1
SELECTED FINANCIAL DATA
(in millions, except per share data and number of employees)
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995(1) 1994(1)
- ---------------------------------------------------------------------------------------------------------------------
Operating Results
Net sales $2,941.4 $3,224.4 $2,317.5 $2,068.4 $1,319.3
Gross profit 537.3 666.8 470.3 440.7 276.3
Income from operations(2) 170.5 319.1 211.9 220.6 119.8
Net income(2) 60.6 168.7(3) 125.9(3) 129.1 115.5(4)
Net income per common share-diluted(2)(5) $ 0.99 $ 2.71(3) $ 2.20(3) $ 2.31 $ 2.35(4)
Weighted average number of common
and common equivalent shares
outstanding-diluted(5) 61.2 62.1 57.4 56.6 49.1
Dividends declared per common share(5) $ 0.04 $ 0.04 $ 0.04 $ 0.02 $ 0.01
- ---------------------------------------------------------------------------------------------------------------------
Other Financial Data
Working capital $1,029.9 $ 884.3 $ 750.5 $ 661.5 $ 513.9
Total assets 2,750.4 2,620.9 2,116.5 1,628.6 1,399.5
Long-term debt 924.2 727.4 567.1 415.9(6) 366.8
Stockholders' equity 982.1 991.6 774.6 588.9 476.7
Number of employees 10,572 11,829 7,801 5,548 5,789
- ---------------------------------------------------------------------------------------------------------------------
(1) AGCO sold a 51% joint venture interest in Agricredit-North America effective
November 1, 1996. Accordingly, Agricredit-North America is reflected on the
equity basis of accounting for the years ended December 31, 1996, 1997, and
1998. For comparative purposes, the above table also reflects
Agricredit-North America on the equity basis of accounting for the years
ended December 31, 1995 and 1994. If the Company's 100% interest in
Agricredit-North America were reflected on a consolidated basis for the
years ending December 31, 1995 and 1994, total revenues would be $2,125.0
million and $1,359.0 million, respectively, total assets would be $2,162.9
million and $1,823.3 million, respectively, and long-term debt would be
$568.9 million and $589.8 million, respectively.
(2) These amounts include nonrecurring expenses of $40.0 million, $18.2 million,
$22.3 million, $6.0 million and $19.5 million for the years ended December
31, 1998, 1997, 1996, 1995 and 1994, respectively. The effect of these
nonrecurring charges reduced net income per common share on a diluted basis
by $0.41, $0.19, $0.25, $0.07 and $0.33 for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, respectively. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Charges for
Nonrecurring Expenses."
(3) Includes extraordinary loss, net of taxes, of $2.1 million, or $0.03 per
share, and $3.5 million, or $0.06 per share, for the write-off of
unamortized debt costs related to the refinancing of the Company's revolving
credit facility in January 1997 and March 1996, respectively.
(4) These amounts include a deferred income tax benefit of $29.9 million related
to the reduction of a portion of the valuation allowance. The deferred
income tax benefit had the effect of increasing net income by $29.9 million
and net income per common share on a diluted basis by $0.61.
(5) Net income per common share - diluted, weighted average number of common and
common equivalent shares outstanding - diluted and dividends declared per
common share have been restated for all periods to reflect all stock splits.
(6) Includes $37.6 million of the Company's 6.5% Convertible Subordinated
Debentures. See Note 7 to the Consolidated Financial Statements.
Trading and Dividend Information(1)
- ---------------------------------------------------------------
Dividends
(in dollars) High Low Declared
- ---------------------------------------------------------------
1998
First Quarter $30 9/16 $26 15/16 $.01
Second Quarter 29 7/16 20 7/16 .01
Third Quarter 20 11/16 6 7/16 .01
Fourth Quarter 10 3/8 5 3/4 .01
- ---------------------------------------------------------------
- ---------------------------------------------------------------
Dividends
(in dollars) High Low Declared
- ---------------------------------------------------------------
1997
First Quarter $30 3/8 $27 $.01
Second Quarter 35 1/2 25 9/16 .01
Third Quarter 35 1/8 30 11/16 .01
Fourth Quarter 32 5/8 25 9/16 .01
- ---------------------------------------------------------------
(1) The Company's stock trades on the New York Stock Exchange under the symbol
AG. As of February 26, 1999, there were approximately 777 stockholders of
record.
