AGCO Reports Fourth Quarter Results
AGCO, Your Agriculture Company (NYSE:AGCO), a worldwide manufacturer and distributor of agricultural equipment, reported net sales of approximately $2.6 billion for the fourth quarter of 2018, an increase of approximately 2.6% compared to net sales of approximately $2.5 billion for the fourth quarter of 2017. Reported net income was $1.26 per share and adjusted net income, which excludes restructuring expenses, costs associated with the early retirement of debt and a tax gain related to U.S. tax reform, was $1.31 per share for the fourth quarter of 2018. These results compare to reported net income of $0.55 per share and adjusted net income, which excludes restructuring expenses and a tax charge related to U.S. tax reform, of $1.10 per share for the fourth quarter of 2017. Excluding unfavorable currency translation impacts of approximately 4.7%, net sales in the fourth quarter of 2018 increased approximately 7.3% compared to the fourth quarter of 2017.
Net sales for the full year of 2018 were approximately $9.4 billion, an increase of approximately 12.6% compared to 2017. Excluding the favorable impact of currency translation of approximately 0.1%, net sales for the full year of 2018 increased approximately 12.5% compared to 2017. For the full year of 2018, reported net income was $3.58 per share and adjusted net income, which excludes restructuring expenses, costs associated with the early retirement of debt and a tax gain related to U. S. tax reform, was $3.89 per share. These results compare to reported net income of $2.32 per share and adjusted net income, which excludes restructuring expenses, a non-cash expense related to waived stock compensation and a tax charge related to U.S. tax reform, of $3.02 per share for the full year of 2017.
“AGCO delivered solid results in 2018 while making important investments to position us for future success,” stated Martin Richenhagen, AGCO’s Chairman, President and Chief Executive Officer. “Sales growth across all of our regions and solid operational execution allowed AGCO to meet its financial targets for 2018 and deliver improved results compared to 2017. We are growing our business by delivering the broadest product offering in the industry. We provide full-line smart farming solutions to our customers throughout the agricultural production cycle, starting with soil preparation and cutting-edge smart planting, through spraying and harvesting, and ending with grain storage and protein production equipment. AGCO will continue to invest in new products, new technology, improved distribution and enhanced digital capabilities in order to improve our margins and produce higher returns on our invested capital. Looking forward to 2019, we are forecasting further earnings improvement as industry conditions trend positively and we benefit from our cost reduction strategies targeted at purchasing actions and factory productivity, as well as new product development.”
“Another year of strong global crop production kept commodity prices at relatively low levels and pressured farm income,” continued Mr. Richenhagen. “Global industry sales of farm equipment in 2018 were mixed across AGCO’s key markets, with future demand dependent on factors such as commodity price development as well as government trade and farm support policy. The USDA is projecting 2019 farm income to be down modestly in the United States compared to 2018. While low horsepower equipment sales may begin to be under pressure from their historically high levels, high horsepower equipment sales are expected to continue their gradual recovery. Industry equipment demand decreased modestly across Western Europe in 2018. Farm income was negatively impacted by reduced crop production across parts of Western Europe and lower milk prices in the first half of the year. Lower demand across most of the European markets was partially offset by growth in the United Kingdom. Farm economics are expected to improve modestly across Western Europe in 2019, driven primarily by favorable wheat prices and more normal crop production. Based on these assumptions, we expect sentiment to remain positive and 2019 demand to be stable across the European markets. Industry equipment demand in Brazil improved in the second half of 2018 after more positive terms for the government financing program were announced. Market growth in Brazil was offset by weaker demand in Argentina in response to a weak first harvest and poor general economic conditions. Industry demand in 2019 in South America is expected to be improved compared to 2018. Higher retail sales in Brazil are expected to be partially offset by lower sales in Argentina. Our long-term global view remains positive. Increasing demand for commodities, driven by the growing world population, rising emerging market protein consumption and biofuel use, are all expected to support elevated farm income and healthy conditions in our industry.”
Net sales in the North American region improved approximately 16.2% in the full year of 2018 compared to 2017, with no significant impact from currency translation. Acquisitions benefited sales by approximately 5.7% in 2018. Sales growth was strongest for sprayers, hay tools and grain storage equipment. Income from operations increased approximately $36.2 million for the full year of 2018 compared to 2017 due to the benefit of higher sales and margin improvement.
