EXHIBIT 99.1
Report of Independent Registered Public Accounting Firm
The Board of Directors
AGCO Corporation:
We have audited the accompanying consolidated balance sheets of AGCO
Corporation and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 2003. In connection
with our audits of the 2003 and 2002 consolidated financial statements, we also
have audited the 2003 and 2002 financial statement schedule as listed in Item
5(c). These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits. The consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
2001, before the revisions as described in Notes 1 and 15 to these consolidated
financial statements, and financial statement schedule of AGCO Corporation and
subsidiaries as listed in Item 5(c) were audited by other auditors who have
ceased operations. Those auditors' reports, dated February 6, 2002, on those
consolidated financial statements and financial statement schedule were
unqualified and included an explanatory paragraph that described the change in
the Company's method of accounting for derivative instruments and hedging
activities as discussed in Note 11 to those consolidated financial statements
and excluded the revisions as described in Notes 1 and 15 to these accompanying
consolidated financial statements.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of AGCO Corporation and subsidiaries as of December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related 2003 and 2002 financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
As discussed above, the consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 2001 and
financial statement schedule of AGCO Corporation and subsidiaries as listed in
Item 5(c) were audited by other auditors who have ceased operations. As
described in Note 1, these consolidated financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the Company as of January 1, 2002. As described in Note 1, these
consolidated financial statements have been revised to adopt the provisions of
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which requires reclassification of
gains and losses on debt extinguishments in prior periods from extraordinary
items to continuing operations. As described in Note 15, the Company changed its
internal organization in 2004 in a manner that caused the composition of its
reportable segments to change. The financial statement disclosures with respect
to segment information have been revised to conform with the new presentation.
In our opinion, these reclassifications and disclosures for 2001 described in
Notes 1 and 15 are appropriate. However, we were not engaged to audit, review,
or apply any procedures to the 2001 consolidated financial statements and
financial statement schedule of AGCO Corporation and subsidiaries other than
with respect to such disclosures and reclassifications and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 consolidated
financial statements and financial statement schedule taken as a whole.
/s/ KPMG LLP
Atlanta, Georgia
February 27, 2004, except as to the fifth and sixth
paragraphs of Note 16, which are as of March 10, 2004,
and Note 15, which is as of May 25, 2004
NOTE: THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, THE
COMPANY'S FORMER INDEPENDENT PUBLIC ACCOUNTANTS. THE ARTHUR ANDERSEN REPORT
REFERS TO CERTAIN FINANCIAL INFORMATION FOR THE FISCAL YEARS ENDED DECEMBER 31,
2000 AND 1999 AND CERTAIN BALANCE SHEET INFORMATION AT DECEMBER 31, 2001 AND
2000, WHICH ARE NO LONGER INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS.
THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THE
FILING OF THIS CURRENT REPORT ON FORM 8-K DATED JUNE 2, 2004.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGCO Corporation:
We have audited the accompanying consolidated balance sheets of AGCO
CORPORATION AND SUBSIDIARIES as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AGCO Corporation and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 11 to the consolidated financial statements, in
accordance with the requirements of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," AGCO
Corporation changed its method of accounting for derivative instruments and
hedging activities effective January 1, 2001.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 6, 2002
1
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net sales $ 3,495.3 $ 2,922.7 $ 2,545.9
Cost of goods sold 2,878.9 2,390.9 2,106.7
----------- ----------- -----------
Gross profit 616.4 531.8 439.2
Selling, general and administrative expenses 331.6 282.4 254.3
Engineering expenses 71.4 57.2 49.6
Restricted stock compensation expense 0.6 44.1 7.1
Restructuring and other infrequent expenses 27.6 42.7 13.0
Amortization of intangibles 1.7 1.4 18.5
----------- ----------- -----------
Income from operations 183.5 104.0 96.7
Interest expense, net 60.0 57.4 59.9
Other expense, net 25.2 20.8 23.4
----------- ----------- -----------
Income before income taxes, equity in net earnings of
affiliates and cumulative effect of a change in
accounting principle 98.3 25.8 13.4
Income tax provision 41.3 99.8 1.4
----------- ----------- -----------
Income (loss) before equity in net earnings of affiliates
and cumulative effect of a change in accounting principle 57.0 (74.0) 12.0
Equity in net earnings of affiliates 17.4 13.7 10.6
----------- ----------- -----------
Income (loss) before cumulative effect of a change in
accounting principle 74.4 (60.3) 22.6
Cumulative effect of a change in accounting principle, net
of taxes -- (24.1) --
----------- ----------- -----------
Net income (loss) $ 74.4 $ (84.4) $ 22.6
=========== =========== ===========
Net income (loss) per common share:
Basic:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.99 $ (0.81) $ 0.33
Cumulative effect of a change in accounting
principle, net of taxes -- (0.33) --
----------- ----------- -----------
Net income (loss) $ 0.99 $ (1.14) $ 0.33
=========== =========== ===========
Diluted:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.98 $ (0.81) $ 0.33
Cumulative effect of a change in accounting
principle, net of taxes -- (0.33) --
----------- ----------- -----------
Net income (loss) $ 0.98 $ (1.14) $ 0.33
=========== =========== ===========
Weighted average number of common and common equivalent
shares outstanding:
Basic 75.2 74.2 68.3
=========== =========== ===========
Diluted 75.6 74.2 68.5
=========== =========== ===========
See accompanying notes to consolidated financial statements.
2
AGCO CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31,
2003 2002
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 147.0 $ 34.3
Accounts and notes receivable, net 553.6 497.4
Inventories, net 803.6 708.6
Other current assets 180.3 144.1
----------- -----------
Total current assets 1,684.5 1,384.4
Property, plant and equipment, net 434.2 343.7
Investment in affiliates 91.6 78.5
Deferred tax assets 147.5 102.2
Other assets 63.8 46.8
Intangible assets, net 417.8 393.4
----------- -----------
Total assets $ 2,839.4 $ 2,349.0
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 393.2 $ 312.0
Accrued expenses 490.2 445.2
Other current liabilities 45.7 27.8
----------- -----------
Total current liabilities 929.1 785.0
Long-term debt 711.1 636.9
Pensions and postretirement health care benefits 197.5 131.9
Other noncurrent liabilities 95.6 77.6
----------- -----------
Total liabilities 1,933.3 1,631.4
----------- -----------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock; $0.01 par value, 150,000,000 shares authorized, 75,409,655
and 75,197,285 shares issued and outstanding in 2003 and
2002, respectively 0.8 0.8
Additional paid-in capital 590.3 587.6
Retained earnings 635.0 560.6
Unearned compensation (0.5) (0.7)
Accumulated other comprehensive loss (319.5) (430.7)
----------- -----------
Total stockholders' equity 906.1 717.6
----------- -----------
Total liabilities and stockholders' equity $ 2,839.4 $ 2,349.0
=========== ===========
See accompanying notes to consolidated financial statements.
3
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------------------- PAID-IN RETAINED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
------ ------ ------ ------ ------- -------- ------------
Balance, December 31, 2000 -- $ -- 59,589,428 $ 0.6 $ 427.1 $ 622.9 $ (1.4)
Net income -- -- -- -- -- 22.6 --
Issuance of preferred shares 555 -- -- -- 5.3 -- --
Conversion of preferred shares
into common stock (555) -- 555,000 -- -- -- --
Issuance of common stock, net
of offering expenses -- -- 11,799,377 0.1 99.2 -- --
Issuance of restricted stock -- -- 226,960 -- 3.5 -- (0.4)
Tax difference on restricted
stock expense -- -- -- -- (4.7) -- --
Stock options exercised -- -- 140,342 -- 1.1 -- --
Common stock dividends
($0.01 per common share) -- -- -- -- -- (0.5) --
Amortization of unearned
compensation -- -- -- -- -- -- 1.2
Additional minimum pension
liability, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives held by
affiliates, net -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
------- ---- ---------- ------- --------- -------- --------
Balance, December 31, 2001 -- -- 72,311,107 0.7 531.5 645.0 (0.6)
Net loss -- -- -- -- -- (84.4) --
Issuance of common stock, net
of offering expenses -- -- 1,020,356 0.1 21.3 -- --
Issuance of restricted stock -- -- 1,088,072 -- 24.5 -- (3.1)
Stock options exercised -- -- 777,750 -- 9.0 -- --
Income tax benefit of stock
options exercised -- -- -- -- 1.3 -- --
Amortization of unearned
compensation -- -- -- -- -- -- 3.0
Additional minimum pension
liability, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives held by
affiliates, net -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
---- ---- ---------- ------- --------- -------- -------
Balance, December 31, 2002 -- -- 75,197,285 0.8 587.6 560.6 (0.7)
Net income -- -- -- -- -- 74.4 --
Issuance of restricted stock -- -- 14,150 -- 0.3 -- --
Stock options exercised -- -- 198,220 -- 2.4 -- --
Amortization of unearned
compensation -- -- -- -- -- -- 0.2
Additional minimum pension
liability, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives held
by affiliates, net -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
---- ---- ---------- ------- --------- -------- -------
Balance, December 31, 2003 -- $ -- 75,409,655 $ 0.8 $ 590.3 $ 635.0 $ (0.5)
==== ==== ========== ======= ========= ======== =======
See accompanying notes to consolidated financial statements.
4
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
ACCUMULATED OTHER COMPREHENSIVE LOSS
-------------------------------------------------------
ADDITIONAL DEFERRED ACCUMULATED
MINIMUM CUMULATIVE GAINS OTHER TOTAL
PENSION TRANSLATION (LOSSES) ON COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
LIABILITY ADJUSTMENT DERIVATIVES LOSS EQUITY INCOME (LOSS)
--------- ---------- ----------- ---- ------ -------------
Balance, December 31, 2000 $ (2.8) $(256.5) $ -- $(259.3) $ 789.9
Net income -- -- -- -- 22.6 $ 22.6
Issuance of preferred shares -- -- -- -- 5.3
Conversion of preferred shares
into common stock -- -- -- -- --
Issuance of common stock, net
of offering expenses -- -- -- -- 99.3
Issuance of restricted stock -- -- -- -- 3.1
Tax difference on restricted
stock expense -- -- -- -- (4.7)
Stock options exercised -- -- -- -- 1.1
Common stock dividends
($0.01 per common share) -- -- -- -- (0.5)
Amortization of unearned
compensation -- -- -- -- 1.2
Additional minimum pension
liability, net (34.3) -- -- (34.3) (34.3) (34.3)
Deferred gains and losses on
derivatives, net -- -- (0.1) (0.1) (0.1) (0.1)
Deferred gains and losses on
derivatives held by
affiliates, net -- -- (5.8) (5.8) (5.8) (5.8)
Change in cumulative
translation adjustment -- (77.7) -- (77.7) (77.7) (77.7)
------- ---------- ---------- --------- ------------- --------
Balance, December 31, 2001 (37.1) (334.2) (5.9) (377.2) 799.4 (95.3)
========
Net loss -- -- -- -- (84.4) (84.4)
Issuance of common stock, net
of offering expenses -- -- -- -- 21.4
Issuance of restricted stock -- -- -- -- 21.4
Stock options exercised -- -- -- -- 9.0
Income tax benefit of stock
options exercised -- -- -- -- 1.3
Amortization of unearned
compensation -- -- -- -- 3.0
Additional minimum pension
liability, net (56.8) -- -- (56.8) (56.8) (56.8)
Deferred gains and losses on
derivatives, net -- -- 0.9 0.9 0.9 0.9
Deferred gains and losses on
derivatives held by
affiliates, net -- -- 0.4 0.4 0.4 0.4
Change in cumulative
translation adjustment -- 2.0 -- 2.0 2.0 2.0
------- -------- ---------- ------- ------------- --------
Balance, December 31, 2002 (93.9) (332.2) (4.6) (430.7) 717.6 (137.9)
========
Net income -- -- -- -- 74.4 74.4
Issuance of restricted stock -- -- -- -- 0.3
Stock options exercised -- -- -- -- 2.4
Amortization of unearned
compensation -- -- -- -- 0.2
Additional minimum pension
liability, net (34.5) -- -- (34.5) (34.5) (34.5)
Deferred gains and losses on
derivatives, net -- -- (0.8) (0.8) (0.8) (0.8)
Deferred gains and losses on
derivatives held
by affiliates, net -- -- 2.7 2.7 2.7 2.7
Change in cumulative
translation adjustment -- 143.8 -- 143.8 143.8 143.8
------- -------- ---------- ------- ------------- --------
Balance, December 31, 2003 $(128.4) $ (188.4) $ (2.7) $(319.5) $ 906.1 $ 185.6
======= ======== ========== ======= ============= ========
5
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 74.4 $ (84.4) $ 22.6
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle, net of taxes -- 24.1 --
Depreciation and amortization 64.2 50.9 53.2
Amortization of intangibles 1.7 1.4 18.5
Restricted stock compensation 0.5 24.4 4.3
Equity in net earnings of affiliates, net of cash received (0.8) (2.7) 4.0
Deferred income tax (benefit) provision (12.3) 48.4 (32.8)
Write-down / (recoveries) of property, plant and equipment 1.6 11.6 (0.3)
Gain on sale of investment in affiliate -- -- (5.2)
Changes in operating assets and liabilities, net of effects from
purchase of businesses:
Accounts and notes receivable, net 11.5 43.4 111.7
Inventories, net 13.8 (119.0) 39.6
Other current and noncurrent assets (20.4) 2.2 0.5
Accounts payable (16.5) 7.4 16.0
Accrued expenses (50.9) 66.2 (8.2)
Other current and noncurrent liabilities 21.2 (0.7) 1.5
-------- -------- --------
Total adjustments 13.6 157.6 202.8
-------- -------- --------
Net cash provided by operating activities 88.0 73.2 225.4
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (78.7) (54.9) (39.3)
Proceeds from sales of property, plant and equipment 14.9 13.8 4.7
Sale/(purchase) of businesses, net of cash acquired 1.5 (60.7) (147.5)
Sale of unconsolidated affiliates 4.5 1.2 1.3
-------- -------- --------
Net cash used for investing activities (57.8) (100.6) (180.8)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt 1,372.8 659.8 1,256.6
Repayments of long-term debt (1,288.5) (637.6) (1,276.3)
Proceeds from issuance of preferred and common stock 2.5 10.3 6.4
Payment of debt and common stock issuance costs (9.8) -- (13.1)
Dividends paid on common stock -- -- (0.5)
-------- -------- --------
Net cash provided by (used for) financing activities 77.0 32.5 (26.9)
-------- -------- --------
Effects of exchange rate changes on cash and cash equivalents 5.5 0.3 (2.1)
-------- -------- --------
Increase in cash and cash equivalents 112.7 5.4 15.6
Cash and cash equivalents, beginning of year 34.3 28.9 13.3
-------- -------- --------
Cash and cash equivalents, end of year $ 147.0 $ 34.3 $ 28.9
======== ======== ========
See accompanying notes to consolidated financial statements.
6
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
AGCO Corporation ("AGCO" or the "Company") is a leading manufacturer and
distributor of agricultural equipment and related replacement parts throughout
the world. The Company sells a full range of agricultural equipment, including
tractors, combines, hay tools, sprayers, forage equipment and implements. The
Company's products are widely recognized in the agricultural equipment industry
and are marketed under the following brand names: AGCO(R), AgcoAllis(R),
AgcoStar(R), Ag-Chem(R), Challenger(R), Farmhand(R), Fendt(R), Fieldstar(R),
Gleaner(R), Glencoe(R), Hesston(R), Lor*Al(R), Massey Ferguson(R), New Idea(R),
RoGator(R), Soilteq(TM), Spra-Coupe(R), Sunflower(R),Terra-Gator(R), Tye(R),
White(R) and Willmar(R). The Company distributes most of its products through a
combination of approximately 8,400 independent dealers, distributors, associates
and licensees. In addition, the Company provides retail financing in North
America, the United Kingdom, France, Germany, Spain and Brazil through its
retail finance joint ventures with Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland".