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2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TRANSACTION HISTORY
During the periods discussed below, AGCO's results of operations were
significantly affected by a series of transactions that expanded the size and
geographic scope of its distribution network, enabled it to offer new products
and increased its manufacturing capacity. The results of operations and
financial position for the years ended December 31, 1998, 1997 and 1996 were
affected by the following transactions completed by the Company:
- - In June 1996, the Company acquired the agricultural and industrial equipment
business of Iochpe-Maxion S.A. (the "Maxion Acquisition"), which expanded its
product offerings and its distribution network in South America, particularly
in Brazil.
- - In July 1996, the Company acquired certain assets of Western Combine
Corporation and Portage Manufacturing, Inc., which were the Company's
suppliers of Massey Ferguson combines and other harvesting equipment sold in
North America (the "Western Combine Acquisition"). The Western Combine
Acquisition provided the Company with access to advanced technology and
increased the Company's gross profit margin on certain combines and harvesting
equipment sold in North America.
- - In November 1996, the Company sold a 51% interest in Agricredit Acceptance
Company ("Agricredit-North America"), the Company's retail finance subsidiary
in North America, to a wholly-owned subsidiary of Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland" ("Rabobank") (the
"Agricredit Sale"). The Company retained a 49% interest in Agricredit-North
America and now operates the finance company with Rabobank as a joint venture
(the "Agricredit-North America Joint Venture"). The Agricredit-North America
Joint Venture has continued the business of Agricredit-North America and seeks
to build a broader asset-based finance business through the addition of other
lines of business.
- - In December 1996, the Company further enhanced its market presence in
Argentina and South America by acquiring the operations of Deutz Argentina
S.A. ("Deutz Argentina"), a manufacturer and distributor of agricultural
equipment, engines and trucks to Argentina and other markets in South America
(the "Deutz Argentina Acquisition").
- - In January 1997, the Company acquired the operations of Xaver Fendt GmbH & Co.
KG ("Fendt"), a manufacturer and distributor of tractors, primarily in Germany
and throughout Europe and Australia (the "Fendt Acquisition"). The Fendt
Acquisition added a new line of tractors to the Company's product offerings
and expanded the Company's market presence in Germany and throughout Europe
and Australia. In December 1997, the Company sold Fendt's caravan and motor
home business in order to focus on its core agricultural equipment business
(the "Fendt Caravan Sale").
- - In December 1997, the Company acquired the remaining 68% of Dronningborg
Industries a/s (the "Dronningborg Acquisition"), the Company's supplier of
combine harvesters sold under the Massey Ferguson brand name in Europe. The
Company previously owned 32% of this combine manufacturer which developed and
manufactured combine harvesters exclusively for AGCO. The Dronningborg
Acquisition enabled the Company to achieve certain synergies within its
worldwide combine manufacturing and increased the Company's gross profit
margin on combines sold primarily in Europe.
- - In December 1997, the Company sold 50% of Deutz Argentina's engine production
and distribution business to Deutz AG, a global supplier of diesel engines.
This joint venture (the "Engine Joint Venture") will allow the Company to
share in research and development costs and gain access to advanced
technology.
- - In May 1998, the Company acquired the distribution rights for the Massey
Ferguson brand in Argentina (the "MF Argentina Acquisition"). The MF Argentina
Acquisition expanded the Company's distribution network in the second largest
market in South America.
- - In July 1998, the Company acquired the Spra-Coupe product line, a brand of
agricultural sprayers sold primarily in North America (the "Spra-Coupe
Acquisition"). In October 1998, the Company acquired the Willmar product line,
a brand of agricultural self-propelled sprayers, spreaders and loaders sold
primarily in North America (the "Willmar Acquisition"). The Spra-Coupe and
Willmar Acquisitions expanded the Company's product offerings to include a
full line of self-propelled sprayers.
As a result of these transactions, the historical results of the Company
are not comparable from year to year in the periods presented and may not be
indicative of future performance.
RESULTS OF OPERATIONS
Sales are recorded by the Company when equipment and replacement parts are
shipped by the Company to its independent dealers, distributors or other
customers. To the extent possible, the Company attempts to ship products to its
dealers and distributors on a level basis throughout the year to reduce the
effect of seasonal demands on its manufacturing operations and to minimize its
investment in inventory. Retail sales by dealers to farmers are highly seasonal
and are a function of the timing of the planting and harvesting seasons. In
certain markets, particularly in North America, there is often a time lag,
generally from one to twelve months, between the date the Company records a sale
and the date a dealer sells the equipment to a farmer. During this time lag
between the wholesale and retail sale, dealers may not return equipment to the
Company unless the Company terminates a dealer's contract or agrees to accept
returned products. Commissions payable under the Company's salesman incentive
programs are paid at the time of retail sale, as opposed to when products are
sold to dealers.
