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AGCO Corporation (AGCO - Analyst Report) posted second-quarter 2013 record earnings of $2.15 per share, up 3% from the prior-year quarter’s earnings of $2.08 per share. The results comfortably beat the Zacks Consensus Estimate of $1.81.

Operational Updates

Revenues in the reported quarter increased 13% year over year to $3.05 billion and exceeded the Zacks Consensus Estimate of $2.84 billion.  Excluding an unfavorable currency translation impact of 0.5%, net revenue increased approximately 13.8%.The growth was mainly driven by strong market demand in South America and the Asia Pacific region.

Cost of sales increased 12% to $2.34 billion in the second quarter from $2.088 billion in the year-ago quarter. Gross profit in the reported quarter was $710 million, up 16% compared with $611 million in the prior-year quarter. Consequently, gross margin expanded 60 basis points (bps) year over year to 23.3% in the quarter.

Selling, general and administrative expenses amounted to $279.7 million, up 10% from the year-ago quarter. Segment income from operations increased 23% to $327 million. Consequently, operating margin expanded 90 bps to 10.7% from the prior-year quarter.

Segmental Performance

The North American region sales increased 8% year over year to $789 million in the quarter. Segment’s income from operations improved 27% to $121.6 million from $95.7 million attributed to higher sales, a favorable product mix and margin improvement initiatives.

Sales in South America went up 20% year over year to $540 million in the reported quarter, driven by increased sales in Brazil and Argentina. Income from operations for the segment increased 43% to $59.7 million in the reported quarter. Higher sales and the benefit of cost reduction initiatives contributed to the year-over-year growth.

The EAME (Europe, Africa, and Middle East) region sales were $1,599 million, up 14% from the year-ago quarter. The EAME operating income increased 21% to $204.9 million.

Sales in the Asia Pacific region inflated 19% year over year to $120.3 million in the first quarter. The segment reported a loss from operations of $0.8 million compared with the year-ago profit of $5.1 million.

Financial Update

As of Jun 30, 2013, cash and temporary investments amounted to $680.6 million versus $781.3 million as of Dec 31, 2012. Long-term debt was $1.08 billion as of Jun 30, 2013, compared with $1.03 billion as of Dec 31, 2012. Debt-to-capitalization ratio was flat year on year at 27.3% as of Jun 30, 2013. Cash flow from operating activities was $65 million in the first half of fiscal 2013, versus a usage of $188.2 million in the prior-year comparable period.

Outlook

AGCO increased its full year 2013 earnings per share guidance to $6.00 from the previous range of $5.50-$5.70. The company also raised full-year revenue band to $10.8–$11 billion from $10.5–$10.7 billion. Growth in South America and North America is expected to be offset by modest declines in Western Europe. Global industry demand is expected to be relatively flat in 2013 compared to 2012.

AGCO also expects gross margin to improve in 2013 compared with 2012, but will be somewhat affected by increased market development expenses and higher engineering expenditures to meet Tier 4 final emission requirements.

Our View

The company remains committed to its plans of expanding its business in international markets. It expects elevated agricultural commodity prices in 2013 to support healthy farm income and sustain a stable equipment demand.

Duluth, Ga.-based AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. AGCO supports more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts.

AGCO currently retains a short-term Zacks Rank #3 (Hold). Other companies in the machinery and farming industry are Lindsay Corporation (LNN - Analyst Report), Deere & Co (DE - Analyst Report) and CNH Global NV .

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