BASIS OF PRESENTATION
The Consolidated Financial Statements represent the consolidation of all
wholly-owned companies, majority-owned companies and joint ventures where the
Company has been determined as the primary beneficiary under FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities," ("FIN 46"). The Company
records investments in all other affiliate companies using the equity method of
accounting. Other investments representing an ownership of less than 20% are
recorded at cost. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
REVENUE RECOGNITION
Sales of equipment and replacement parts are recorded by the Company when
title and risks of ownership have been transferred to the independent dealer,
distributor or other customer. Payment terms vary by market and product with
fixed payment schedules on all sales. The terms of sale generally require that a
purchase order or order confirmation accompany all shipments. Title generally
passes to the dealer or distributor upon shipment and the risk of loss upon
damage, theft or destruction of the equipment is the responsibility of the
dealer or distributor. The dealer or distributor may not return equipment or
replacement parts while its contract with the Company is in force. Replacement
parts may be returned only under promotional and annual return programs.
Provisions for returns under these programs are made at the time of sale based
on the terms of the program and historical returns experience. The Company may
provide certain sales incentives to dealers and distributors. Provisions for
sales incentives are made at the time of sale for existing incentive programs.
These provisions are revised in the event of subsequent modification to the
incentive program.
In the United States and Canada, all equipment sales to dealers are
immediately due upon a retail sale of the equipment by the dealer. If not
already paid by the dealer in the United States and Canada, installment payments
are required generally beginning 7 to 13 months after shipment with the
remaining outstanding equipment balance generally due within 12 to 24 months of
shipment. Interest is generally charged on the outstanding balance 4 to 13
months after shipment. Sales terms of some highly seasonal products provide for
payment and due dates based on a specified date during the year regardless of
the shipment date. Equipment sold to dealers in the United States and Canada is
paid in full on average within 12 months of shipment. Sales of replacement parts
are generally payable within 30 days of shipment with terms for some larger
seasonal stock orders generally payable within 6 months of shipment.
In other international markets, equipment sales are generally payable in
full within 30 to 180 days of shipment. Payment terms for some highly seasonal
products have a specific due date during the year regardless of the shipment
7
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
date. Sales of replacement parts are generally payable within 30 days of
shipment with terms for some larger seasonal stock orders generally payable
within 6 months of shipment.
In certain markets, particularly in North America, there is a time lag,
which varies based on the timing and level of retail demand, between the date
the Company records a sale and when the dealer sells the equipment to a retail
customer.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated into U.S. currency in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and
liabilities are translated to U.S. dollars at period-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the period. Translation adjustments are included in "Accumulated other
comprehensive loss" in stockholders' equity. Gains and losses, which result from
foreign currency transactions, are included in the accompanying Consolidated
Statements of Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The estimates made by management primarily relate to accounts and
notes receivable, inventories, deferred income tax valuation allowances,
intangible assets and certain accrued liabilities, principally relating to
reserves for volume discounts and sales incentives, warranty, product liability
and workers' compensation obligations and pensions and postretirement benefits.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents at December 31, 2003 of
$92.9 million consisted of overnight repurchase agreements with financial
institutions. There were no such investments as of December 31, 2002.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable arise from the sale of equipment and
replacement parts to independent dealers, distributors or other customers.
Payments due under the Company's terms of sale are not contingent upon the sale
of the equipment by the dealer or distributor to a retail customer. Under normal
circumstances, payment terms are not extended and equipment may not be returned.
In certain regions, including the United States and Canada, the Company is
obligated to repurchase equipment and replacement parts upon cancellation of a
dealer or distributor contract. These obligations are required by national,
state or provincial laws and require the Company to repurchase dealer or
distributor's unsold inventory, including inventory for which the receivable has
already been paid.
For sales outside of the United States and Canada, the Company does not
normally charge interest on outstanding receivables with its dealers and
distributors. For sales to dealers or distributors in the United States and
Canada, where approximately 27.5% of the Company's net sales were generated in
2003, interest is charged at or above prime lending rates on outstanding
receivable balances after interest-free periods. These interest-free periods
vary by product and generally range from 6 to 12 months with the exception of
certain seasonal products, which bear interest after various periods depending
on the time of year of the sale and the dealer or distributor's sales volume
during the preceding year. For the year ended December 31, 2003, 18.6%, 6.7%,
1.4% and 0.8% of the Company's net sales had maximum interest-free periods
ranging from 1 to 6 months, 7 to 12 months, 13 to 20 months and 21 months or
more, respectively. Actual interest-free periods are shorter than above because
the equipment receivable to dealers or distributors in the United States and
Canada is due immediately upon sale of the equipment to a retail customer. Under
normal circumstances, interest is not forgiven and interest-free periods are not
extended.
8
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accounts and notes receivable are shown net of allowances for sales
incentive discounts available to dealers and for doubtful accounts. Accounts and
notes receivable allowances at December 31, 2003 and 2002 were as follows (in
millions):
2003 2002
---- ----
Sales incentive discounts $ 76.5 $ 69.9
Doubtful accounts 47.2 43.1
-------- --------
$ 123.7 $ 113.0
======== ========
The Company transfers certain accounts receivable to various financial
institutions primarily under its accounts receivable securitization facilities
(Note 4). The Company records such transfers as sales of accounts receivable
when it is considered to have surrendered control of such receivables under the
provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a Replacement of SFAS No. 125."
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out method. Market is net realizable value for finished goods and repair
and replacement parts. For work in process, production parts and raw materials,
market is replacement cost. At December 31, 2003 and 2002, the Company had
recorded $83.6 million and $74.5 million as adjustments for surplus and obsolete
inventories. These adjustments are reflected within "Inventories, net."
Inventories, net at December 31, 2003 and 2002 were as follows (in
millions):
2003 2002
---- ----
Finished goods $ 285.3 $ 288.5
Repair and replacement parts 270.2 235.5
Work in process, production parts and raw materials 248.1 184.6
-------- --------
Inventories, net $ 803.6 $ 708.6
======== ========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is provided on a straight-line basis
over the estimated useful lives of 10 to 40 years for buildings and
improvements, 3 to 15 years for machinery and equipment and 3 to 10 years for
furniture and fixtures. Expenditures for maintenance and repairs are charged to
expense as incurred.
Property, plant and equipment, net at December 31, 2003 and 2002 consisted
of the following (in millions):
2003 2002
---- ----
Land $ 48.6 $ 41.5
Buildings and improvements 164.3 139.1
Machinery and equipment 473.3 327.4
Furniture and fixtures 107.9 77.8
-------- --------
Gross property, plant and equipment 794.1 585.8
Accumulated depreciation and amortization (359.9) (242.1)
-------- --------
Property, plant and equipment, net $ 434.2 $ 343.7
======== ========
INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires companies to cease
amortizing goodwill and other indefinite-lived intangible assets on December 31,
2001 that were in existence at June 30, 2001. Any goodwill and other
indefinite-lived intangible assets resulting from acquisitions completed after
June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method
of testing goodwill and other indefinite-lived intangible assets for impairment
on an
9
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
SFAS No. 142 requires that an initial impairment assessment be performed on all
goodwill and indefinite-lived intangible assets. This assessment involves
determining an estimate of the fair value of the Company's reporting units
including trademarks in order to evaluate whether an impairment of the current
carrying amount of goodwill and other intangible assets exists. Fair values are
derived based on an evaluation of past and expected future performance of the
Company's reporting units.
The Company's acquired intangible assets are as follows (in millions):
December 31, 2003 December 31, 2002
---------------------------------- ----------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amounts Amortization Amounts Amortization
--------- ------------ --------- -------------
Amortized intangible assets:
Patents and Trademarks $ 32.7 $ (2.5) $ 32.7 $ (1.5)
Other 3.7 (1.2) 2.2 (0.5)
--------- -------- --------- ---------
Total $ 36.4 $ (3.7) $ 34.9 $ (2.0)
========= ======== ========= =========
Unamortized intangible assets:
Trademarks $ 53.4 $ 53.4
========= =========
The Company amortizes certain acquired intangible assets over estimated
useful lives of 7 to 30 years. For the years ended December 31, 2003 and 2002,
acquired intangible asset amortization was $1.7 million and $1.4 million,
respectively. In accordance with SFAS No. 142, the Company ceased amortizing
certain trademarks, which it determined to have an indefinite useful life as of
January 1, 2002. The Company estimates amortization of existing intangible
assets will be $1.7 million for 2004, $1.6 million for 2005, $1.5 million for
2006 and 2007 and $1.4 million for 2008.
Changes in the carrying amount of goodwill during the years ended December
31, 2003 and 2002 are summarized as follows (in millions):
North South Europe/Africa/ Sprayer
America America Middle East Division Consolidated
-------- -------- ------------- --------- ------------
Balance as of December 31, 2001 $ 10.2 $ 70.0 $ 92.5 $ 159.2 $ 331.9
Transitional impairment losses (10.2) (17.5) -- -- (27.7)
Acquisitions 4.9 -- -- -- 4.9
Adjustment to purchase price allocations -- -- -- 3.6 3.6
Reversal of unused restructuring
reserves -- -- (2.2) -- (2.2)
Foreign currency translation -- (17.4) 14.0 -- (3.4)
-------- -------- -------- -------- -------
Balance as of December 31, 2002 4.9 35.1 104.3 162.8 307.1
Adjustment to purchase price allocations (1.8) -- (0.1) -- (1.9)
Foreign currency translation -- 7.2 19.3 -- 26.5
-------- -------- -------- -------- -------
Balance as of December 31, 2003 $ 3.1 $ 42.3 $ 123.5 $ 162.8 $ 331.7
======== ======== ======== ======== =======
The goodwill in each of the Company's segments was tested for impairment as
of January 1, 2002 as required by SFAS No. 142. The Company utilized a
combination of valuation techniques including a discounted cash flow approach, a
market multiple approach and a comparable transaction approach. Based on this
evaluation, the Company determined that goodwill associated with its Argentina
and North America reporting units was impaired. As a result, the Company
recorded a pre-tax write-down of goodwill of $27.7 million. This write-down was
recognized as a cumulative effect of a change in accounting principle of $24.1
million, net of $3.6 million of taxes, in the first quarter of 2002. Goodwill is
tested for impairment on an annual basis and more often if indications of
10
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
impairment exist. The results of the Company's analyses conducted as of October
1, 2003 indicated that no further reduction in the carrying amount of goodwill
was required in 2003.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill and
other indefinite-lived intangible assets over periods ranging from 10 to 40
years. In addition, the Company would periodically review the carrying values
assigned to goodwill and other intangible assets based on expectations of future
cash flows and operating income generated by the underlying tangible assets. The
following is a reconciliation of the Company's income (loss) before cumulative
effect of a change in accounting principle and net income (loss) and net income
(loss) per share as if goodwill and indefinite-lived intangible assets were
accounted for in accordance with SFAS No. 142 in prior periods (in millions,
except per share data):
2003 2002 2001
-------- -------- --------
Reported income (loss) before cumulative
effect of a change in accounting principle $ 74.4 $ (60.3) $ 22.6
Add: Goodwill amortization -- -- 10.1
Add: Indefinite-lived trademark
amortization -- -- 1.0
-------- -------- --------
Adjusted income (loss) before cumulative
effect of a change in accounting principle 74.4 (60.3) 33.7
Cumulative effect of a change in
accounting principle, net of taxes -- (24.1) --
-------- -------- --------
Adjusted net income (loss) $ 74.4 $ (84.4) $ 33.7
======== ======== ========
Net income (loss) per common share:
Basic:
Reported income (loss) before cumulative
effect of a change in accounting principle $ 0.99 $ (0.81) $ 0.33
Add: Goodwill amortization -- -- 0.15
Add: Indefinite-lived trademark
amortization -- -- 0.01
-------- -------- --------
Adjusted income (loss) before cumulative
effect of a change in accounting principle 0.99 (0.81) 0.49
Cumulative effect of a change in
accounting principle, net of taxes -- (0.33) --
-------- -------- --------
Adjusted net income (loss) $ 0.99 $ (1.14) $ 0.49
======== ======== ========
Diluted:
Reported income (loss) before cumulative
effect of a change in accounting principle $ 0.98 $ (0.81) $ 0.33
Add: Goodwill amortization -- -- 0.15
Add: Indefinite-lived trademark
amortization -- -- 0.01
-------- -------- --------
Adjusted income (loss) before cumulative
effect of a change in accounting principle 0.98 (0.81) 0.49
Cumulative effect of a change in
accounting principle, net of taxes -- (0.33) --
-------- -------- --------
Adjusted net income (loss) $ 0.98 $ (1.14) $ 0.49
======== ======== ========
LONG-LIVED ASSETS
During 2003 and 2002, the Company reviewed its long-lived assets for
impairment whenever events or changes in circumstances indicated that the
carrying amount of an asset may not be recoverable in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). The Company adopted SFAS No. 144 on January
1, 2002. The adoption of SFAS No. 144 did not affect the Company's consolidated
financial statements. Prior to SFAS No. 144, the Company applied the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". Under SFAS No. 144, an impairment loss is
recognized when the undiscounted future cash flows estimated to be generated by
the asset to be held and used are not sufficient to recover the unamortized
balance of the asset. An impairment loss would be recognized based on the
difference between the carrying values and estimated fair value.
11
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The estimated fair value will be determined based on either the discounted
future cash flows or other appropriate fair value methods with the amount of any
such deficiency charged to income in the current year. If the asset being tested
for recoverability was acquired in a business combination, intangible assets
resulting from the acquisition that are related to the asset are included in the
assessment. Estimates of future cash flows are based on many factors, including
current operating results, expected market trends and competitive influences.
The Company also evaluates the amortization periods assigned to its intangible
assets to determine whether events or changes in circumstances warrant revised
estimates of useful lives. Assets to be disposed of by sale are reported at the
lower of the carrying amount or fair value, less estimated costs to sell. During
2003, the Company recorded a write-down of property, plant and equipment to net
realizable value of $2.0 million in conjunction with assets currently held for
sale. The Company recorded a write-down of property, plant and equipment of
$11.2 million in 2002 in conjunction with the announced closure of its Coventry,
England manufacturing facility (Note 3).
ACCRUED EXPENSES
Accrued expenses at December 31, 2003 and 2002 consisted of the following
(in millions):
2003 2002
-------- --------
Reserve for volume discounts and sales incentives $ 104.4 $ 103.7
Warranty reserves 98.5 83.7
Accrued employee compensation and benefits 93.1 85.8
Accrued taxes 68.4 47.4
Other 125.8 124.6
-------- --------
$ 490.2 $ 445.2
======== ========
WARRANTY RESERVES
The warranty reserve activity for the years ended December 31, 2003 and
2002 consisted of the following (in millions):
2003 2002
-------- --------
Balance at beginning of the year $ 83.7 $ 61.1
Acquisitions -- 1.7
Accruals for warranties issued during the year 76.4 82.8
Settlements made (in cash or in kind) during the year (72.1) (66.0)
Foreign currency translation 10.5 4.1
-------- --------
Balance at the end of the year $ 98.5 $ 83.7
======== ========
The Company's agricultural equipment products are generally under warranty
against defects in material and workmanship for a period of one to four years.
The Company accrues for future warranty costs at the time of sale based on
historical warranty experience.
INSURANCE RESERVES
Under the Company's insurance programs, coverage is obtained for
significant liability limits as well as those risks required to be insured by
law or contract. It is the policy of the Company to self-insure a portion of
certain expected losses related primarily to workers' compensation and
comprehensive general, product and vehicle liability. Provisions for losses
expected under these programs are recorded based on the Company's estimates of
the aggregate liabilities for the claims incurred.