20
3
The following table sets forth, for the periods indicated, the percentage
relationship to revenues of certain items included in the Company's Consolidated
Statements of Income:
- -----------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 81.7 79.3 79.7
- -----------------------------------------------------------------------
Gross profit 18.3 20.7 20.3
Selling, general and
administrative expenses 9.2 8.5 9.0
Engineering expenses 1.9 1.7 1.2
Nonrecurring expenses 1.4 0.6 1.0
- -----------------------------------------------------------------------
Income from operations 5.8 9.9 9.1
Interest expense, net 2.3 1.7 1.4
Other expense, net 1.0 0.6 0.3
- -----------------------------------------------------------------------
Income before income taxes,
equity in net earnings
of affiliates and
extraordinary loss 2.5 7.6 7.4
Provision for income taxes 0.9 2.7 2.6
- -----------------------------------------------------------------------
Income before equity in net
earnings of affiliates and
extraordinary loss 1.6 4.9 4.8
Equity in net earnings
of affiliates 0.5 0.4 0.8
- -----------------------------------------------------------------------
Income before
extraordinary loss 2.1 5.3 5.6
Extraordinary loss,
net of taxes -- (0.1) (0.2)
- -----------------------------------------------------------------------
Net income 2.1% 5.2% 5.4%
=======================================================================
YEAR ENDED DECEMBER 31, 1998 COMPARED TO
YEAR ENDED DECEMBER 31, 1997
The Company recorded net income for 1998 of $60.6 million compared to $168.7
million for 1997. Net income per common share on a diluted basis was $0.99 for
1998 compared to $2.71 in 1997. Net income for 1998 included nonrecurring
expenses of $40.0 million, or $0.41 per common share on a diluted basis,
primarily related to reductions in the Company's worldwide workforce (see
"Nonrecurring Expenses"). Net income for 1997 included nonrecurring expenses of
$18.2 million, or $0.19 per share on a diluted basis, primarily related to the
restructuring of the Company's European Operations, the integration of the Deutz
Argentina and Fendt operations and executive severance costs. In addition, net
income for 1997 included an extraordinary loss of $2.1 million, or $0.03 per
share on a diluted basis, for the write-off of unamortized debt costs related to
the refinancing of the Company's revolving credit facility (see "Liquidity and
Capital Resources"). The results for 1998 were negatively impacted by lower
sales and operating margins caused by unfavorable industry conditions, lower
production, lower price realization and the negative impact of currency
translation.
RETAIL SALES
Global demand for agricultural equipment weakened in the second half of 1998 in
most major markets. The industry decline was primarily due to the effects of
high global commodity stocks and lower export demand for farm commodities which
resulted in lower commodity prices. These conditions have the effect of reducing
farm income thereby reducing demand for new equipment purchases. In many
markets, this impact offset relatively favorable industry demand in the first
half of the year.
In the United States and Canada, industry unit retail sales of tractors
increased approximately 4% in 1998 over 1997 despite declining in the second
half of the year. Industry retail sales of combines declined approximately 4%
compared to 1997. Company retail sales of tractors were 2% higher than 1997 and
Company retail sales of combines were 9% below the prior year. The Company's
combine sales were negatively impacted relative to the industry primarily due to
lower 1998 pre-season sales and new product introductions by competitors.
In Western Europe, industry unit retail sales of tractors in 1998
decreased approximately 3% compared to 1997. Industry results were mixed with
significant declines experienced in the United Kingdom and Scandinavia offset by
increases in Germany and Italy. Company retail sales of tractors decreased
approximately 6% in 1998 compared to 1997. The Company's retail sales were
negatively impacted by sales declines of the Massey Ferguson high horse-power
tractors and aggressive pricing in this segment of the market.
In South America, industry unit retail sales of tractors in 1998 decreased
approximately 5% compared to 1997. Industry results in 1998 were also mixed in
this region with favorable industry results in Brazil offset by industry
declines in Argentina and the remaining markets. Company retail sales of
tractors were 2% below 1997, thereby slightly outperforming the market primarily
due to favorable acceptance of new product introductions.
In other international markets, industry unit retail sales of tractors
were lower than 1997, particularly in Asia and Africa. The Company also
experienced lower retail sales in these markets.
