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AGCO Corporation (AGCO - Analyst Report) posted first-quarter 2013 earnings of $1.19 per share, declining 1.6% from the prior-year quarter’s earnings of $1.21 per share. The results, however, beat the Zacks Consensus Estimate of 88 cents.

Operational Updates

Revenues in the reported quarter increased 5.7% year over year to $2.4 billion and exceeded the Zacks Consensus Estimate of $2.2 billion. The growth was mainly driven by strong market demand in South America and the Asia Pacific region.

Cost of sales increased 5% to $1.87 billion in the first quarter from $1.78 billion in the year-ago quarter. Gross profit in the reported quarter was $533 million, up 8% compared with $493 million in the prior-year quarter. Consequently, gross margin expanded 50 basis points (bps) year over year to 22.1% in the quarter.

Selling, general and administrative expenses amounted to $255.7 million, inched up 7% from the year-ago quarter. Segment income from operations plummeted 7% to $225.6. Consequently, operating margin expanded 10 bps to 9.4% from the prior year quarter.

Segmental Performance

The North American region’s sales jumped 10.2% year over year to $624 million in the quarter. Segment’s income from operations improved 43.6% to $72.1 million from $50.2 million, due to higher sales and margin improvement initiatives.

Sales in South America went up 26.4% year over year to $465.7 million in the reported quarter. Income from operations for the segment increased nearly two-fold to $48.3 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 $1,193 million, flat compared to the year-ago quarter. The EAME operating income, however, declined 26.5% to $99.7 million. The income was negatively impacted by a poor sales mix, increased engineering expenses and transition costs associated with the new Fendt tractor assembly facility.

Sales in the Asia Pacific region inflated 30.4% year over year to $120 million in the first quarter. Income from operations in the reported quarter surged nearly six-fold to $5.5 million, driven by higher sales. The hike was partly offset by increased market development costs in China.

Financial Update

As of Mar 31, 2013, cash and temporary investments amounted to $551.7 million versus $781.3 million as of Dec 31, 2012. Long-term debt was $1.87 billion as of Mar 31, 2013, compared with $1.73 billion as of Dec 31, 2012. Debt-to-capitalization ratio was 25.9% as of Mar 31, 2013, compared to 23.9% as of Dec 31, 2012. Cash flow from operating activities was $261.3 million in the reported quarter versus $280.5 million in the prior-year quarter.

Outlook

AGCO revised its full year of 2013 earnings per share range of $5.50-$5.70 from the previous range of $5.50-$5.75 based on modest declines anticipated in the Western European region. However, the company raised full year revenue band from $10.2–$10.4 billion to $10.5–$10.7 billion. The enhancement in full year outlook depends on the projected growth in South America while, North America is expected to remain stable.

AGCO also expects gross margin to improve in 2013 compared with 2012, partly offset by increased engineering expenditures. The company also expects global industry demand to remain flat in 2013 compared with 2012.

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. However, soft demand for grain storage and protein production equipment, start-up issues at the Marktoberdorf plant and increased engineering expenses to meet Tier 4 requirements will weigh on the near-term results.

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 Corp (LNN - Analyst Report), Deere & Co (DE - Analyst Report) and CNH Global NV .

 

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