STOCK INCENTIVE PLANS
The Company accounts for all stock-based compensation awarded under its
Non-employee Director Incentive Plan, Long-Term Incentive Plan and Stock Option
Plan as prescribed under APB No. 25, "Accounting for Stock Issued to Employees,"
and also provides the disclosures required under SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and
12
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Disclosure." APB No. 25 requires no recognition of compensation expense for
options granted under the Stock Option Plan as long as certain conditions are
met. APB No. 25 requires recognition of compensation expense under the
Non-employee Director Incentive Plan and Long-Term Incentive Plan at the time
the award is earned. Refer to Note 10 for additional information.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred and are
included in engineering expenses in the Consolidated Statements of Operations.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Cooperative
advertising costs are normally expensed at the time the revenue is earned.
Advertising expenses for the years ended December 31, 2003 and 2002 totaled
approximately $26.0 million and $23.5 million, respectively.
SHIPPING AND HANDLING EXPENSES
All shipping and handling fees charged to customers are included as a
component of net sales. Shipping and handling costs are included as a part of
cost of goods sold, with the exception of certain handling costs included in
selling, general and administrative expenses in the amount of $13.7 million,
$12.8 million and $11.7 million for the years ended December 31, 2003, 2002 and
2001, respectively.
INTEREST EXPENSE, NET
Interest expense, net for the years ended December 31, 2003, 2002 and 2001
consisted of the following (in millions):
2003 2002 2001
-------- -------- --------
Interest expense $ 70.7 $ 66.7 $ 72.1
Interest income (10.7) (9.3) (12.2)
-------- -------- --------
$ 60.0 $ 57.4 $ 59.9
======== ======== ========
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NET INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during each
period. Diluted earnings (loss) per share assumes exercise of outstanding stock
options and vesting of restricted stock into common stock during the periods
outstanding when the effects of such assumptions are dilutive.
A reconciliation of net income (loss) and the weighted average number of
common and common equivalent shares outstanding used to calculate basic and
diluted net income (loss) per common share for the years ended December 31,
2003, 2002 and 2001 is as follows (in millions, except per share data):
13
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2003 2002 2001
-------- -------- --------
Basic Earnings (Loss) Per Share:
Weighted average number of
common shares outstanding 75.2 74.2 68.3
======== ======== ========
Income (loss) before cumulative effect of a change in
accounting principle $ 74.4 $ (60.3) $ 22.6
Cumulative effect of a change in accounting principle, net of
taxes -- (24.1) --
-------- -------- --------
Net income (loss) $ 74.4 $ (84.4) $ 22.6
======== ======== ========
Net income (loss) per common share:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.99 $ (0.81) $ 0.33
Cumulative effect of a change in accounting
principle, net of taxes -- (0.33) --
-------- -------- --------
Net income (loss) $ 0.99 $ (1.14) $ 0.33
======== ======== ========
Diluted Earnings (Loss) Per Share:
Weighted average number of
common shares outstanding 75.2 74.2 68.3
Shares issued upon assumed vesting of restricted stock 0.1 -- 0.1
Shares issued upon assumed exercise of outstanding
stock options 0.3 -- 0.1
-------- -------- --------
Weighted average number of common and common
equivalent shares 75.6 74.2 68.5
======== ======== ========
Income (loss) before cumulative effect of a change in
accounting principle $ 74.4 $ (60.3) $ 22.6
Cumulative effect of a change in accounting principle, net of
taxes -- (24.1) --
-------- -------- --------
Net income (loss) $ 74.4 $ (84.4) $ 22.6
======== ======== ========
Net income (loss) per common share:
Income (loss) before cumulative effect of a change
in accounting principle $ 0.98 $ (0.81) $ 0.33
Cumulative effect of a change in accounting
principle, net of taxes -- (0.33) --
-------- -------- --------
Net income (loss) $ 0.98 $ (1.14) $ 0.33
======== ======== ========
Stock options to purchase 0.7 million, 0.6 million, and 2.1 million shares
for the years ended December 31, 2003, 2002 and 2001, respectively, were
outstanding but not included in the calculation of weighted average of common
and common equivalent shares outstanding because the option exercise prices were
higher than the average market price of the Company's common stock during the
related period. In addition, the diluted loss per share calculation for 2002
excludes the potentially dilutive effect of options to purchase approximately
0.7 million shares of the Company's common stock as the Company incurred a loss
and their inclusion would have been anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss), defined as the total of
net income (loss) and all other non-owner changes in equity and the components
thereof in the Consolidated Statements of Stockholders' Equity. The components
of other comprehensive income (loss) and the related tax effects for the years
ended December 31, 2003, 2002 and 2001 are as follows (in millions):
14
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2003
--------------------------------------------
Before-tax Income After-tax
Amount Taxes Amount
------------ ------------ ------------
Additional minimum pension liability $ (50.3) $ 15.8 $ (34.5)
Unrealized loss on derivatives (1.4) 0.6 (0.8)
Unrealized gain on derivatives held by affiliates 4.5 (1.8) 2.7
Foreign currency translation adjustments 143.8 -- 143.8
------------ ------------ ------------
Total other comprehensive income $ 96.6 $ 14.6 $ 111.2
============ ============ ============
2002
--------------------------------------------
Before-tax Income After-tax
Amount Taxes Amount
------------ ------------ ------------
Additional minimum pension liability $ (83.7) $ 26.9 $ (56.8)
Unrealized gain on derivatives 1.5 (0.6) 0.9
Unrealized gain on derivatives held by affiliates 0.7 (0.3) 0.4
Foreign currency translation adjustments 2.0 -- 2.0
------------ ------------ ------------
Total other comprehensive loss $ (79.5) $ 26.0 $ (53.5)
============ ============ ============
2001
--------------------------------------------
Before-tax Income After-tax
Amount Taxes Amount
------------ ------------ ------------
Additional minimum pension liability $ (49.0) $ 14.7 $ (34.3)
Unrealized loss on derivatives (0.2) 0.1 (0.1)
Unrealized loss on derivatives held by affiliates (9.8) 4.0 (5.8)
Foreign currency translation adjustments (77.7) -- (77.7)
------------ ------------ -----------
Total other comprehensive loss $ (136.7) $ 18.8 $ (117.9)
============ ============ ===========
FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's Consolidated Balance Sheets
for "Cash and cash equivalents," "Accounts and notes receivable" and "Accounts
payable" approximate fair value due to the immediate or short-term maturity of
these financial instruments. The carrying amount of long-term debt under the
Company's Revolving Credit Facility (Note 7) approximates fair value based on
the borrowing rates currently available to the Company for loans with similar
terms and average maturities. At December 31, 2003, the estimated fair values of
the Company's 9 1/2% Senior Notes, 8 1/2% Senior Subordinated Notes and 1 3/4%
Convertible Notes (Note 7), based on their listed market values, were $272.8
million, $249.1 million and $226.4 million, respectively, compared to their
carrying values of $250.0 million, $249.3 million and $201.3 million,
respectively. At December 31, 2002, the estimated fair values of the Company's 9
1/2% Senior Notes and 8 1/2% Senior Subordinated Notes, based on their listed
market values, were $272.1 million and $250.0 million, respectively, compared to
their carrying values of $250.0 million and $249.1 million, respectively.
The Company enters into foreign exchange forward contracts to hedge the
foreign currency exposure of certain receivables, payables and committed
purchases and sales. These contracts are for periods consistent with the
exposure being hedged and generally have maturities of one year or less. At
December 31, 2003 and 2002, the Company had foreign exchange forward contracts
outstanding with gross notional amounts of $1,202.9 million and $225.4 million,
respectively. The changes in fair value resulted in a gain on the foreign
exchange forward contracts at December 31, 2003 and 2002 of $0.6 million and
$7.1 million, respectively. These foreign exchange forward contracts do not
subject the Company's results of operations to risk due to exchange rate
fluctuations because gains and losses on these contracts generally offset gains
and losses on the exposure being hedged. The Company does not enter into any
foreign exchange forward contracts for speculative trading purposes.
The notional amounts of foreign exchange forward contracts do not
represent amounts exchanged by the parties and therefore are not a measure of
the Company's risk. The amounts exchanged are calculated on the basis of the
15
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
notional amounts and other terms of the contracts. The credit and market risks
under these contracts are not considered to be significant.
ACCOUNTING CHANGES
On January 1, 2002, the Company adopted SFAS No. 142. In accordance with
the transition provisions of SFAS NO. 142, the goodwill in each of the Company's
segments was tested for impairment as of January 1, 2002 as required by SFAS No.
142. The Company utilized a combination of valuation techniques including a
discounted cash flow approach, a market multiple approach and a comparable
transaction approach. Based on this evaluation, the Company determined that
goodwill associated with its Argentine and North American reporting units was
impaired. As a result, the Company recorded a pre-tax write-down of goodwill of
$27.7 million. This write-down was recognized as a cumulative effect of a change
in accounting principle of $24.1 million, net of $3.6 million of taxes, in the
first quarter of 2002.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity capitalizes the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the entity either settles the
obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of this
standard in 2003 had no impact on the Company's current results of operations or
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the requirement under
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," to report
gains and losses from extinguishments of debt as extraordinary items in the
income statement. Accordingly, gains or losses from extinguishments of debt for
fiscal years beginning after May 15, 2002 shall not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30. Upon adoption of SFAS No. 145, any gain or
loss on extinguishment of debt previously classified as an extraordinary item in
prior periods presented that does not meet the criteria of APB Opinion No. 30
for such classification should be reclassified to conform with the provisions of
SFAS No. 145. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. In
addition, SFAS No. 145 amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The new standard required the Company to
reclassify the extraordinary loss recorded in 2001 to interest expense, net
which resulted in a reduction in income before cumulative effect of a change in
accounting principle of $0.8 million, or $0.01 per share but had no impact on
net income or stockholders' equity. The consolidated statements of operations
reflect the adoption of this standard.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF Issue No. 94-3, a liability for an exit cost as defined in the Issue
was recognized at the date of an entity's commitment to an exit plan. Therefore,
SFAS No. 146 eliminates the definition and requirements for recognition of exit
costs in EITF Issue No. 94-3, and also establishes that fair value is the
objective for initial measurement of the liability. SFAS No. 146 is effective
for all exit or disposal activities that are initiated after December 31, 2002.
The adoption of SFAS No. 146 did not impact the Company's restructuring plans
related to the closure of the Coventry, England manufacturing facility. The
DeKalb, Illinois closure was accounted for under the requirements of this
standard.
16
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure about the guarantor's obligations under certain
guarantees that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements are effective after December 15, 2002 and are included in Note 12.
The adoption of FIN 45 did not have a material impact on the results of
operations or financial position of the Company.
In January 2003, the FASB issued FIN 46, as revised in December 2003,
which addresses the consolidation by business enterprises of variable interest
entities, to which the usual condition of consolidating a controlling financial
interest does not apply. FIN 46 requires an entity to assess its equity
investments to determine if they are variable interest entities. As defined in
FIN 46, variable interests are contractual, ownership or other interests in an
entity that change with changes in the entity's net asset value. Variable
interests in an entity may arise from financial instruments, service contracts,
guarantees, leases or other arrangements with the variable interest entity. An
entity that will absorb a majority of the variable interest entity's expected
losses or expected residual returns, as defined in FIN 46, is considered the
primary beneficiary of the variable interest entity. The primary beneficiary
must include the variable interest entity's assets, liabilities and results of
operations in its consolidated financial statements. FIN 46 is immediately
effective for all variable interest entities created after January 31, 2003. For
variable interest entities created prior to this date, the provisions of FIN 46
must be applied no later than the first interim period ending after March 15,
2004; however, all public companies must apply the unmodified provisions of FIN
46 to entities considered "special purpose entities" by the end of the first
reporting period ending after December 15, 2003. The Company analyzed the
provisions of FIN 46 as they relate to its current securitization facilities and
special purpose entity related to these facilities, and concluded that that it
did not believe the special purpose entity or its securitization facilities are
impacted by this interpretation. In addition, the Company analyzed the
provisions of FIN 46 as they relate to the accounting for its investments in
joint ventures and determined that it is the primary beneficiary of one of its
joint ventures, GIMA. GIMA was established in 1994 between the Company and
Renault Agriculture S.A. ("Renault") to cooperate in the field of purchasing,
design and manufacturing of components for agricultural tractors. Each party has
a 50% ownership in the joint venture. On July 1, 2003, the Company began
consolidating the accounts of GIMA. Historically, the Company accounted for its
investment in GIMA under the equity method. The consolidation of GIMA did not
have a material impact on the results of operations or financial position of the
Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." The statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement amends Statement No. 133 for decisions made
as part of the Derivatives Implementation Group process, in connection with
other Board projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative. The adoption of this standard in 2003 had no impact on the
Company's current results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, the Company's third quarter of fiscal
2003. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability. The adoption of this standard in 2003 had no
impact on the Company's current results of operations or financial position.
2. ACQUISITIONS
On November 7, 2002, the Company completed the acquisition of Sunflower
Manufacturing Co., Inc. ("Sunflower"), a former product line of SPX Corporation.
Sunflower is a leading producer of tillage, seeding and specialty harvesting
equipment, serving the North American market and is located in Beloit, Kansas.
The purchase price was approximately $48.0 million and was funded through
borrowings under the Company's revolving credit facility. The acquired assets
and liabilities consist primarily of inventories, accounts receivables,
property, plant and
17
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
equipment, technology, tradenames and patents. The results of operations for the
Sunflower acquisition are included in the Company's Consolidated Financial
Statements as of and from the date of acquisition. The Company recorded
approximately $3.1 million of goodwill and approximately $8.7 million of
tradenames, patents and other identifiable intangible assets associated with the
acquisition of Sunflower. The tradenames, patents and other identifiable
intangible assets are being amortized over a period from 12 to 30 years. The
Sunflower acquisition was accounted for in accordance with SFAS No. 141,
"Business Combinations" ("SFAS No. 141"), and accordingly, the purchase price
was allocated to the assets acquired and the liabilities assumed based on their
estimated fair values as of the acquisition date.
On March 5, 2002, the Company completed its agreement with Caterpillar
Inc. ("Caterpillar") to acquire the design, assembly and marketing of the new MT
Series of Caterpillar's Challenger tractor line. The Company issued
approximately 1.0 million shares of common stock in the transaction valued at
approximately $21.3 million based on the closing price of the Company's common
stock on the acquisition date. During July 2002, the Company received
approximately $0.9 million from Caterpillar pursuant to the terms of the
purchase agreement, whereby any proceeds Caterpillar received upon the sale of
the Company's stock above $21.0 million would be refunded to the Company. In
addition, the Company purchased approximately $13.6 million of initial
production inventory from Caterpillar in connection with a supply agreement with
Caterpillar. The results of operations for this product line have been included
in the Company's results as of and from the date of the acquisition. The
acquired assets consisted primarily of inventories and property, plant and
equipment. There were no accounts receivable acquired or liabilities assumed in
the transaction since all rights and obligations relating to past sales of the
prior series of the Challenger product line remained with Caterpillar. The
Challenger acquisition was accounted for in accordance with SFAS No. 141, and
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their estimated fair values as of the acquisition
date. Since the estimated fair value of the assets acquired was in excess of the
purchase price, no goodwill was recorded in connection with the acquisition.
On April 16, 2001, the Company completed the acquisition of Ag-Chem
Equipment Co., Inc. ("Ag-Chem"), a manufacturer and distributor of
self-propelled sprayers. The Company paid Ag-Chem shareholders approximately
$247.2 million consisting of approximately 11.8 million AGCO common shares and
$147.5 million of cash. The funding of the cash component of the purchase price
was made through borrowings under the Company's revolving credit facility. The
acquired assets and liabilities primarily consisted of technology, trademarks,
tradenames, accounts receivables, inventories, property, plant and equipment,
accounts payable and accrued liabilities. The results of operations for the
Ag-Chem acquisition are included in the Company's Consolidated Financial
Statements as of and from the date of acquisition. The Company recorded
approximately $145.2 million of goodwill and $27.2 million of trademarks and
other identifiable intangible assets associated with the acquisition of Ag-Chem.