STATEMENT OF INCOME
Net sales for 1998 were $2.9 billion compared to $3.2 billion in 1997. This
decline primarily reflects lower retail demand in the majority of markets
throughout the world. Net sales for 1998 were also negatively impacted by the
Fendt Caravan Sale and Engine Joint Venture divestitures and the negative impact
on foreign currency translation due to the strengthening of the U.S. dollar
against most European currencies. Net sales for 1998 were positively impacted by
the Dronningborg, MF Argentina, Spra-Coupe and Willmar Acquisitions. Excluding
the impact of currency translation, acquisitions and divestitures, net sales
decreased approximately 6% compared to 1997.
On a regional basis, net sales in North America decreased $15.7 million,
or 1.6%, compared to 1997, primarily due to unfavorable market conditions which
particularly impacted sales of
21
4
combines and replacement parts. In the Europe/Africa/Middle East region, net
sales in 1998 declined $183.6 million, or 10.3%, compared to 1997 primarily due
to unfavorable industry conditions, the impact of the Fendt Caravan Sale, and
the negative impact of foreign currency translation. Net sales in South America
decreased $19.0 million, or 5.7%, for 1998 compared to 1997, primarily due to
the impact of the Engine Joint Venture and the negative impact of foreign
exchange. In the East Asia/Pacific region, net sales declined $64.7 million, or
42.5%, for 1998 compared to 1997, primarily due to depressed industry conditions
resulting from the Asian currency devaluation and the negative impact of
currency translation.
Income from operations was $170.5 million for 1998 compared to $319.1
million in 1997. Excluding nonrecurring expenses (see "Nonrecurring Expenses"),
operating income for 1998 was $210.5 million, or 7.2% of net sales, compared to
$337.3 million, or 10.5% of net sales, for 1997. The reduction in operating
margin was a result of lower gross margins, higher selling, general and
administrative expenses ("S,G&A expenses") and higher engineering expenses as a
percentage of net sales. Gross margins of 18.3% for 1998 were lower than gross
margins of 20.7% for 1997 due to lower production overhead absorption, lower
price realization in the majority of markets, and unfavorable foreign currency
exchange relating primarily to the weakening of the Canadian dollar in relation
to the U.S. dollar and the strengthening of the British pound compared to other
European currencies. The Company lowered 1998 tractor and combine unit
production volumes by approximately 13% to reduce inventory levels in response
to weakening industry conditions. Price realization in 1998 was impacted by a
more competitive market environment and higher discounts to liquidate older,
slower-moving inventory. S,G&A expenses for 1998 were $270.7 million, or 9.2% of
net sales, compared to $275.4 million, or 8.5% of net sales, for 1997. As a
percentage of net sales, S,G&A expenses were higher in 1998 due to the lower
sales volumes and Year 2000 costs recorded in 1998 (see "Year 2000").
Engineering expenses for 1998 were $56.1 million, or 1.9% of net sales, compared
to $54.1 million, or 1.7% of net sales, for 1997. As a percentage of net sales,
engineering expenses were higher in 1998 primarily due to lower sales volumes
and higher expenses due to the Dronningborg Acquisition.
Interest expense, net was $67.7 million in 1998 compared to $53.5 million
in 1997. The higher expense was primarily due to additional borrowings to fund
the Company's recent acquisitions, common stock repurchases in the second
quarter of 1998 and higher levels of working capital.
Other expense, net was $28.5 million in 1998 compared to $19.9 million in
1997. The increase in other expense primarily relates to increased hedging costs
and foreign exchange losses in addition to higher amortization of intangibles
due to the Company's recent acquisitions.
The Company recorded an income tax provision of $27.5 million in 1998
compared to $87.5 million in 1997. The Company's effective tax rate increased in
1998 compared to 1997 due to a change in the mix of income to jurisdictions with
higher tax rates.
Equity in net earnings of affiliates was $13.8 million in 1998 compared to
$12.6 million in 1997. The increase primarily related to increased earnings in
the Company's retail finance joint ventures.
YEAR ENDED DECEMBER 31,1997 COMPARED TO
YEAR ENDED DECEMBER 31,1996
The Company recorded net income for the year ended December 31, 1997 of $168.7
million compared to $125.9 million for the year ended December 31, 1996. Net
income per common share on a diluted basis was $2.71 for 1997 compared to $2.20
for 1996. Net income for 1997 included nonrecurring expenses of $18.2 million,
or $0.19 per share on a diluted basis, primarily related to the restructuring of
the Company's European operations, the integration of the Deutz Argentina and
Fendt operations and executive severance costs (see "Nonrecurring Expenses"). In
addition, net income for 1997 included an extraordinary after-tax charge of $2.1
million, or $0.03 per share on a diluted basis, for the write-off of unamortized
debt costs related to the refinancing of the Company's revolving credit facility
(see "Liquidity and Capital Resources"). Net income for 1996 included
nonrecurring expenses of $22.3 million, or $0.25 per share on a diluted basis,
primarily related to the restructuring of the Company's European operations, the
integration and restructuring of the Company's Brazilian operations acquired in
the Maxion Acquisition and executive severance costs (see "Nonrecurring
Expenses"). In addition, net income for 1996 included an extraordinary after-tax
charge of $3.5 million, or $0.06 per share on a diluted basis, for the write-off
of unamortized debt costs related to the refinancing of the Company's revolving
credit facility and a gain on the Agricredit Sale of $4.7 million, or $0.05 per
share on a diluted basis. The Company's improved results for 1997 primarily
reflected the positive impact of the Fendt Acquisition completed in January 1997
and improved operating margins, particularly in the Company's South American
operations, partially offset by the negative currency translation effect of the
strengthening dollar against most European currencies.