South American net sales increased approximately 4.5%, excluding unfavorable currency translation impacts, in the full year of 2018 compared to 2017. The improvement was primarily driven by higher sales in Brazil partially offset by weaker demand in Argentina. Income from operations in the fourth quarter of 2018 increased $9.7 million compared to the same period in 2017, although the impacts of material cost inflation and costs associated with transitioning to new products with tier 3 emission technology contributed to a decrease in income from operations of approximately $25.5 million for the full year of 2018 compared to 2017.
AGCO’s EME net sales increased approximately 13.3% in the full year of 2018 compared to 2017, excluding favorable currency translation. Acquisitions benefited sales by approximately 2.3% during 2018 compared to the full year of 2017. Sales growth was achieved in the key markets of the Germany, France and the United Kingdom. Income from operations increased approximately $107.8 million for the full year of 2018 compared to 2017 due to the benefit of higher sales and margin improvement.
Net sales in AGCO’s Asia/Pacific/Africa region, excluding the negative impact of currency translation, increased approximately 10.2% in the full year of 2018 compared to the same period in 2017. Sales growth was driven primarily by Australia and China. Acquisitions benefited sales by approximately 1.7% during the full year of 2018 compared to 2017. Income from operations improved approximately $0.8 million in 2018 compared to the full year of 2017 due to the impact of higher sales.
Global industry demand is projected to improve modestly in 2019. AGCO’s net sales for 2019 are expected to reach approximately $9.6 billion reflecting improved sales volumes and positive pricing, offset by unfavorable foreign currency translation impacts. Gross and operating margins are expected to improve from 2018 levels, reflecting the positive impact of pricing and cost reduction efforts. Based on these assumptions, 2019 earnings per share is targeted to be approximately $4.60.
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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, February 5th. The Company will refer to slides on its conference call. The conference call and slide presentation can be accessed on 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, world population, biofuel use and protein consumption, currency translation, farm income levels, margin levels, industry inventory levels, investments in product and technology development, cost reduction initiatives, production volumes, 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 and subsequent Form 10-Qs. 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 2018, AGCO had net sales of $9.4 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 for the years 2014 to 2017. The Company had approximately $10.9 million of severance and related costs accrued as of December 31, 2017. During the year ended December 31, 2018, the Company recorded an additional $12.0 million of severance and related costs associated with further rationalizations associated with the termination of approximately 520 employees, and paid approximately $14.4 million of severance and related costs. The $12.0 million of costs incurred during the year end December 31, 2018 included a $0.3 million write-down of property, plant and equipment. The remaining $7.1 million of accrued severance and other related costs as of December 31, 2018, inclusive of approximately $1.1 million of negative foreign currency translation impacts, are expected to be paid primarily during 2019.
Indebtedness at December 31, 2018 and 2017 consisted of the following:
Inventories at December 31, 2018 and 2017 were as follows:
5. ACCOUNTS RECEIVABLE SALES AGREEMENTS
At December 31, 2018 and 2017, the Company had 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 December 31, 2018 and 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 Consolidated Statements of Operations, were approximately $11.8 million and $36.0 million during the three months and year ended December 31, 2018, respectively. Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Consolidated Statements of Operations, were approximately $11.7 million and $39.2 million during the three months and year ended December 31, 2017, respectively.
The Company’s finance joint ventures in Europe, Brazil and Australia also provide wholesale financing to the Company’s dealers. As of December 31, 2018 and 2017, these finance joint ventures had approximately $82.5 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 months and years ended December 31, 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 months and years ended December 31, 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, adjusted net income per share, net sales on a constant currency basis and free cash flow, each of which excludes 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 months and years ended December 31, 2018 and 2017 (in millions, except per share data):
The following table sets forth, for the three months and year ended December 31, 2018, the impact to net sales of currency translation and recent acquisitions by geographical segment (in millions, except percentages):
The following is a reconciliation of net cash provided by operating activities to free cash flow for the years ended December 31, 2018 and 2017 (in millions):
AGCO Reports Fourth Quarter Results