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AGCO Corporation’s (AGCO - Analyst Report) third-quarter 2012 adjusted and reported earnings were 96 cents per share, compared to the year-ago quarter’s adjusted as well as reported earnings of 87 cents. Earnings missed the Zacks Consensus Estimate of $1.01 per share.

Total revenue rose 9.3% year over year to $2.3 billion, falling short of the Zacks Consensus Estimate of $2.4 billion. Total revenue included an unfavorable currency translation impact of 11%, excluding which total revenue soared 20.3% in the quarter. The growth was mainly driven by an increase in sales in North America and the Asia / Pacific region.

The North American region’s sales jumped 51.4% year over year to $632.2 million, while sales in South America dropped 6.9% to $479.9 million in the quarter. Sales in the Asia / Pacific region inflated 67% to $122.4 million, whereas in the EAME region sales declined 2.9% to $1,060.5 million.

Cost and Margins

Cost of goods sold went up 6.7% to $1.8 billion in the quarter. Gross profit also increased 20.4% to $491 million. Consequently, gross margin jumped 200 basis-points (bps) to 21.4%.

Selling, general and administrative expenses increased 18.8% to $262.8 million in the quarter. Operating income rose 22% to $139.6 million. Operating margin soared 70 bps to 6.1%.

Financial Updates

Cash and cash equivalents were $321.9 million as of September 30, 2012, compared to $724.4 million as of December 31, 2012. Net debt amounted to $1,406.7 million as of September 30, 2012, compared to $1,469.8 million as of December 31, 2012. Debt-to-capitalization ratio improved to 29.6% as of September 30, 2012, compared to 32.9% as of December 31, 2012 and 32.2% as of June 30, 2012.   

Outlook for 2012

The company has reduced its sales and earnings per share outlook for 2012 due to severe drought prevailing in the U.S. It  expects adjusted earnings of $5.20 per share, down from the prior guidance of $5.50 to $5.75 per share for the year. It has also revised its revenue guidance in the range of $9.8 billion to $10 billion from its previous range of $10.1 billion to $10.3 billion.

Our View

AGCO Corp. aims at reducing the production rate of Fendt in the fourth quarter of 2012 to cut down manufacturing costs of Fendt. Moreover, drought in the U.S. has taken a toll on crop yield and is expected to affect grain storage.  Further, weak demand in the Scandinavian and Finnish markets will remain headwind for the next quarter.

AGCO Corp. will be focusing on managing the new manufacturing schedule, cutting down its inventory level and carrying on with its margin improvement initiatives. It also intends to invest significantly in producing new products and increase its geographical footprint. Moreover, the company is working diligently for meeting Tier 4 Final emission requirements in order to boost its product portfolio.

AGCO Corp. retains a short-term Zacks #3 rank (Hold). We have a long-term Outperform recommendation on the stock.

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