RETAIL SALES
Conditions in the United States and Canadian agricultural markets were favorable
in 1997 compared to 1996. Industry unit retail sales of tractors, combines and
hay and forage equipment for 1997 increased approximately 12%, 9% and 8%,
respectively, over 1996. The Company believes general market conditions were
positive due to favorable economic conditions relating to high net cash farm
incomes, stable commodity prices and strong domestic and export demand of
commodities. Company unit retail sales of tractors in the United States and
Canada increased 5% in 1997 compared to 1996 and were negatively impacted by a
change in the timing of the Massey Ferguson volume bonus plan from January 1997
to December 1996. Company unit retail sales of combines in the United States and
Canada for 1997 were flat compared to 1996. Company hay and forage equipment
retail sales increased in line with the industry compared to the prior year
primarily due to new products and improvements in the dairy and cattle industry.
The
22
5
Company believes that aggressive competitor pricing and the introduction of
certain new products contributed to the strong industry growth while the Company
maintained its focus on improved profit margins.
Industry conditions in Western Europe showed mixed results in 1997 with
unit retail sales of tractors decreasing approximately 3% compared to 1996
primarily due to declines in the U.K., France and Germany. The industry decline
was partially due to farm consolidation in Western Europe and the relatively
strong retail sales of tractors in 1996. Company unit retail sales of tractors
in Western Europe, including sales of Fendt tractors in both periods, decreased
in line with the industry compared to 1996. In addition to the industry
conditions, the strength of the British pound against other European currencies
also had a negative impact on sales and gross margins of the Company's tractors
produced in the U.K.
Industry unit retail sales of tractors in South America increased
approximately 35% compared to the prior year. This increase was primarily due to
a recovery in Brazil resulting from increasingly favorable economic conditions
and reduced farm debt levels. Company retail unit sales of tractors in South
America increased approximately 25% and were negatively impacted by competitor
discounting which the Company chose not to match. In other international
markets, Company retail unit sales of tractors increased approximately 11%,
consistent with the industry.
STATEMENT OF INCOME
Net sales for 1997 increased 39.1% to $3.2 billion compared to $2.3 billion for
1996. The increase was primarily the result of the Company's recent
acquisitions. This increase was partially offset by the negative currency
translation effect of the strengthening dollar against most European currencies.
Net sales for 1997 were approximately $181.0 million lower than they would have
been at 1996 foreign exchange rates. On a regional basis in 1997, the Company
experienced increased net sales of $94.0 million, or 10.9% over 1996, in North
America primarily due to the strong industry and introduction of new products.
The Company achieved net sales increases in the Europe/Africa/Middle East region
of $596.5 million, or 50.3% over 1996, primarily resulting from the Fendt
Acquisition, which was acquired effective January 1, 1997. In South America, the
Company achieved net sales increases of $234.0 million, or 233% over 1996,
primarily related to the impact of acquired operations in Brazil and Argentina,
acquired in June 1996 and December 1996, respectively. In the Asia/Pacific
region, net sales in 1997 decreased $17.6 million, or 10.4%, compared to 1996,
primarily due to weak economic conditions in Asia.
Income from operations was $319.1 million in 1997 compared to $211.9
million in 1996. Excluding nonrecurring expenses, operating income for 1997 was
$337.3 million or 10.5% of net sales, compared to $234.2 million, or 10.1% of
net sales, in 1996. The improvement in operating margin in 1997 was the result
of higher gross margins and lower S,G&A expenses as a percent of net sales.