The trademarks and other identifiable intangible assets are being amortized over
periods ranging from 8 to 30 years.
The Ag-Chem acquisition was accounted for as a purchase in accordance with
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of the acquisition date. In
connection with the acquisition of Ag-Chem, the Company established $3.1 million
in liabilities primarily related to severance, employee relocation and other
costs associated with the planned closure of Ag-Chem's Benson, Minnesota
manufacturing facility, Minnetonka, Minnesota administrative office and 15 parts
and service facilities.
During the first quarter of 2002, all costs in connection with the
liabilities established had been incurred. Accordingly, the Company adjusted its
purchase price allocation to reflect a reduction in these established
liabilities by $0.4 million. In addition, the Company finalized its purchase
price allocation resulting in a net total goodwill adjustment of approximately
$3.6 million. The adjustment primarily related to the reflection of final
appraised values of property, plant and equipment acquired and the establishment
of certain liabilities related to outstanding litigation and warranty
obligations.
In connection with the acquisition of Xaver Fendt GmbH in 1997, the
Company established liabilities of $7.1 million primarily related to severance
and other costs associated with the planned closure of certain sales and
marketing offices and parts distribution operations. Approximately $3.1 million
of the reserves originally established remained at December 31, 2001. During the
second quarter of 2002, the Company reversed to goodwill approximately $2.2
million of restructuring reserves determined not to be required. During 2002,
$0.8 million of
18
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
costs were incurred which resulted in a remaining $0.1 million of reserves at
December 31, 2002. This amount was reversed to goodwill during the fourth
quarter of 2003, as it was determined not to be required.
The following unaudited pro forma data summarizes the results of
operations for the years ended December 31, 2002 and 2001 as if the Ag-Chem,
Challenger and Sunflower acquisitions had occurred at the beginning of 2001. The
unaudited pro forma information has been prepared for comparative purposes only
and does not purport to represent what the results of operations of the Company
would actually have been had the transactions occurred on the dates indicated or
what the results of operations may be in any future period.
Years Ended December 31,
------------------------------------
2002 2001
--------------- -----------------
(in millions, except per share data)
Net sales $ 2,962.5 $ 2,765.6
Loss before cumulative effect of a change in
accounting principle (57.2) (33.9)
Net loss (81.3) (33.9)
Net loss per common share - basic $ (1.08) $ (0.47)
Net loss per common share - diluted $ (1.08) $ (0.47)
3. RESTRUCTURING AND OTHER INFREQUENT EXPENSES
The Company recorded restructuring and other infrequent expenses of $27.6
million, $42.7 million and $13.0 million for the years ended December 31, 2003,
2002 and 2001, respectively. The 2003 expense consisted of $12.0 million
associated with the closure of the Company's tractor manufacturing facility in
Coventry, England, $12.4 million associated with litigation regarding its U.K.
pension plan, $2.5 million associated with the closure of the Company's tractor
manufacturing facility in DeKalb, Illinois, $1.2 million associated with various
functional rationalizations initiated during 2002 and 2003 and a $1.5 million
write-down of real estate associated with the closed Ag-Chem Willmar, Minnesota
facility, offset by a $2.0 million gain related to the sale of machinery and
equipment at auction from the Coventry facility. The 2002 expense consisted of
$40.2 million associated with the closure of the Company's tractor manufacturing
facility in Coventry, England and $3.5 million primarily associated with various
functional rationalizations, offset by a $1.0 million net gain related to the
sale of two closed manufacturing facilities. The 2001 expense consisted of $8.5
million associated with the integration of the Ag-Chem acquisition and $4.5
million associated with manufacturing facility rationalizations commenced in
prior years.
DEKALB RATIONALIZATION
In March 2003, the Company announced the closure of the Challenger track
tractor facility located in DeKalb, Illinois and the relocation of production to
its facility in Jackson, Minnesota. Production at the DeKalb facility ceased in
May 2003 and was relocated and resumed in the Minnesota facility in June 2003.
In connection with the restructuring plan, the Company recorded approximately
$2.5 million of restructuring and other infrequent expenses during 2003. The
components of the restructuring expenses are summarized in the following table:
Write-down Facility
of Relocation
Property, Employee and Facility
Plant and Employee Retention Transition Closure
Equipment Severance Payments Costs Costs Total
------------ ------------ ------------ ------------ ------------ ------------
2003 provision $ 0.5 $ 0.5 $ 0.2 $ 0.8 $ 0.5 $ 2.5
Less: Non-cash expense 0.5 -- -- -- -- 0.5
------------ ------------ ------------ ------------ ------------ ------------
Cash expense -- 0.5 0.2 0.8 0.5 2.0
2003 cash activity -- (0.5) (0.2) (0.8) (0.5) (2.0)
------------ ------------ ------------ ------------ ------------ ------------
Balances as of December 31,
2003 $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============
19
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The write-down of property, plant and equipment represents the impairment
of real estate resulting from the facility closure and based upon the estimated
fair value of the assets compared to their carrying value. The estimated fair
value of the real estate was determined based on current conditions in the
market. The severance costs relate to the termination of 134 employees,
following the completion of production at the DeKalb facility. As of December
31, 2003, all employees have been terminated. The employee retention payments
relate to incentives paid to DeKalb employees who remained employed until
certain future termination dates and were accrued over the term of the retention
period. The severance costs were also accrued over the term of the retention
period, as employees were entitled to severance payments only if they remained
in service through their scheduled termination dates. Certain employees
relocated to the Jackson, Minnesota facility, and costs associated with
relocation were expensed as incurred. A portion of the machinery and equipment
and all tooling located at DeKalb were relocated to the Jackson, Minnesota
facility during the second quarter of 2003. The remaining portion of machinery
and equipment was disposed of or will be sold. The buildings, land and
improvements are being marketed for sale.
COVENTRY RATIONALIZATION
During 2002, the Company announced and initiated a restructuring plan
related to the closure of its tractor manufacturing facility in Coventry,
England and the relocation of existing production at Coventry to the Company's
Beauvais, France and Canoas, Brazil manufacturing facilities. The components of
the restructuring expenses are summarized in the following table:
Write-down
of
Property, Employee Facility
Plant and Employee Retention Closure
Equipment Severance Payments Costs Total
------------ ------------ ------------ ------------ ------------
2002 provision $ 11.2 $ 8.3 $ 18.3 $ 2.4 $ 40.2
Less: Non-cash expense 11.2 -- -- -- 11.2
------------ ------------ ------------ ------------ ------------
Cash expense -- 8.3 18.3 2.4 29.0
2002 cash activity -- (0.1) (0.3) (0.3) (0.7)
------------ ------------ ------------ ------------ ------------
Balances as of December 31,
2002 -- 8.2 18.0 2.1 28.3
------------ ------------ ------------ ------------ ------------
2003 provision -- -- 10.2 1.8 12.0
2003 cash activity -- (8.9) (26.7) (2.5) (38.1)
Foreign currency translation -- 1.2 0.5 0.2 1.9
------------ ------------ ------------ ------------ ------------
Balances as of
December 31, 2003 $ -- $ 0.5 $ 2.0 $ 1.6 $ 4.1
============ ============ ============ ============ ============
The write-down of property, plant and equipment represents the impairment
of machinery and equipment resulting from the facility closure and was based on
the estimated fair value of the assets compared to their carrying value. The
estimated fair value of the equipment was determined based on current conditions
in the market. The machinery, equipment and tooling will be disposed of after
production ceases and the buildings, land and improvements are being marketed
for sale. The severance costs relate to the termination of 1,054 employees. As
of December 31, 2003, 1,024 employees have been terminated. The employee
retention payments relate to incentives paid to Coventry employees who remain
employed until certain future termination dates and are accrued over the term of
the retention period. The facility closure costs include certain noncancelable
operating lease terminations and other facility exit costs. During the fourth
quarter of 2003, the Company sold machinery and equipment at auction and as a
result of those sales, recognized a net gain of approximately $2.0 million. This
gain has been reflected in "Restructuring and other infrequent expenses" in the
Company's Consolidated Statements of Operations. The $4.1 million of
restructuring costs accrued at December 31, 2003 are expected to be incurred
during 2004. On January 30, 2004, the Company sold the land, buildings and
improvements of the Coventry facility (Note 16).
In October 2002, the Company applied to the High Court in London, England,
for clarification of a provision in its U.K. pension plan that governs the value
of pension payments payable to an employee who is over 50 years old and who
retires from service in certain circumstances prior to his normal retirement
date. The primary matter before the High Court was whether pension payments to
such employees, including those who take early retirement and those terminated
due to the closure of the Company's Coventry facility, should be reduced to
compensate for the
20
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
fact that the pension payments begin prior to a normal retirement age of 65. In
December 2002, the High Court ruled against the Company's position that reduced
pension payments are payable in the context of early retirements or
terminations. The Company appealed the High Court's ruling, and in July 2003,
the Court of Appeal ruled that employees terminated as a result of the closure
of the Coventry facility do not qualify for full pensions, thereby reversing the
earlier High Court ruling for this aspect of the case, but ruled that other
employees might qualify. The Court of Appeal ruling is subject to further
appeal. The representatives of the beneficiaries of the pension plan have sought
the right to appeal to the House of Lords and the House of Lords has yet to
conclude on the matter.
As a result of the court's ruling in that case, certain employees who took
early retirement in prior years under voluntary retirement arrangements would be
entitled to additional payments, and therefore the Company recorded a charge in
the second quarter of 2003, included in "Restructuring and other infrequent
expenses", of approximately $12.4 million to reflect its current estimate of the
additional pension liability associated with previous early retirement programs.
In the event that the Court of Appeal ruling is successfully challenged, the
Company may incur an additional pension liability within the range of
approximately $40.0 million to $50.0 million. The timing of the Company's
obligation to fund cash into the pension plan with respect to this increased
liability, as well as the Company's existing liabilities, depends on many
factors including the overall funded status of the plan and the investment
returns of the plan's assets and is the subject of ongoing negotiations with
representatives of the beneficiaries of the pension plan.
2002 AND 2003 FUNCTIONAL RATIONALIZATIONS
During 2002, the Company initiated several rationalization plans and
recorded restructuring and other infrequent expenses of $3.4 million. The
expenses primarily related to severance costs and certain lease terminations and
other exit costs associated with the rationalization of the Company's European
engineering and marketing personnel, certain components of the Company's German
manufacturing facilities located in Kempten and Marktoberdorf, Germany and the
restructuring of the Company's North American information systems function.
During the year ended December 31, 2003, the Company recorded an additional $1.2
million of restructuring and other infrequent expenses associated with the
rationalization initiatives in Germany as well as a European combine engineering
rationalization that was initiated during 2003. A total of $3.6 million of
severance costs have been recorded associated with these activities, and relate
to the termination of approximately 180 employees in total. At December 31,
2003, a total of approximately $3.8 million of expenses had been incurred and
paid. The remaining accrued balance of $0.8 million as of December 31, 2003 is
expected to be incurred during 2004.
AG-CHEM ACQUISITION INTEGRATION
In 2001, the Company announced its plans to rationalize certain facilities
as part of the Ag-Chem acquisition integration. The Company consolidated AGCO's
Willmar, Minnesota manufacturing facility and Ag-Chem's Benson, Minnesota
manufacturing facility into Ag-Chem's Jackson, Minnesota manufacturing plant. In
addition, the Company closed Ag-Chem's Minnetonka, Minnesota administrative
offices and relocated all functions to the Jackson facility. The Company also
closed fifteen parts and service facilities and integrated parts warehousing and
logistics into AGCO's North American parts distribution system.
All employees identified in the restructuring plan had been terminated as
of the end of the first quarter of 2002. Employee retention payments related to
incentives paid to Ag-Chem and AGCO employees who remained employed until
certain future termination dates were accrued over the term of the retention
period. The Company incurred facility closure costs, which included employee
relocation costs and other exit costs at the Company's Willmar location after
operations ceased. The facility relocation and transition costs were expensed as
incurred and represented costs to relocate inventory and machinery and costs to
integrate operations into the remaining facilities. There were no remaining
costs accrued related to these rationalizations as of December 31, 2002 and
there were no costs incurred related to this rationalization during 2003. The
components of the restructuring expenses are summarized in the following table
(in millions):
21
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Write-down Facility
of Relocation
Property, Employee Facility and
Plant and Employee Retention Closure Transition
Equipment Severance Payments Costs Costs Total
------------ ------------ ------------ ------------ ------------ ------------
2001 Provision $ 0.4 $ 1.3 $ 1.4 $ 0.8 $ 4.6 $ 8.5
Less: Non-cash expense 0.4 -- -- -- -- 0.4
------------ ------------ ------------ ------------ ------------ ------------
Cash expense -- 1.3 1.4 0.8 4.6 8.1
2001 cash activity -- (0.7) (1.2) (0.7) (4.6) (7.2)
------------ ------------ ------------ ------------ ------------ ------------
Balances as of December 31,
2001 -- 0.6 0.2 0.1 -- 0.9
2002 Provision -- 0.2 -- -- 0.1 0.3
Reversal of 2001 Provision -- -- (0.2) -- -- (0.2)
2002 cash activity -- (0.8) -- (0.1) (0.1) (1.0)
------------ ------------ ------------ ------------ ------------ ------------
Balances as of December 31,
2002 $ -- $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============ ============
After production ceased at the Willmar facility and manufacturing had been
consolidated into Jackson, Minnesota, the Company began marketing the Willmar
facility and real estate for sale, along with the other closed facilities. The
Benson and Minnetonka facilities and several of the parts and service facilities
were sold during 2001 and 2002. During the fourth quarter of 2003, the Company
wrote down the carrying value of the real estate of the Willmar facility to its
estimated fair value. The estimated fair value of the real estate was determined
based on current conditions in the market. The write-down of the real estate of
approximately $1.5 million was reflected in "Restructuring and other infrequent
expenses" in the Company's Condensed Consolidated Statements of Operations.
1999 THROUGH 2001 MANUFACTURING FACILITY RATIONALIZATIONS
In 2000, the Company permanently closed its combine manufacturing facility
in Independence, Missouri and its Lockney, Texas and Noetinger, Argentina
implement manufacturing facilities. In 1999, the Company permanently closed its
Coldwater, Ohio manufacturing facility. The majority of production in these
facilities has been relocated to existing facilities or outsourced to third
parties. The Company expensed approximately $4.5 million and $24.9 million
associated with these rationalizations during 2001 and 2000, respectively, and
had $1.0 million of costs accrued related to these rationalizations as of
December 31, 2001. The Company did not record any additional restructuring and
other infrequent expenses in 2002 or 2003 related to these closures. The Company
incurred and paid approximately $0.5 million of expenses in each of the years
ending December 31, 2003 and 2002, respectively. There are no remaining costs
accrued related to these rationalizations as of December 31, 2003.
In addition, during 2002, the Company sold its closed manufacturing
facilities in Independence, Missouri and Coldwater, Ohio. A net gain on the sale
of these two facilities of $1.0 million was reflected in "Restructuring and
other infrequent expenses" in the Company's Consolidated Statements of
Operations.
4. ACCOUNTS RECEIVABLE SECURITIZATION
At December 31, 2003 and 2002, the Company has accounts receivable
securitization facilities in the United States, Canada, and Europe totaling
approximately $448.5 million and $424.9 million, respectively. Under these
facilities, wholesale accounts receivable are sold on a revolving basis to
commercial paper conduits either on a direct basis or through a wholly-owned
special purpose U.S. subsidiary. The Company completed the U.S. securitization
facility in 2000 and completed the Canadian and European securitization
facilities in 2001. Outstanding funding under these facilities totaled
approximately $448.4 million at December 31, 2003 and $423.9 million at December
31, 2002. The funded balance has the effect of reducing accounts receivable and
short-term liabilities by the same amount.
