisted of the following:
During the three months ended June 30, 2018, the Company completed a voluntary cash tender offer to purchase any and all of its outstanding 57/8% senior notes at a cash purchase price of $1,077.50 per $1,000.00 of senior notes. The Company repurchased approximately $185.9 million of principal amount of the senior notes for approximately $200.3 million, plus accrued interest. The repurchase resulted in a loss on extinguishment of debt of approximately $15.7 million, including associated fees. The Company also recorded approximately $3.0 million of accelerated amortization of the deferred gain related to a terminated interest rate swap instrument associated with the senior notes. Both the loss on extinguishment and the accelerated amortization were reflected in “Interest expense, net,” for the three months ended June 30, 2018.
As of June 30, 2018 and December 31, 2017, the Company had short-term borrowings due within one year of approximately $197.7 million and $90.8 million, respectively, primarily in China, Brazil and Europe.
Inventories at June 30, 2018 and December 31, 2017 were as follows:
5. ACCOUNTS RECEIVABLE SALES AGREEMENTS
The Company has accounts receivable sales agreements that permit the sale, on an ongoing basis, of a majority of its wholesale receivables in North America, Europe and Brazil to its U.S., Canadian, European and Brazilian finance joint ventures. As of June 30, 2018 and December 31, 2017, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.4 billion and $1.3 billion, respectively.
Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $9.7 million and $17.5 million, respectively, during the three and six months ended June 30, 2018. Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $8.9 million and $17.2 million, respectively, during the three and six months ended June 30, 2017.
The Company’s finance joint ventures in Europe, Brazil and Australia also provide wholesale financing directly to the Company’s dealers. As of June 30, 2018 and December 31, 2017, these finance joint ventures had approximately $48.2 million and $41.6 million, respectively, of outstanding accounts receivable associated with these arrangements. In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world.
6. NET INCOME PER SHARE
A reconciliation of net income attributable to AGCO Corporation and subsidiaries and weighted average common shares outstanding for purposes of calculating basic and diluted net income per share for the three and six months ended June 30, 2018 and 2017 is as follows:
7. SEGMENT REPORTING
The Company’s four reportable segments distribute a full range of agricultural equipment and related replacement parts. The Company evaluates segment performance primarily based on income from operations. Sales for each segment are based on the location of the third-party customer. The Company’s selling, general and administrative expenses and engineering expenses are charged to each segment based on the region and division where the expenses are incurred. As a result, the components of income from operations for one segment may not be comparable to another segment. Segment results for the three and six months ended June 30, 2018 and 2017 are as follows:
A reconciliation from the segment information to the consolidated balances for income from operations is set forth below:
RECONCILIATION OF NON-GAAP MEASURES
This earnings release discloses adjusted income from operations, adjusted net income and adjusted net income per share, each of which exclude amounts that are typically included in the most directly comparable measure calculated in accordance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation of each of those measures to the most directly comparable GAAP measure is included below.
The following is a reconciliation of reported income from operations, net income and net income per share to adjusted income from operations, net income and net income per share for the three and six months ended June 30, 2018 and 2017 (in millions, except per share data):
The following is a reconciliation of targeted net income per share to adjusted targeted net income per share for the year ended December 31, 2018:
The following tables set forth, for the three and six months ended June 30, 2018, the impact to net sales of currency translation and recent acquisitions by geographical segment (in millions, except percentages):
AGCO Reports Improved Second Quarter Results