Gross profit for 1997 was $666.8 million, or 20.7% of net sales, as compared to
$470.3 million, or 20.3% of net sales, for 1996. Gross margins were favorably
impacted by cost reduction efforts, particularly in the Company's South American
operations, partially offset by the negative effect of foreign exchange related
to the Company's products sourced from the U.K., resulting from the strength of
the British pound. S,G&A expenses were $275.4 million, or 8.5% of net sales, for
1997 compared to $208.4 million, or 9.0% of net sales, for 1996. The decrease in
S,G&A expenses as a percentage of net sales was primarily due to a decrease in
the amortization of stock-based compensation expense of $5.2 million related to
the Company's long-term incentive plan. Excluding the amortization expense
related to the long-term incentive plan, S,G&A expenses were $260.5 million, or
8.1% of net sales, in 1997 compared to $188.3 million, or 8.1% of net sales, in
1996. Excluding the amortization expense related to the long-term incentive
plan, S,G&A expenses as a percentage of net sales in 1997 were equal to 1996
primarily due to cost reduction initiatives in the Company's European operations
offset by increased marketing expenses related to new product introductions. The
cost reduction efforts involved the centralization of certain selling, general
and administrative functions (see "Nonrecurring Expenses"). Engineering expenses
were $54.1 million, or 1.7% of net sales, for 1997 compared to $27.7 million, or
1.2% of net sales, for 1996. The increase in engineering expenses as a
percentage of net sales compared to 1996 primarily related to the higher level
of engineering expenses in the newly acquired Fendt operations relative to the
Company's other operations.
Interest expense, net was $53.5 million for 1997 compared to $32.7 million
for 1996. The increase in interest expense, net was primarily due to the
additional borrowings associated with the financing of the Maxion, Deutz
Argentina and Fendt Acquisitions. The increased interest expense related to
acquisition indebtedness was partially offset by proceeds from the Company's
offering of 5.2 million shares of common stock in March 1997.
Other expense, net was $19.9 million for 1997 compared to $7.6 million for
1996. The increase in other expense, net was primarily due to increased
amortization of intangible assets resulting from the Maxion, Deutz Argentina and
Fendt Acquisitions and a gain of $4.7 million recorded in 1996 for the
Agricredit Sale.
The Company recorded a net income tax provision of $87.5 million for 1997
compared to $59.9 million for 1996. In 1997 and 1996, the Company's income tax
provision approximated statutory rates, although actual income tax payments
remained at rates below statutory rates. The Company's effective tax rate
increased slightly in 1997 compared to 1996 due to a change in the mix of income
to jurisdictions with higher tax rates.
Equity in net earnings of affiliates was $12.6 million in 1997 compared to
$17.7 million in 1996. The decrease in income was primarily due to a decrease in
net income recognized relating to Agricredit-North America. As a result of the
Agricredit Sale in November 1996, the Company recognized only 49% of net income
of the North American retail finance company in 1997 compared to 100% through
October 31, 1996.
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QUARTERLY RESULTS
The following table presents unaudited interim operating results of the Company.
The Company believes that the following information includes all adjustments
(consisting only of normal, recurring adjustments) that the Company considers
necessary for a fair presentation, in accordance with generally accepted
accounting principles. The operating results for any interim period are not
necessarily indicative of results for any future interim period or the entire
fiscal year.
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
1998:
Net sales $ 701.5 $ 816.1 $ 665.7 $ 758.1
Gross profit 144.5 156.5 131.2 105.1
Income from operations(1) 67.9 73.2 46.1 (16.7)
Net income(1) 32.7 32.3 17.9 (22.3)
Net income per common share - diluted(1) 0.52 0.52 0.30 (0.37)
1997:
Net sales $ 704.3 $ 871.9 $ 759.5 $ 888.7
Gross profit 134.3 175.8 169.5 187.2
Income from operations(1) 56.6 89.2 82.4 90.9
Income before extraordinary loss(1) 27.8 48.8 44.2 50.0
Net income(1)(2) 25.7 48.8 44.2 50.0
Net income per common share before extraordinary loss - diluted(1)(2) 0.47 0.77 0.70 0.79
- ----------------------------------------------------------------------------------------------------------------------------------
(1) The 1998 operating results include nonrecurring expenses of $40.0 million,
or $0.42 per share, for the three months ended December 31, 1998. The 1997
operating results include nonrecurring expenses of $2.6 million, or $0.03
per share, for the three months ended March 31, 1997, $5.2 million, or $0.05
per share, for the three months ended June 30, 1997, $4.9 million, or $0.05
per share, for the three months ended September 30, 1997 and $5.5 million,
or $0.06 per share, for the three months ended December 31, 1997.