Losses on sales of receivables primarily from securitization facilities
were $14.6 million in 2003, $14.8 million in 2002 and $23.5 million in 2001. The
amount for 2001 includes $4.0 million of losses and transaction fees associated
with the initial closing and funding of the Canadian and European facilities.
The losses are determined by calculating the estimated present value of
receivables sold compared to their carrying amount. The present value is based
on historical collection experience and a discount rate representing the spread
over LIBOR as prescribed
22
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
under the terms of the agreements. Other information related to these facilities
and assumptions used in loss calculations are summarized below (dollar amounts
in millions):
U.S. Canada Europe Total
----------------- ----------------- ------------------ -----------------
2003 2002 2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ---- ---- ----
Unpaid balance of receivables
sold at December 31 $307.6 $311.9 $ 95.9 $ 78.2 $160.9 $133.1 $564.4 $523.2
Retained interest in
receivables sold $ 57.6 $ 61.9 $ 35.9 $ 18.2 $ 22.5 $ 19.2 $116.0 $ 99.3
Credit losses on receivables
sold $ 1.6 $ 1.2 $ -- $ -- $ -- $ -- $ 1.6 $ 1.2
Average liquidation period
(months) 6.3 5.9 6.3 5.9 2.9 2.4
Discount rate 1.8% 2.4% 3.6% 3.1% 3.2% 4.2%
The Company continues to service the sold receivables and maintains a
retained interest in the receivables. The Company received approximately $5.7
million in servicing fees in 2003 and 2002 and $4.3 million in 2001. No
servicing asset or liability has been recorded since the estimated fair value of
the servicing of the receivables approximates the servicing income. The retained
interest in the receivables sold is included in the caption "Accounts and notes
receivable, net" in the accompanying Consolidated Balance Sheets. The Company's
risk of loss under the securitization facilities is limited to a portion of the
unfunded balance of receivables sold which is approximately 15% of the funded
amount. The Company maintains reserves for the portion of the residual interest
it estimates is uncollectible. At December 31, 2003 and 2002, approximately $5.2
million and $3.3 million, respectively, of the unpaid balance of receivables
sold was past due 60 days or more. The fair value of the retained interest is
approximately $113.6 million and $97.3 million, respectively, compared to the
carrying amount of $115.9 million and $99.3 million, respectively, at December
31, 2003 and 2002, and is based on the present value of the receivables
calculated in a method consistent with the losses on sales of receivables
discussed above. Assuming a 10% and 20% increase in the average liquidation
period, the fair value of the residual interest would decline by $0.2 million
and $0.4 million, respectively. Assuming a 10% and 20% increase in the discount
rate assumed the fair value of the residual interest would decline by $0.2
million and $0.4 million, respectively. For 2003, the Company received
approximately $1,047.8 million from sales of receivables and $5.7 million for
servicing fees. For 2002, the Company received $919.5 million from sales of
receivables and $5.7 million for servicing fees. For 2001, the Company received
approximately $879.2 million from sales of receivables and $4.3 million for
servicing fees.
5. INVESTMENTS IN AFFILIATES
Investments in affiliates as of December 31, 2003 and 2002 were as
follows (in millions):
2003 2002
-------- --------
Retail finance joint ventures $ 79.9 $ 64.7
Manufacturing joint venture 2.2 4.9
Other joint ventures 9.5 8.9
-------- --------
$ 91.6 $ 78.5
======== ========
The manufacturing joint venture as of December 31, 2003 consisted of a
joint venture with an unrelated manufacturer to produce engines in South
America. The other joint ventures represent minority investments in farm
equipment manufacturers and licensees.
The Company's equity in net earnings of affiliates for the years ended
December 31, 2003, 2002 and 2001 were as follows (in millions):
2003 2002 2001
--------- --------- ---------
Retail finance joint ventures $ 14.6 $ 12.7 $ 10.1
Other joint ventures 2.8 1.0 0.5
--------- --------- ---------
$ 17.4 $ 13.7 $ 10.6
========= ========= =========
The manufacturing joint venture of the Company primarily sells its
products to the joint venture partners at prices which result in operating at or
near breakeven on an annual basis.
23
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Summarized combined financial information of the Company's retail
finance joint ventures as of December 31, 2003 and 2002 and for the years ended
December 31, 2003, 2002 and 2001 were as follows (in millions):
As of December 31,
----------------------------
2003 2002
-------- ---------
Total assets $1,894.0 $ 1,539.0
Total liabilities 1,720.3 1,400.6
Partners' equity 173.7 138.4
For the Years Ended December 31,
----------------------------------------------
2003 2002 2001
--------- -------- ---------
Revenues $ 156.0 $ 140.9 $ 138.1
Costs 102.8 98.6 104.5
--------- -------- ---------
Income before income taxes $ 53.2 $ 42.3 $ 33.6
========= ======== =========
The majority of the assets of the Company's retail finance joint
ventures represent finance receivables. The majority of the liabilities
represent notes payable and accrued interest. Under the various joint venture
agreements, Rabobank or its affiliates are obligated to provide financing to the
joint venture companies. AGCO does not guarantee the obligations of the retail
finance joint ventures.
6. INCOME TAXES
The sources of income before income taxes, equity in net earnings of
affiliates and cumulative effect of a change in accounting principle were as
follows for the years ended December 31, 2003, 2002 and 2001 (in millions):
2003 2002 2001
--------- --------- ---------
United States $ (28.4) $ (98.7) $ (105.9)
Foreign 126.7 124.5 119.3
--------- --------- ---------
Income before income taxes, equity in net earnings
of affiliates and the cumulative effect of a
change in accounting principle $ 98.3 $ 25.8 $ 13.4
========= ========= =========
The provision for income taxes by location of the taxing jurisdiction
for the years ended December 31, 2003, 2002 and 2001 consisted of the following
(in millions):
2003 2002 2001
---------- ------- -------
Current:
United States:
Federal $ (3.9) $ -- $ --
State -- -- --
Foreign 57.5 51.4 34.7
---------- ------- -------
53.6 51.4 34.7
Deferred:
United States:
Federal -- 43.3 (34.3)
State -- 9.5 (4.1)
Foreign (12.3) (4.4) 5.1
---------- ------- -------
(12.3) 48.4 (33.3)
---------- ------- -------
$ 41.3 $ 99.8 $ 1.4
========== ======= =======
At December 31, 2003, the Company had approximately $929.6 million of
undistributed earnings of the Company's foreign subsidiaries. These earnings are
considered to be indefinitely invested, and accordingly, no United States
federal or state income taxes have been provided on these earnings.
Determination of the amount of
24
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
unrecognized deferred taxes on these earnings is not practical, however,
unrecognized foreign tax credits would be available to reduce a portion of the
tax liability.
A reconciliation of income taxes computed at the United States federal
statutory income tax rate (35%) to the provision for income taxes reflected in
the Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001 is as follows (in millions):
2003 2002 2001
--------- --------- ---------
Provision for income taxes at United States
federal statutory rate of 35% $ 34.4 $ 9.0 $ 4.7
State and local income taxes, net of federal income tax
benefit (1.1) (3.8) (4.1)
Taxes on foreign income which differ from the United
States statutory rate 0.7 4.3 (2.5)
Adjustment to valuation allowance 6.7 90.0 2.8
Other 0.6 0.3 0.5
--------- --------- ---------
$ 41.3 $ 99.8 $ 1.4
========= ========= =========
The significant components of the deferred tax assets and liabilities at
December 31, 2003 and 2002 were as follows (in millions):
2003 2002
--------- ---------
Deferred Tax Assets:
Net operating loss carryforwards $ 211.7 $ 164.2
Sales incentive discounts 36.4 35.6
Inventory valuation reserves 14.2 17.4
Pensions and postretirement health care benefits 61.3 27.1
Other 114.7 82.5
--------- ---------
Total gross deferred tax assets 438.3 326.8
Valuation allowance (141.7) (126.2)
--------- ---------
Net deferred tax assets 296.6 200.6
--------- ---------
Deferred Tax Liabilities:
Tax over book depreciation 54.1 42.7
Tax over book amortization of goodwill 20.8 16.1
Other 27.4 1.0
--------- ---------
Total deferred tax liabilities 102.3 59.8
--------- ---------
Net deferred tax assets $ 194.3 $ 140.8
========= =========
Amounts recognized in Consolidated Balance Sheets:
Other current assets $ 128.3 $ 105.4
Other assets 147.5 102.2
Other current liabilities (7.5) (2.1)
Other noncurrent liabilities (74.0) (64.7)
--------- ---------
$ 194.3 $ 140.8
========= =========
The Company has recorded a net deferred tax asset of $194.3 million and
$140.8 million as of December 31, 2003 and 2002, respectively. As reflected in
the preceding table, the Company established a valuation allowance of $141.7
million and $126.2 million as of December 31, 2003 and 2002, respectively.
The change in the valuation allowance for the years ended December 31,
2003, 2002 and 2001 was an increase of $15.5 million, an increase of $73.5
million, and a decrease of $19.1 million, respectively. In accordance with SFAS
No. 109, the Company assessed the likelihood that its deferred tax assets would
be recovered from future taxable income and determined that the appropriate
adjustment has been made to the Company's valuation
25
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
allowance. In making this assessment, all available evidence was considered
including the current economic climate as well as reasonable tax planning
strategies. The Company believes it is more likely than not that the Company
will realize the remaining deferred tax assets, net of the valuation allowance,
in future years.
The Company has net operating loss carryforwards of $545.4 million as
of December 31, 2003, with expiration dates as follows: 2004 - $3.6 million,
2005 - $4.9 million, 2006 - $8.3 million, 2007 - $34.1 million, 2008 - $3.3
million and thereafter or unlimited - $491.2 million. These net operating loss
carryforwards include U.S. net loss carryforwards of $315.4 million and foreign
net operating loss carryforwards of $230.0 million. The Company paid income
taxes of $78.5 million, $41.5 million, and $26.9 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
7. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2003 and 2002
(in millions):
2003 2002
--------- ---------
Revolving credit facility $ -- $ 126.9
9-1/2% Senior notes due 2008 250.0 250.0
8-1/2% Senior subordinated notes due 2006 249.3 249.1
1-3/4% Convertible senior subordinated notes due 2033 201.3 --
Other long-term debt 10.5 10.9
--------- ---------
$ 711.1 $ 636.9
========= =========
On December 23, 2003, the Company issued $201.3 million of 1-3/4%
convertible senior subordinated notes due 2033 under a private placement
offering. The convertible senior subordinated notes are unsecured obligations
and are convertible into shares of the Company's common stock upon satisfaction
of certain conditions, as discussed below. Interest is payable on the notes at
1-3/4% per annum, payable semi-annually in arrears in cash on June 30 and
December 31 of each year, beginning June 30, 2004.
The convertible senior subordinated notes are convertible into shares
of the Company's common stock at an effective price of $22.36 per share, subject
to adjustment. Holders of the notes may convert the notes into shares of the
Company's common stock at a conversion rate of 44.7193 shares per $1,000
principal amount of notes, subject to adjustment, before close of business on
December 31, 2033, only under the following circumstances: (1) during any fiscal
quarter commencing after March 31, 2004, if the closing sales price of the
Company's common stock exceeds 120% of the conversion price for at least 20
trading days in the 30 consecutive trading days ending on the last trading day
of the preceding fiscal quarter; (2) during the five business day period after a
five consecutive trading day period in which the trading price per note for each
day of that period was less than 98% of the product of the closing sale price of
the Company's common stock and the conversion rate; (3) if the notes have been
called for redemption; or (4) upon the occurrence of certain corporate
transactions, as defined. Beginning January 1, 2011, the Company may redeem any
of the notes at a redemption price of 100% of their principal amount, plus
accrued interest. Holders of the notes may require the Company to repurchase the
notes at a repurchase price of 100% of their principal amount, plus accrued
interest on December 31, 2010, 2013, 2018, 2023 and 2028.
On April 17, 2001, the Company issued $250.0 million of 9-1/2% Senior
Notes due 2008 (the "Senior Notes"). The Senior Notes are unsecured obligations
of the Company and are redeemable at the option of the Company, in whole or in
part, commencing May 1, 2005 initially at 104.75% of their principal amount,
plus accrued interest, declining to 100% of their principal amount plus accrued
interest on or after May 1, 2007. The indenture governing the Senior Notes
requires the Company to offer to repurchase the Senior Notes at 101% of their
principal amount, plus accrued interest to the date of the repurchase in the
event of a change in control. The indenture also contains certain covenants
that, among other things, limit the Company's ability (and that of its
restricted subsidiaries) to incur additional indebtedness; make restricted
payments (including dividends and share repurchases); make investments;
guarantee indebtedness; create liens; and sell assets. The proceeds were used to
repay borrowings outstanding under the Company's existing revolving credit
facility and support the financing of the Ag-Chem acquisition.
26
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On April 17, 2001, the Company entered into a $350.0 million
multi-currency revolving credit facility with Rabobank that will mature October
2005. The facility is secured by a majority of the Company's U.S., Canadian and
U.K. based assets and a pledge of a portion of the stock of the Company's
domestic and material foreign subsidiaries. Interest accrues on borrowings
outstanding under the facility, at the Company's option, at either (1) LIBOR
plus a margin based on a ratio of the Company's senior debt to EBITDA, as
adjusted, or (2) the higher of the administrative agent's base lending rate or
one-half of one percent over the federal funds rate plus a margin ranging
between 0.625% and 1.5% based on the Company's senior debt ratio. The weighted
average interest rate during 2003 was 4.1%. The facility contains covenants,
including, among others, covenants restricting the incurrence of indebtedness
and the making of restrictive payments, including dividends. In addition, the
Company must fulfill financial covenants including, among others, a total debt
to EBITDA ratio, a senior debt to EBITDA ratio and a fixed charge coverage
ratio, as defined in the facility. On July 16, 2003, the Company amended its
revolving credit facility to adjust the total debt to EBITDA and senior debt to
EBITDA financial covenants for the quarters ended June 30, 2003, September 30,
2003 and December 31, 2003 and to eliminate the impact of any unfavorable
judgments associated with the current pension litigation in the United Kingdom
from the consolidated tangible net worth covenant calculation. As of December
31, 2003, the Company had no outstanding borrowings and availability to borrow
$342.5 million under the revolving credit facility. At December 31, 2002, the
Company had borrowings of $126.9 million and availability to borrow $217.6
million under the revolving credit facility. $19.1 million of the outstanding
borrowings as of December 31, 2002 were payable in Canadian dollars. The Company
replaced its credit facility subsequent to December 31, 2003 (Note 16).
In 1996, the Company issued $250.0 million of 8-1/2% Senior
Subordinated Notes due 2006 (the "Notes") at 99.139% of their principal amount.
The Notes are unsecured obligations of the Company and are redeemable at the
option of the Company, in whole or in part, at any time at 100% of their
principal amount, plus accrued interest. The indenture governing the senior
subordinated notes requires the Company to offer to repurchase the senior
subordinated notes at 101% of their principal amount, plus accrued interest to
the date of the repurchase, in the event of a change in control. The Notes
include certain covenants restricting the incurrence of indebtedness and the
making of certain restrictive payments, including dividends. In March 2001, the
Company was issued a notice of default by the trustee of the Notes regarding the
violation of a covenant restricting the payment of dividends during periods in
1999, 2000 and 2001 when an interest coverage ratio was not met. During those
periods, the Company paid approximately $4.8 million in dividends based upon its
interpretation that it did not need to meet the interest coverage ratio but,
instead, an alternative total debt test. The Company subsequently received
sufficient waivers from the holders of the Notes for any violations of the
covenant that might have resulted from the dividend payments. In connection with
the solicitation of waivers, the Company incurred costs of approximately $2.6
million, which were expensed in the first quarter of 2001. The Company may pay
dividends when the interest coverage ratio in the indenture is met.
At December 31, 2003, the aggregate scheduled maturities of long-term
debt are as follows (in millions):
2005 $ 2.0
2006 251.2
2007 1.5
2008 250.8
2009 0.8
Thereafter 204.8
---------
$ 711.1
=========
Cash payments for interest were $75.3 million, $64.1 million and $65.7
million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company has arrangements with various banks to issue standby
letters of credit or similar instruments, which guarantee the Company's
obligations for the purchase or sale of certain inventories and for potential
claims exposure for insurance coverage. At December 31, 2003, outstanding
letters of credit issued under the revolving credit facility totaled $7.5
million.
27
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans covering certain
employees principally in the United States, the United Kingdom and Germany. The
Company also provides certain postretirement health care and life insurance
benefits for certain employees principally in the United States.
Net annual pension and postretirement cost and the measurement
assumptions for the plans for the years ended December 31, 2003, 2002 and 2001
are set forth below (in millions):
2003 2002 2001
--------- --------- ---------
Pension benefits
Service cost $ 6.6 $ 6.8 $ 7.8
Interest cost 31.3 27.5 26.7
Expected return on plan assets (29.3) (30.5) (29.0)
Amortization of net actuarial loss 9.7 3.5 0.1
Special termination benefits 12.4 -- --
--------- --------- ---------
Net annual pension cost $ 30.7 $ 7.3 $ 5.6
========= ========= =========
The weighted average assumptions used to determine the net annual
benefit costs for the Company's pension plans for the years ended December 31,
2003, 2002 and 2001 are as follows:
2003 2002 2001
--------- --------- ---------
All Plans:
Weighted average discount rate 5.8% 6.4% 6.4%
Weighted average expected long-term rate of return
on plan assets 7.1% 7.1% 7.6%
Rate of increase in future compensation 3.0-5.0% 3.0-5.0% 4.0-5.0%
U.S. - based plans:
Weighted average discount rate 6.75% 7.5% 7.5%
Weighted average expected long-term rate of
return on plan assets 8.0% 8.0% 8.0%
Rate of increase in future compensation N/A N/A N/A
2003 2002 2001
--------- --------- ---------
Postretirement benefits
Service cost $ 0.4 $ 0.4 $ 0.3
Interest cost 1.7 1.7 1.5
Amortization of transition and prior service cost (0.9) -- 0.1
Amortization of unrecognized net loss (gain) 0.5 (0.2) (0.5)
Curtailment loss 0.1 -- --
--------- --------- ---------
Net annual postretirement cost $ 1.8 $ 1.9 $ 1.4
========= ========= =========
Weighted average discount rate 6.25% 6.75% 7.5%
========= ========= =========
The following tables set forth reconciliations of the changes in
benefit obligation, plan assets and funded status as of December 31, 2003 and
2002 (in millions):
28
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- --------
Change in benefit obligation
Benefit obligation at beginning of year $ 509.1 $ 431.3 $ 24.2 $ 21.7
Service cost 6.6 6.8 0.4 0.4
Interest cost 31.3 27.5 1.7 1.7
Plan participants' contributions 1.9 2.1 -- --
Actuarial loss 67.5 23.2 8.0 2.4
Acquisitions -- -- -- 1.0
Amendments -- -- (0.2) --
Benefits paid (44.0) (24.5) (3.3) (3.0)
Foreign currency exchange rate changes 56.1 42.7 -- --
--------- --------- --------- --------
Benefit obligation at end of year $ 628.5 $ 509.1 $ 30.8 $ 24.2
========= ========= ========= ========
Pension Benefits Postretirement Benefits
---------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- --------
Change in plan assets
Fair value of plan assets at beginning
of year $ 372.0 $ 372.9 $ -- $ --
Actual return on plan assets 45.4 (21.9) -- --
Employer contributions 13.0 11.5 3.3 3.0
Plan participants' contributions 1.9 2.1 -- --
Benefits paid (44.0) (24.5) (3.3) (3.0)
Foreign currency exchange rate changes 39.0 31.9 -- --
--------- --------- --------- --------
Fair value of plan assets at end of year $ 427.3 $ 372.0 $ -- $ --
========= ========= ========= ========
Funded status $ (201.2) $ (137.1) $ (30.8) $ (24.2)
Unrecognized net obligation -- -- 0.2 0.3
Unrecognized net actuarial loss (gain) 219.3 165.2 7.1 (1.6)
Unrecognized prior service cost -- -- 0.5 1.0
Curtailment gain (6.8) -- -- --
--------- --------- --------- --------
Net amount recognized $ 11.3 $ 28.1 $ (23.0) $ (24.5)
========= ========= ========= ========
Amounts recognized in Consolidated
Balance Sheets:
Prepaid benefit cost $ 2.0 $ -- $ -- $ --
Accrued benefit liability (176.5) (107.4) (23.0) (24.5)
Additional minimum pension liability 185.8 135.5 -- --
--------- --------- --------- --------
Net amount recognized $ 11.3 $ 28.1 $ (23.0) $ (24.5)
========= ========= ========= ========
The weighted average assumptions used to determine the benefit
obligation for the Company's pension plans as of December 31, 2003 and 2002 are
as follows:
2003 2002
--------- ---------
All Plans:
Weighted average discount rate 5.8% 5.8%
Weighted average expected long-term rate of return
on plan assets 7.1% 7.1%
Rate of increase in future compensation 3.0-5.0% 3.0-5.0%
U.S. - based plans:
Weighted average discount rate 6.25% 6.75%
Weighted average expected long-term rate of
return on plan assets 8.0% 8.0%
Rate of increase in future compensation N/A N/A
29
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The aggregate projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $628.5 million, $601.8 million
and $427.3 million, respectively, as of December 31, 2003 and $509.1 million,
$479.3 million and $372.0 million, respectively, as of December 31, 2002. The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for the Company's U.S. - based pension plans were $49.3 million,
$49.3 million and $37.2 million, respectively, as of December 31, 2003, and
$43.8 million, $43.8 million and $34.7 million, respectively, as of December 31,
2002. At December 31, 2003 and 2002, the Company had recorded a reduction to
equity of $185.8 million, net of taxes of $57.4 million, and $135.5 million, net
of taxes of $41.6 million, respectively, related to the recording of a minimum
pension liability primarily related to the Company's UK plans where the
accumulated benefit obligation exceeded plan assets.
The Company utilizes a September 30 measurement date to determine the
pension benefit measurements for the Company's UK plans. The Company utilizes a
December 31 measurement date to determine the pension and postretirement benefit
measurements for the Company's plans in the U.S. and Germany.
The weighted average asset allocation of the Company's U.S. pension
benefit plans at December 31, 2003 and 2002 are as follows:
2003 2002
---- ----
Asset Category
Large cap domestic equity securities 39% 36%
International equity securities 11% 8%
Domestic fixed income securities 34% 37%
Other investments 16% 19%
--- ---
Total 100% 100%
=== ===
All tax - qualified pension fund investments in the United States are
held in the AGCO Corporation Master Pension Trust. The pension fund strategy is
to diversify investments across broad categories of equity and fixed income
securities with appropriate use of alternative investment categories to minimize
risk and volatility. The Company's target allocation of retirement fund
investments is 40% large cap domestic equity securities, 10% international
equity securities, 35% domestic fixed income securities, and 15% other
investments. The Company has noted that over very long periods, this mix of
investments would achieve an average return of in excess of 9%. In arriving at
the choice of an expected return assumption of 8% for its U.S. based plans, the
Company has tempered this historical indicator with lower expectations for
returns on equity investments in the future. To date, the Company has not
invested pension funds in its own stock, and has no intention of doing so in the
future.
The weighted average discount rate used to determine the benefit
obligation for the Company's postretirement benefit plans for the years ended
December 31, 2003 and 2002 was 6.25% and 6.75%, respectively.
For measuring the expected postretirement benefit obligation at
December 31, 2003, an 11% health care cost trend rate was assumed for 2004,
decreasing 1.0% per year to 5.0% and remaining at that level thereafter. For
measuring the expected postretirement benefit obligation at December 31, 2002,
an 8.25% health care cost trend rate was assumed for 2003, decreasing 0.75% per
year to 6.0% and remaining at that level thereafter. Changing the assumed health
care cost trend rates by one percentage point each year and holding all other
assumptions constant would have the following effect to service and interest
cost for 2003 and the accumulated postretirement benefit obligation at December
31, 2003 (in millions):
One One
Percentage Percentage
Point Point
Increase Decrease
---------- -----------
Effect on service and interest cost $ 0.1 $ (0.1)
Effect on accumulated benefit obligation $ 1.9 $ (1.6)
30
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2003, the U.S. Congress passed the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, and this Act was signed into
law in December 2003. The Act introduces a prescription drug benefit under
Medicare as well as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least equivalent to Medicare Part D. The
above measurements of the accumulated postretirement benefit obligation and net
periodic postretirement benefit cost do not reflect the effects of the Act on
the Company's postretirement health care plans. The Company is currently
evaluating the impact of the Act on the Company's plans.
The Company currently estimates its minimum contributions for 2004 to
its U.S. - based defined pension plans and postretirement health care and life
insurance benefit plans will aggregate approximately $5.2 million and $3.6
million, respectively.
The Supplemental Executive Retirement Plan ("SERP") is an unfunded plan
that provides Company executives with retirement income for a period of ten
years based on a percentage of their final base salary, reduced by the
executive's social security benefits and 401(k) employer matching contributions
account. The benefit paid to the executive is equal to 3% of the final base
salary times credited years of service, with a maximum benefit of 60% of the
final base salary. Benefits under the SERP vest at age 65 or, at the discretion
of the Board of Directors, at age 62 reduced by a factor to recognize early
commencement of the benefit payments.
Net annual SERP cost and the measurement assumptions for the plan for
the years ended December 31, 2003, 2002 and 2001 are set forth below (in
millions):
2003 2002 2001
--------- --------- ---------
Service cost $ 0.6 $ 0.5 $ 0.4
Interest cost 0.3 0.3 0.3
Amortization of prior service cost 0.3 0.3 0.3
Recognized actuarial gain -- (0.1) --
--------- --------- ---------
Net annual SERP costs $ 1.2 $ 1.0 $ 1.0
========= ========= =========
Discount rate 6.75% 7.5% 7.5%
Rate of increase in future compensation 5.0% 4.0% 4.0%
The following tables set forth reconciliations of the changes in benefit
obligation and funded status as of December 31, 2003 and 2002 (in millions):
2003 2002
--------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 5.3 $ 4.4
Service cost 0.6 0.5
Interest cost 0.3 0.3
Actuarial loss 0.2 0.1
--------- ---------
Benefit obligation at end of year $ 6.4 $ 5.3
========= =========
Funded status $ (6.4) $ (5.3)
Unrecognized net actuarial gain (0.5) (0.7)
Unrecognized prior service cost 2.9 3.2
--------- ---------
Net amount recognized $ (4.0) $ (2.8)
========= =========
Amounts recognized in Consolidated
Balance Sheets:
Accrued benefit liability $ (4.4) $ (3.8)
Intangible asset 0.4 1.0
--------- ---------
Net amount recognized $ (4.0) $ (2.8)
========= =========
The weighted average discount rate used to determine the benefit
obligation for the Company's SERP plan for the years ended December 31, 2003 and
2002 was 6.25% and 6.75%, respectively.
31
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company maintains separate defined contribution plans covering
certain employees primarily in the United States and United Kingdom. Under the
plans, the Company contributes a specified percentage of each eligible
employee's compensation. The Company contributed $3.1 million, $3.4 million and
$2.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.
9. COMMON STOCK
At December 31, 2003, the Company had 150.0 million authorized shares
of common stock with a par value of $0.01 per share, with 75.4 million shares of
common stock outstanding, 1.9 million shares reserved for issuance under the
Company's 2001 Stock Option Plan (Note 10), 0.1 million shares reserved for
issuance under the Company's Non-employee Director Stock Incentive Plan (Note
10) and 1.9 million shares reserved for issuance under the Company's Long-Term
Incentive Plan (Note 10).
In April 1994, the Company designated 300,000 shares of Junior
Cumulative Preferred Stock ("Junior Preferred Stock") in connection with the
adoption of a Stockholders' Rights Plan (the "Rights Plan"). Under the terms of
the Rights Plan, one-third of a preferred stock purchase right (a "Right") is
attached to each outstanding share of the Company's common stock. The Rights
Plan contains provisions that are designed to protect stockholders in the event
of certain unsolicited attempts to acquire the Company. Under the terms of the
Rights Plan, each Right entitles the holder to purchase one one-hundredth of a
share of Junior Preferred Stock, par value of $0.01 per share, at an exercise
price of $200 per share. The Rights are exercisable a specified number of days
following (i) the acquisition by a person or group of persons of 20% or more of
the Company's common stock or (ii) the commencement of a tender or exchange
offer for 20% or more of the Company's common stock. In the event the Company is
the surviving company in a merger with a person or group of persons that owns
20% or more of the Company's outstanding stock, each Right will entitle the
holder (other than such 20% stockholder) to receive, upon exercise, common stock
of the Company having a value equal to two times the Right's exercise price. In
addition, in the event the Company sells or transfers 50% or more of its assets
or earning power, each Right will entitle the holder to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
Right's exercise price. The Rights may be redeemed by the Company at $0.01 per
Right prior to their expiration on April 27, 2004.
In March 2001, the Company sold 555 non-voting preferred shares, which
were convertible into shares of the Company's common stock in a private
placement with net proceeds of approximately $5.3 million. In June 2001, the
preferred shares were converted into 555,000 shares of the Company's common
stock.
10. STOCK INCENTIVE PLANS
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
The Company's Non-employee Director Stock Incentive Plan (the "Director
Plan") provides for restricted stock awards to non-employee directors based on
increases in the price of the Company's common stock. The awarded shares are
earned in specified increments for each 15% increase in the average market value
of the Company's common stock over the initial base price established under the
plan. When an increment of the awarded shares is earned, the shares are issued
to the participant in the form of restricted stock which vests at the earlier of
12 months after the specified performance period or upon departure from the
Board of Directors. When the restricted shares are earned, a cash bonus equal to
40% of the value of the shares on the date the restricted stock award is earned
is paid by the Company to satisfy a portion of the estimated income tax
liability to be incurred by the participant. At December 31, 2003, there were
36,000 shares awarded but not earned under the Director Plan and 44,870 shares
that have been earned but not vested under the Director Plan.
Outstanding shares awarded but not earned as of December 31, 2003
consist of the following and can be earned when the Company's average common
stock price reaches the following increments (over a consecutive 20-day period):
Stock Price
------------------------------------------------------
$ 22.70 $25.32 - $27.94 $ 29.13 $ 32.14 Total
------- --------------- ------- ------- -----
Shares 7,500 19,500 4,500 4,500 36,000
32
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In 2003, the Director Plan was amended to increase the number of shares
authorized for issuance by 150,000 shares.