(2) The 1997 operating results include an extraordinary after-tax loss of $2.1
million, or $0.03 per share, for the write-off of unamortized debt costs
related to the refinancing of the Company's revolving credit facility for
the three months ended March 31, 1997.
To the extent possible, the Company attempts to ship products to its dealers on
a level basis throughout the year to reduce the effect of seasonal demands on
its manufacturing operations and to minimize investments in inventory. However,
retail sales of agricultural equipment are highly seasonal, with farmers
traditionally purchasing agricultural equipment in the spring and fall in
conjunction with the major planting and harvesting seasons. The Company's net
sales and income from operations have historically been the lowest in the first
quarter and have increased in subsequent quarters as dealers increase inventory
in anticipation of increased retail sales in the third and fourth quarters. The
Company's results in the fourth quarter of 1998 reflect the impact of lower
sales due to weakening industry conditions, a significant reduction in worldwide
production resulting in low production overhead absorption and increased
competitive pricing environment in certain markets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing requirements are subject to variations due to seasonal
changes in inventory and dealer receivable levels. Internally generated funds
are supplemented when necessary from external sources, primarily the Company's
revolving credit facility. In January 1997, the Company replaced its $650.0
million unsecured revolving credit facility with a new $1.2 billion unsecured
revolving credit facility (the "January 1997 Credit Facility"). The January 1997
Credit Facility is the Company's primary source of financing. In March 1997, the
lending commitment for the January 1997 Credit Facility was reduced by $141.2
million which represented the proceeds to the Company, net of underwriting
discounts, from the Company's common stock offering. Effective January 1, 1999,
lending commitments under the January 1997 Credit Facility were further reduced
to $1.0 billion. Borrowings under the January 1997 Credit Facility may not
exceed the sum of 90% of eligible accounts receivable and 60% of eligible
inventory. As of December 31, 1998, approximately $661.2 million was outstanding
under the January 1997 Credit Facility and available borrowings, based on the
lending commitment of $1 billion, were approximately $338.6 million. Total
long-term debt for the Company increased from $727.4 million at December 31,
1997 to $924.2 million at December 31, 1998.
In December 1997, the Company's Board of Directors authorized the
repurchase of up to $150.0 million of its outstanding common stock. As of
December 31, 1998, the Company has repurchased approximately 3.5 million shares
of its common stock at a cost of approximately $88.1 million. The purchases are
made through open market transactions, and the timing and number of shares
purchased depends on various factors, such as price and other market conditions.
In March 1997, the Company completed a public offering of 5.2 million
shares of its common stock (the "Offering"). The net proceeds to the Company
from the Offering were approximately $140.4 million after deduction of
underwriting discounts and commissions and other expenses. The Company used the
proceeds from the Offering to reduce a portion of the borrowings outstanding
under the January 1997 Credit Facility.
In March 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 sale of the Notes provided the Company with subordinated capital and
replaced a portion of its floating rate debt with longer term fixed rate debt.
The Company's working capital requirements are seasonal, with investments
in working capital typically building in the first
24
7
half of the year and then reducing in the second half of the year. The Company
had $1,029.9 million of working capital as of December 31, 1998 compared to
$884.3 million as of December 31, 1997. The increase in working capital was
primarily due to working capital acquired in the Company's recent acquisitions
and lower accounts payables due to lower production volume in 1998 compared to
1997.
Cash flow provided by operating activities was $11.2 million for 1998,
$100.0 million for 1997, and $206.7 million for 1996. The decrease in operating
cash flow for 1998 compared to 1997 was primarily due to lower net income, a
lower provision for deferred income taxes primarily due to the utilization of
net operating losses in 1997, and lower accounts payable. This impact was offset
to some extent by a lower use of cash for receivables and inventories in 1998
compared to 1997. In response to the weakening industry conditions, the Company
reduced production levels, particularly in the second half of 1998. The lower
production levels had the effect of generating positive cash flow by reducing
the Company's receivables and inventory levels, partially offset by reducing
payables due to lower raw material requirements.
The operating cash flow for 1996 was impacted favorably by the collection
in 1996 of unusually high accounts receivable levels at December 31, 1995. The
1995 international receivables were unusually high due to the timing of
shipments of tractors in Western Europe which were delayed until the fourth
quarter of 1995 due to tire supply shortages resulting from a labor strike of a
major supplier. While this tire shortage impacted the Company's cash flow at
that time, the Company has alternative sources of supply and adequate borrowing
availability should a similar situation occur in the future. Excluding this
impact, cash flow provided by operating activities for 1997 was lower compared
to 1996 primarily due to increases in inventory compared to the prior year
partially caused by higher inventory levels related to the introduction of new
tractors sourced from the Company's U.K. and France production facilities and
increased accounts receivable related to sales growth in certain markets that
require longer than average payment terms.