LONG-TERM INCENTIVE PLAN ("LTIP")
The Company's LTIP provides for restricted stock awards to executives
based on increases in the price of the Company's common stock. The awarded
shares may be earned over a five-year performance period in specified increments
for each 20% increase in the average market value of the Company's common stock
over the established initial base price. For all restricted stock awards prior
to 2000, earned shares are issued to the participant in the form of restricted
stock which generally carries a five-year vesting period with one-third of each
earned award vesting at the end of the third, fourth and fifth year after each
award is earned. In 2000, the LTIP was amended to replace the vesting schedule
with a non-transferability period for all future grants. Accordingly, for
restricted stock awards in 2000 and all future awards, earned shares are subject
to a non-transferability period, which expires over a five-year period with the
transfer restrictions lapsing in one-third increments at the end of the third,
fourth and fifth year after each award is earned. During the non-transferability
period, participants will be restricted from selling, assigning, transferring,
pledging or otherwise disposing of any earned shares, but earned shares are not
subject to forfeiture. In the event a participant terminates employment with the
Company, the non-transferability period is extended by two years. When the
earned shares have vested and are no longer subject to forfeiture, the Company
is obligated to pay a cash bonus equal to 40% of the value of the shares on the
date the shares are earned in order to satisfy a portion of the estimated income
tax liability to be incurred by the participant.
For awards granted in 2000 and in the future, the Company will record the
entire compensation expense relating to the market value of the earned shares
and related cash bonus in the period in which the award is earned. For awards
granted prior to 2000, the market value of awards earned are added to common
stock and additional paid-in capital and an equal amount is deducted from
stockholders' equity as unearned compensation. The LTIP unearned compensation
and the amount of cash bonus to be paid when the awarded shares become vested
are amortized to expense ratably over the vesting period. The Company recognized
compensation expense associated with the LTIP and Director Plan of $0.6 million,
$44.1 million and $7.1 million for the years ended December 31, 2003, 2002 and
2001, respectively, consisting of compensation expense relating to earned
shares, amortization of stock awards for earned shares issued prior to 2000 and
the related cash bonuses.
Additional information regarding the LTIP for the years ended December 31,
2003, 2002 and 2001 is as follows:
2003 2002 2001
--------- --------- ---------
Shares awarded but not earned at January 1 747,500 1,717,000 1,930,000
Shares awarded 55,000 755,000 260,000
Shares forfeited or expired unearned (40,000) (375,000) (196,000)
Shares earned (5,500) (1,349,500) (277,000)
--------- ---------- ---------
Shares awarded but not earned at December 31 757,000 747,500 1,717,000
Shares available for grant 1,141,000 1,156,000 1,536,000
--------- ---------- ---------
Total shares reserved for issuance 1,898,000 1,903,500 3,253,000
========= ========== =========
Outstanding shares awarded but not earned as of December 31, 2003 consist
of the following and can be earned when the Company's average common stock price
reaches the following increments (over a consecutive 20-day period):
Ranges of Stock Price
-------------------------------------------------------------------------------
$23.10 - $26.74 $28.40 - $33.42 $ 38.00 $ 42.75 $ 47.50 Total
--------------- --------------- -------- -------- --------- -------
Shares 25,250 218,000 137,000 171,250 205,500 757,000
In 2001, the LTIP was amended to permit a participant to elect to forfeit
a portion of an earned award in order to fully satisfy federal, state and
employment taxes which are payable at the time the shares and the related cash
bonus are earned. The number of shares of common stock equal to the value of the
participant's tax liability, net of the cash bonus, are thereby forfeited in
lieu of an additional cash payment contributed to the participant's tax
33
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
withholding. In 2003, 2002 and 2001, 1,513, 299,409 and 52,540 earned shares,
respectively, were forfeited in this manner.
For awards granted prior to 2000, the number of shares vested during the
years 2003, 2002 and 2001 were 1,667, 201,334 and 166,500, respectively. All
awards granted after 2000 vest immediately upon being earned.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") provides for the
granting of nonqualified and incentive stock options to officers, employees,
directors and others. The stock option exercise price is determined by the Board
of Directors except in the case of an incentive stock option for which the
purchase price shall not be less than 100% of the fair market value at the date
of grant. Each recipient of stock options is entitled to immediately exercise up
to 20% of the options issued to such person, and the remaining 80% of such
options vest ratably over a four-year period and expire not later than ten years
from the date of grant.
Stock option transactions during the years ended December 31, 2003, 2002
and 2001 were as follows:
2003 2002 2001
----------- -------------- -----------
Options outstanding at January 1 2,132,365 2,850,345 2,433,497
Options granted -- 87,500 727,500
Options exercised (198,220) (777,750) (140,342)
Options canceled (150,857) (27,730) (170,310)
----------- -------------- -----------
Options outstanding at December 31 1,783,288 2,132,365 2,850,345
----------- -------------- -----------
Options available for grant at December 31 1,867,837 1,839,438 1,908,938
----------- -------------- -----------
Option price ranges per share:
Granted $ -- $ 18.30-23.00 $8.19-15.12
Exercised 6.31-15.12 2.50-22.31 1.52-14.63
Canceled 6.25-31.25 11.00-31.25 6.25-31.25
Weighted average option prices per share:
Granted $ -- $ 20.68 $ 14.32
Exercised 12.46 11.61 8.07
Canceled 17.10 16.97 15.87
Outstanding at December 31 17.12 16.69 15.28
At December 31, 2003, the outstanding options had a weighted average
remaining contractual life of approximately 6.9 years and there were 1,226,488
options currently exercisable with option prices ranging from $8.19 to $31.25
and with a weighted average exercise price of $18.59.
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------
Weighted Average Weighted Weighted
Remaining Average Exercisable Average
Contractual Life Exercise as of December Exercise
Range of Exercise Prices Number of Shares (Years) Price 31, 2003 Price
- ------------------------ ---------------- ------------------- -------- -------------- --------
$8.19 - $11.88 571,130 6.6 $ 11.18 304,230 $ 11.06
$14.63 - $20.98 636,250 7.1 $ 15.73 352,350 $ 15.43
$22.31 - $31.25 575,908 3.9 $ 24.55 569,908 $ 24.56
---------------- --------------
1,783,288 1,226,488
================ ==============
34
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company accounts for all stock-based compensation awarded under the
Director Plan, the LTIP and the Option Plan as prescribed under APB No. 25, and
also provides the disclosures required under SFAS No. 123 and SFAS No. 148. APB
No. 25 requires no recognition of compensation expense for options granted under
the Option Plan as long as certain conditions are met. There was no compensation
expense recorded under APB No. 25 for the Option Plan. However, APB No. 25 does
require recognition of compensation expense under the Director Plan and the
LTIP.
For disclosure purposes only, under SFAS No. 123, the Company estimated
the fair value of grants under the Company's stock option plan using the
Black-Scholes option pricing model and utilized the Barrier option model for
awards granted under the Director Plan and LTIP. Based on these models, the
weighted average fair value of options granted under the Option Plan and the
weighted average fair value of awards granted under the Director Plan and the
LTIP, were as follows (in millions):
2003 2002 2001
--------- ---------- --------
Director Plan $ 14.46 $ 11.86 $ --
LTIP 13.82 19.81 9.88
Option Plan -- 11.60 8.63
Weighted average assumptions under Black-Scholes
and Barrier option models:
Expected life of awards (years) 4.3 5.0 7.0
Risk-free interest rate 2.9% 3.4% 4.8%
Expected volatility 50.2% 53.3% 52.0%
Expected dividend yield -- -- --
The fair value of the grants and awards are amortized over the vesting
period for stock options and awards earned under the Director Plan and LTIP and
over the performance period for unearned awards under the Director Plan and
LTIP. The following table illustrates the effect on net income (loss) and
earnings (loss) per common share if the Company had applied the fair value
recognition provisions of SFAS No. 123 and SFAS No. 148 (in millions, except per
share data):
Years Ended December 31,
---------------------------------------------
2003 2002 2001
-------- -------- --------
Net income (loss), as reported $ 74.4 $ (84.4) $ 22.6
Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax
effects 0.4 16.1 4.4
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (7.2) (9.4) (8.6)
-------- -------- --------
Pro forma net income (loss) $ 67.6 $ (77.7) $ 18.4
======== ======== ========
Earnings (loss) per share:
Basic - as reported $ 0.99 $ (1.14) $ 0.33
======== ======== ========
Basic - pro forma $ 0.90 $ (1.05) $ 0.27
======== ======== ========
Diluted - as reported $ 0.98 $ (1.14) $ 0.33
======== ======== ========
Diluted - pro forma $ 0.90 $ (1.05) $ 0.27
======== ======== ========
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, as amended by
SFAS No. 138. The cumulative effect for adopting this standard as of January 1,
2001 resulted in a fair value asset, net of taxes of approximately $0.5 million,
which was reclassified to earnings over the next twelve months. All derivatives
are
35
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
recognized on the consolidated balance sheets at fair value. On the date the
derivative contract is entered, the Company designates the derivative as either
(1) a fair value hedge of a recognized liability, (2) a cash flow hedge of a
forecasted transaction, (3) a hedge of a net investment in a foreign operation,
or (4) a non-designated derivative instrument. The Company currently engages in
derivatives that are classified as cash flow hedges and non-designated
derivative instruments. Changes in the fair value of a derivative that is
designated as a cash flow hedge are recorded in other comprehensive income until
reclassified into earnings at the time of settlement of the forecasted
transaction. Changes in the fair value of non-designated derivative contracts
and the ineffective portion of designated derivative instruments are reported in
current earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as the risk management objectives and
strategy for undertaking various hedge transactions. The Company formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flow of hedged items. When it is
determined that a derivative is no longer highly effective as a hedge, hedge
accounting is discontinued on a prospective basis.
Foreign Currency Risk
The Company has significant manufacturing operations in the United States,
France, Germany, Denmark and Brazil, and it purchases a portion of its tractors,
combines and components from third party foreign suppliers, primarily in various
European countries and in Japan. The Company also sells products in over 140
countries throughout the world. The Company's most significant transactional
foreign currency exposures are the Euro, Brazilian real and the Canadian dollar
in relation to the U.S. dollar.
The Company attempts to manage its transactional foreign exchange exposure
by hedging identifiable foreign currency cash flow commitments and forecasts
arising from receivables, payables, and expected purchases and sales. Where
naturally offsetting currency positions do not occur, the Company hedges certain
of its exposures through the use of foreign currency forward contracts.
The Company uses foreign currency forward contracts to hedge receivables
and payables on the Company and its subsidiaries' balance sheets that are
denominated in foreign currencies other than the functional currency. These
forward contracts are classified as non-designated derivatives instruments. For
the years ended December 31, 2003 and 2002, the Company recorded net gains of
approximately $9.0 million and $17.3 million and a net loss of $7.8 million for
the year ended December 31, 2001 under the caption of other expense, net,
respectively. These gains and losses were substantially offset by losses and
gains on the remeasurement of the underlying asset or liability being hedged.
The Company uses foreign currency forward contracts to hedge forecasted
foreign currency inflows and outflows resulting from purchases and sales. The
Company recorded no gain or loss resulting from a forward contract's
ineffectiveness or discontinuance as a cash flow hedge.
Interest Rate Risk
The Company may use interest rate swap agreements to manage its exposure
to interest rate changes. Currently, the Company has no interest rate swap
agreements outstanding.
The following table summarizes activity in accumulated other comprehensive
loss related to derivatives held by the Company during the years ended December
31, 2003, 2002 and 2001 (in millions):
36
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2003
--------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
---------- --------- ---------
Accumulated derivative net gains as of December 31, 2002 $ 1.3 $ (0.5) $ 0.8
Net changes in fair value of derivatives (1.1) 0.4 (0.7)
Net losses reclassified from accumulated other
comprehensive loss into earnings (0.2) 0.1 (0.1)
---------- --------- ---------
Accumulated derivative net gains as of December 31, 2003 $ -- $ -- $ --
========== ========= =========
2002
--------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
---------- --------- ---------
Accumulated derivative net losses as of December 31, 2001 $ (0.2) $ 0.1 $ (0.1)
Net changes in fair value of derivatives 3.9 (1.6) 2.3
Net losses reclassified from accumulated other
comprehensive loss into earnings (2.4) 1.0 (1.4)
---------- --------- ---------
Accumulated derivative net gains as of December 31, 2002 $ 1.3 $ (0.5) $ 0.8
========== ========= =========
2001
--------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
---------- --------- ---------
Cumulative effect of adopting SFAS No. 133, net $ 0.8 $ (0.3) $ 0.5
Net changes in fair value of derivatives (3.4) 1.4 (2.0)
Net gains reclassified from accumulated other
comprehensive loss into earnings 2.4 (1.0) 1.4
---------- --------- ---------
Accumulated derivative net losses as of December 31, 2001 $ (0.2) $ 0.1 $ (0.1)
========== ========= =========
In addition to the above, the Company recorded a deferred gain of $2.7
million and $0.4 million, net of taxes, and a deferred loss of $5.8 million, net
of taxes, to other comprehensive loss related to derivatives held by affiliates
for the years ended December 31, 2003, 2002 and 2001, respectively. The gains
and loss are related to interest rate swap contracts in the Company's retail
finance joint ventures. These swap contracts have the effect of converting
floating rate debt to fixed rates in order to secure its yield against its fixed
rate loan portfolio.
The Company's senior management establishes the Company's foreign currency
and interest rate risk management policies. These policies are reviewed
periodically by the Audit Committee of the Board of Directors. The policy allows
for the use of derivative instruments to hedge exposures to movements in foreign
currency and interest rates. The Company's policy prohibits the use of
derivative instruments for speculative purposes.
12. COMMITMENTS AND CONTINGENCIES
The future payments required under the Company's significant commitments
as of December 31, 2003 are as follows (in millions):
37
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Payments Due By Period
-------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
Capital lease obligations $ 0.8 $ 0.8 $ 0.4 $ -- $ -- $ -- $ 2.0
Operating lease obligations 22.0 15.4 10.1 6.3 5.7 25.1 84.6
Unconditional purchase
obligations(1) 11.8 2.5 0.3 0.1 -- 0.9 15.6
Other long-term
obligations 28.2 22.5 18.7 18.6 17.9 163.1 269.0
Total contractual cash ------ ------ ------ ------ ------ ---------- -------
obligations $ 62.8 $ 41.2 $ 29.5 $ 25.0 $ 23.6 $ 189.1 $ 371.2
====== ====== ====== ====== ====== ========== =======
(1) Unconditional pur chase obligations exclude routine purchase orders
entered into in the normal course of business.
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
Guarantees $ 24.6 $ 12.0 $ 4.3 $ 1.9 $ 1.1 $ -- $ 43.9
====== ====== ====== ====== ====== ========== =======
Guarantees
At December 31, 2003, the Company was obligated under certain
circumstances to purchase through the year 2009 up to $13.7 million of equipment
upon expiration of certain operating leases between AGCO Finance LLC and AGCO
Finance Canada Ltd., the Company's retail finance joint ventures in North
America, and end users. The Company also maintains a remarketing agreement with
these joint ventures, whereby the Company is obligated to repurchase repossessed
inventory at market values. On December 31, 2003, the Company entered into an
agreement with AGCO Finance LLC which limits the Company's purchase obligations
under this arrangement to $6.0 million in the aggregate per calendar year. The
Company believes that any losses, which might be incurred on the resale of this
equipment, will not materially impact the Company's financial position or
results of operations.
At December 31, 2003, the Company guaranteed indebtedness owed to third
parties of approximately $30.2 million, primarily related to dealer and end user
financing of equipment. The Company believes the credit risk associated with
these guarantees is not material to its financial position.
Other
In addition, at December 31, 2003, the Company had outstanding net foreign
currency forward contracts of approximately $146.6 million. All contracts have a
maturity of less than one year (Note 11).
Total lease expense under noncancelable operating leases was $23.1
million, $22.3 million and $17.2 million for the years ended December 31, 2003,
2002 and 2001, respectively.
The Company has received assessments from Brazilian tax authorities
regarding transaction taxes payable on certain foreign currency gains and
losses. The Company is currently contesting the assessments and does not believe
the calculation method applied by the tax authorities is correct. The Company
believes that it is not probable or likely the assessments will have to be paid.
The total assessment approximates $9.0 million to $9.5 million. The Company
anticipates that it may take significant time to resolve the dispute with the
Brazilian tax authorities.
As discussed in Note 3, the Company is involved in litigation with respect
to its pension scheme in Coventry, England. The Company is also party to various
claims and lawsuits arising in the normal course of business. It is the opinion
of management, after consultation with legal counsel, that those claims and
lawsuits, excluding a potential adverse outcome with respect to the pension
case, when resolved, will not have a material adverse effect on the financial
position or results of operations of the Company.
38
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. RELATED PARTY TRANSACTIONS
Rabobank Nederland, a AAA rated financial institution based in the
Netherlands, is a 51% owner in the Company's retail finance joint ventures which
are located in the United States, Canada, the United Kingdom, France, Germany,
Spain, Ireland and Brazil. Rabobank is also the principal agent and participant
in the Company's revolving credit facility and securitization facilities. The
majority of the assets of the Company's retail finance joint ventures represent
finance receivables. The majority of the liabilities represent notes payable and
accrued interest. Under the various joint venture agreements, Rabobank or its
affiliates are obligated to provide financing to the joint venture companies,
primarily through lines of credit. The Company does not guarantee the
obligations of the retail finance joint ventures other than 49%, or
approximately $19.8 million, of the solvency requirements of the Brazil joint
venture. In Brazil, the Company's joint venture company has an agency
relationship with Rabobank whereby Rabobank provides funding.
The Company's retail finance joint ventures provide retail financing and
wholesale financing to its dealers. The terms of the financing arrangements
offered to the Company's dealers are similar to arrangements the retail finance
joint ventures provide to unaffiliated third parties. At December 31, 2003, the
Company was obligated under certain circumstances to purchase through the year
2009 up to $13.7 million of equipment upon expiration of certain operating
leases between AGCO Finance LLC and AGCO Finance Canada Ltd, its retail joint
ventures in North America, and end users. The Company also maintains a
remarketing agreement with these joint ventures (Note 12). In addition, as part
of sales incentives provided to end users, the Company may from time to time
subsidize interest rates of retail financing provided by its retail joint
ventures. The cost of those programs is recognized at the time of sale to the
Company's dealers.
During 2003 and 2002, the Company had net sales of $116.1 million and
$130.2 million, respectively, to BayWa Corporation, a German distributor, in the
ordinary course of business. The President and CEO of BayWa Corporation is also
a member of the Board of Directors of the Company.
During 2002, the Company purchased approximately $127.5 million of
equipment components from its manufacturing joint venture, GIMA, at cost. As of
July 1, 2003, the Company began consolidating GIMA in accordance with the
requirements of FIN 46 (Note 14). During 2003 and 2002, the Company purchased
approximately $5.6 million and $5.3 million, respectively, of equipment
components from its manufacturing joint venture, Deutz AGCO Motores SA, at
prices approximating cost.
14. CONSOLIDATION OF JOINT VENTURE
The Company currently has equity interests in joint ventures with other
entities. For those joint ventures where the Company is not the primary
beneficiary as determined under FIN 46, the Company accounts for its investments
under the equity method of accounting. During the third quarter of 2003, the
Company analyzed the provisions of FIN 46 as they relate to the accounting for
its investments in joint ventures and determined that it is the primary
beneficiary of one of its joint ventures, GIMA.
GIMA was established in 1994 between the Company and Renault to cooperate
in the field of purchasing, design and manufacturing of components for
agricultural tractors. Each party has a current investment of $4.8 million in
the joint venture. GIMA has no third party debt obligations.
Under the terms of the GIMA agreement, either party may give notice that
it wishes to sell its shares to the other party. The party receiving notice is
obligated to purchase the shares within eighteen months. Per the GIMA agreement,
the share price will be 25% of the net worth of the joint venture.
On July 1, 2003, the Company began consolidating the accounts of GIMA.
Historically, the Company accounted for its investment in GIMA under the equity
method. The consolidation of GIMA did not have a material impact on the results
of operations or financial position of the Company. The equity interest of
Renault is reported as a minority interest, included in "Other noncurrent
liabilities" in the accompanying Condensed Consolidated Balance Sheet as of
December 31, 2003.
39
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
15. SEGMENT REPORTING
The Company has four reportable segments: North America; South America;
Europe/Africa/Middle East and Asia/Pacific. Each regional segment distributes a
full range of agricultural equipment and related replacement parts. The Company
evaluates segment performance primarily based on income from operations. Sales
for each regional segment are based on the location of the third-party customer.
Beginning in the first quarter of 2004, the Company modified its segment
reporting from five reportable segments to four reportable segments. The Company
no longer considers the Sprayers division a reportable segment under the
requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," due to organizational changes and changes in the
distribution and servicing of certain Sprayer products which became effective
January 1, 2004. Therefore, the segment disclosures for 2003, 2002 and 2001 have
been reclassified to conform to the presentation going forward. All intercompany
transactions between the segments have been eliminated. The Company's selling,
general and administrative expenses and engineering expenses, excluding
corporate expenses, are charged to each segment based on the region and division
where the expenses are incurred. As a result, the components of operating income
for one segment may not be comparable to another segment. Segment results for
the years ended December 31, 2003, 2002 and 2001 are as follows (in millions):
North South Europe/Africa/ Asia/
Years ended December 31, America America Middle East Pacific Consolidated
- ------------------------------ --------- --------- -------------- ------- ------------
2003
Net sales $ 1,176.2 $ 416.3 $ 1,758.8 $ 144.0 $ 3,495.3
Income from operations 39.4 60.5 113.7 23.2 236.8
Depreciation 17.0 5.9 32.8 3.1 58.8
Assets 685.2 222.0 836.4 47.3 1,790.9
Capital expenditures 15.7 14.0 46.5 2.5 78.7
2002
Net sales $ 1,039.2 $ 270.8 $ 1,505.6 $ 107.1 $ 2,922.7
Income from operations 30.9 30.5 133.6 19.4 214.4
Depreciation 15.0 4.3 26.0 2.5 47.8
Assets 742.0 127.2 634.4 37.2 1,540.8
Capital expenditures 15.5 8.8 30.6 -- 54.9
2001
Net sales $ 897.9 $ 257.8 $ 1,292.3 $ 97.9 $ 2,545.9
Income from operations 23.1 22.5 94.2 16.0 155.8
Depreciation 14.0 5.1 27.7 2.5 49.3
Assets 567.0 176.3 565.6 30.3 1,339.2
Capital expenditures 15.5 5.1 18.7 -- 39.3
A reconciliation from the segment information to the consolidated balances
for income from operations and total assets is set forth below (in millions):
2003 2002 2001
--------- --------- ---------
Segment income from operations $ 236.8 $ 214.4 $ 155.8
Corporate expenses (23.4) (22.2) (20.5)
Restricted stock compensation (0.6) (44.1) (7.1)
Restructuring and other infrequent expenses (27.6) (42.7) (13.0)
Amortization of intangibles (1.7) (1.4) (18.5)
--------- --------- ---------
Consolidated income from operations $ 183.5 $ 104.0 $ 96.7
========= ========= =========
Segment assets $ 1,790.9 $ 1,540.8 $ 1,339.2
Cash and cash equivalents 147.0 34.3 28.9
Receivables from affiliates 0.5 8.9 8.4
Investments in affiliates 91.6 78.5 69.6
Other current and noncurrent assets 391.6 293.1 315.2
Intangible assets 417.8 393.4 412.0
--------- --------- ---------
Consolidated total assets $ 2,839.4 $ 2,349.0 $ 2,173.3
========= ========= =========
40
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Net sales by customer location for the years ended December 31, 2003, 2002
and 2001 were as follows (in millions):
2003 2002 2001
--------- --------- ---------
Net sales:
United States $ 968.8 $ 881.4 $ 759.2
Canada 169.3 129.5 115.2
Germany 433.1 411.4 362.8
France 357.6 273.4 240.6
United Kingdom and Ireland 204.6 168.1 137.6
Other Europe 608.5 491.0 422.3
South America 409.7 263.4 249.4
Middle East 112.5 123.4 99.8
Asia 56.9 46.9 49.6
Australia 87.1 60.2 48.3
Africa 42.6 37.3 29.2
Mexico, Central America and Caribbean 44.6 36.7 31.9
--------- --------- ---------
$ 3,495.3 $ 2,922.7 $ 2,545.9
========= ========= =========
Net sales by product for the years ended December 31, 2003, 2002 and 2001
were as follows (in millions):
2003 2002 2001
--------- --------- ---------
Net sales:
Tractors $ 2,040.9 $ 1,712.1 $ 1,470.3
Combines 301.7 202.1 195.3
Sprayers 232.3 226.9 153.4
Other machinery 377.9 286.7 254.7
Replacement parts 542.5 494.9 472.2
--------- --------- ---------
$ 3,495.3 $ 2,922.7 $ 2,545.9
========= ========= =========
Property, plant and equipment by country as of December 31, 2003 and 2002
was as follows (in millions):
2003 2002
--------- ---------
United States $ 108.8 $ 111.6
United Kingdom 41.9 48.0
Germany 121.8 96.1
France 86.0 33.9
Brazil 51.5 34.9
Other 24.2 19.2
--------- ---------
$ 434.2 $ 343.7
========= =========
16. SUBSEQUENT EVENTS
On January 5, 2004, the Company acquired the Valtra tractor and diesel
engine operations of Kone Corporation, a Finnish company, for (euro)600.6
million, net of approximately (euro)21.4 million cash acquired (approximately
$755.9 million, net), subject to customary closing adjustments. Valtra is a
global tractor and off-road engine manufacturer in the Nordic region of Europe
and Latin America. The acquisition of Valtra provides the Company with the
opportunity to expand its business in significant global markets by utilizing
Valtra's technology and productivity leadership in the agricultural equipment
market. Valtra's unaudited revenues for the twelve months ended September 30,
2003 under accounting principles generally accepted in the United States of
America were approximately $902.2 million. The acquired assets and liabilities
consist primarily of inventories, accounts receivable, property, plant and
equipment, technology, tradenames and patents. The results of operations for the
Valtra acquisition will be included in the Company's Consolidated Financial
Statements as of and from the date of acquisition. The Valtra acquisition will
be accounted for in accordance with SFAS No. 141, "Business Combinations," and
accordingly, the Company will allocate the purchase price to the assets acquired
and the
41
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
liabilities assumed based on a preliminary estimate of fair values as of the
acquisition date. The Company expects to record goodwill and other identifiable
intangible assets such as tradenames, technology and related patents, and
customer relationship intangibles as part of the purchase price allocation. The
Company completed the initial funding of the (euro)600.6 million cash purchase
price of Valtra through the issuance of $201.3 million principal amount of
convertible senior subordinated notes (Note 7), funds borrowed under the
Company's new credit facility and term loan facility (with availability up to
$750.0 million) which was entered into January 5, 2004, and $100.0 million
borrowed under an interim bridge facility that also closed on January 5, 2004.
The Company's new credit facility provides for a $300.0 million
multi-currency revolving credit facility, a $300.0 million U.S. dollar
denominated term loan and a (euro)120.0 million (or approximately $150.0
million) Euro denominated term loan. The revolving credit facility will mature
in January 2006. The maturity date of the revolving credit facility can be
extended to March 2008 if the Company's existing 8-1/2% senior subordinated
notes due 2006 are refinanced on terms specified by the lenders prior to such
date and further extended to December 2008 if the Company's existing 9-1/2%
senior notes due 2008 are refinanced on terms specified by the lenders prior to
such date. Both term loans will amortize at the rate of one percent per annum
until the maturity date. The maturity date for the term loans will be January
2006. The maturity date of the term loans can be extended to March 2008 if the
subordinated notes are refinanced on terms specified by the lender prior to such
date and further extended to June 2009 if the senior notes are refinanced on
terms specified by the lenders prior to such date. The revolving credit and term
facilities are secured by a majority of the Company's U.S., Canadian, Finnish
and U.K. based assets and a pledge of a portion of the stock of the Company's
domestic and material foreign subsidiaries. Interest accrues on amounts
outstanding under the facility, at the Company's option, at either (1) LIBOR
plus a margin ranging between 1.50% and 2.25% based upon the Company's senior
debt ratio or (2) the higher of the administrative agent's base lending rate or
one-half of one percent over the federal funds rate plus a margin ranging
between 0.25% and 1.0% based on the Company's senior debt ratio. The facility
contains covenants restricting, among other things, the incurrence of
indebtedness and the making of certain payments, including dividends. The
Company must also fulfill financial covenants including, among others, a total
debt to EBITDA ratio, a senior debt to EBITDA ratio and a fixed charge coverage
ratio, as defined in the facility. In addition, the new credit facility requires
the Company to issue at least $100.0 million of common stock by January 5, 2005.
The Company borrowed $100.0 million under a bridge financing facility on
January 5, 2004 as discussed above. The loans under the bridge facility
constitute unsecured senior subordinated obligations. The bridge loan facility
matures on January 5, 2005, and interest accrues on borrowings at an increasing
rate of interest, subject to a maximum rate. The bridge facility contains
covenants restricting, among other things, the incurrence of indebtedness and
the making of certain payments, including dividends, and requires that the net
proceeds from any issuances of stock or debt be used to prepay the bridge
financing. If the bridge financing has not been repaid by the first anniversary
of the closing date, January 5, 2005, and there is not any other default or
event of default under the bridge financing, then the bridge lenders may, with
the approval of the holders of 50% of the principal amount of the loans under
the bridge facility, exchange all of the bridge loan for "exchange notes" which
would mature on the tenth anniversary of the closing date.
On January 30, 2004, the Company sold the land, buildings and improvements
of its Coventry facility for approximately $40.7 million. The Company will lease
part of the facility back from the buyers for a period of three years, with the
ability to exit the lease within two years from the date of the sale. The
Company expects to recognize a gain on the sale of the real estate of
approximately $6.9 million. The Company received approximately $34.4 million of
the sale proceeds on January 30, 2004, with remainder to be paid on January 30,
2005.
On February 5, 2004, the Company announced that it had received an
informal inquiry from the Securities and Exchange Commission ("SEC") asking for
its policies and related information with regard to the Company's accounting for
revenue recognition (particularly bill and hold transactions), sales and sales
returns and allowances, plant and facility closing costs and reserves, and
personal use of corporate aircraft. The Company responded to the SEC's inquiry
and subsequently met with the SEC to answer any questions that the SEC had
regarding the Company's response. On March 10, 2004, the SEC informed the
Company that it had terminated its inquiry.
As a result of the Company's announcement of this SEC inquiry, on February
6, 2004, Sekuk Global Enterprises filed a putative class action complaint in the
U.S. District Court for the Northern District of Illinois, Civil Action No.
04-CV-961, on behalf of all persons who purchased or otherwise acquired the
Company's
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AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
securities between February 6, 2003 and February 4, 2004, inclusive (the "Class
Period"). Subsequently, three additional similar complaints were filed in the
U.S. District Court for the Northern District of Georgia by the City of Dania
Beach Police & Firefighters' Retirement System (Civil Action No. 1:04-CV-0535),
Ann Vogel (Civil Action No. 1:04-CV-0617), and Detectives Endowment Association
Annuity Fund. In general, the complaints allege that the Company, and its chief
executive officer and chief financial officer violated securities laws and
regulations by issuing materially false and misleading statements regarding the
Company's financial results during the Class Period that had the effect of
artificially inflating the market price of the Company's securities and request
monetary damages and attorneys' fees. A fifth complaint was filed in the U.S.
District Court for the Northern District of Illinois on March 10, 2004 by Sachin
Joshi (Civil Action No. 1:04-CV-0669). This complaint is a derivative action and
names the directors of AGCO as defendants as well. In general, this complaint
alleges that the directors breached their fiduciary duties to shareholders by
permitting or participating in the activities alleged in the other complaints.
The Company does not believe these cases have any merit and intends to defend
these actions.
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