Capital expenditures were $61.0 million in 1998, $72.1 million in 1997 and
$45.2 million in 1996. For all years, the Company's capital expenditures related
to the development of new and existing products as well as the maintenance and
improvement of existing facilities. The decrease in capital expenditures in 1998
compared to 1997 was due to lower capital requirements for new products. The
increase in capital expenditures in 1997 compared to 1996 was primarily due to
capital expenditures at Fendt. The Company currently estimates that aggregate
capital expenditures for 1999 will range from approximately $55 million to $65
million and will primarily be used to support the development and enhancement of
new and existing products. The capital expenditures for 1999 are expected to be
funded with cash flows from operations.
The Company's debt to capitalization ratio was 48.5% at December 31, 1998
compared to 42.3% at December 31, 1997. The increase in the debt to
capitalization ratio was primarily due to the common stock repurchases and
acquisitions completed in 1998.
The Company believes that available borrowings under the January 1997
Credit Facility, available cash and internally generated funds will be
sufficient to support its working capital, capital expenditures, and debt
service requirements for the foreseeable future.
The Company from time to time reviews and will continue to review
acquisition and joint venture opportunities as well as changes in the capital
markets. If the Company were to consummate a significant acquisition or elect to
take advantage of favorable opportunities in the capital markets, the Company
may supplement availability or revise the terms under its credit facilities or
complete public or private offerings of equity or debt securities.
NONRECURRING EXPENSES
In 1998, the Company recorded nonrecurring expenses of $40.0 million primarily
related to severance and related costs associated with the reduction in the
Company's worldwide permanent workforce of approximately 1,400 employees. These
headcount reductions were made to address the negative market conditions which
are expected to adversely affect demand in the majority of markets. The
headcount reductions are expected to result in cost savings related to
manufacturing costs and S,G&A expenses.
In 1997, the Company recorded nonrecurring expenses of $18.2 million which
consisted of (i) $15.0 million related to the restructuring of the Company's
European operations and the integration of the Deutz Argentina and Fendt
operations, acquired in December 1996 and January 1997, respectively, and (ii)
$3.2 million related to executive severance. The costs associated with the
restructuring and integration activities primarily related to the centralization
and rationalization of certain manufacturing, selling and administrative
functions in addition to the rationalization of a small portion of the Company's
European dealer network. These restructuring and integration activities resulted
in cost savings related to manufacturing costs and selling, general and
administrative expenses. In addition, the European dealer rationalization is
expected to improve long-term sales in certain markets.
In 1996, the Company recorded nonrecurring expenses of $22.3 million which
consisted of (i) $15.0 million related to the restructuring of the Company's
European operations and the integration and restructuring of the Company's
Brazilian operations, acquired in the Maxion Acquisition in June 1996, and (ii)
$7.3 million related to executive severance. The European restructuring costs
are primarily related to the centralization of certain parts warehousing,
administrative, sales and marketing functions. As a result of these actions, the
Company achieved savings in reduced selling, general and administrative expenses
primarily relating to the Company's parts warehousing, finance, dealer
communications, sales and marketing functions. The Brazilian integration costs
are primarily related to the rationalization of manufacturing, sales and
administrative functions designed to resize the operations to then existing
sales and production volumes. The Company achieved savings from the integration
and restructuring of the Brazilian operations resulting primarily in reduced
selling, general and administrative expenses and product cost reductions.
25
8
OUTLOOK
The Company's operations are subject to the cyclical nature of the agricultural
industry. Sales of the Company's equipment have been and are expected to
continue to be affected by changes in net cash farm income, farm land values,
weather conditions, the demand for agricultural commodities and general economic
conditions.
Global demand for agricultural equipment weakened in the second half of
1998 in most major markets. Economic uncertainty coupled with low commodity
prices caused by strong harvests and reduced export demand of commodities are
expected to continue to adversely affect agricultural equipment sales in the
world's significant markets. In 1999, retail demand in North America is expected
to decrease 15-20% due to the continued impact that low commodity prices will
have on net cash farm income. In Western Europe, retail demand in 1999 is
expected to decline 5-10% due to uncertainty surrounding the Common Agricultural
Policy reforms discussions and projected lower European Union farm income.
Retail demand in 1999 in South America is expected to decline 10-15% resulting
from the recent Brazilian currency devaluation and economic uncertainty in the
region. In other international markets, retail demand in 1999 is expected to
decline due to continued weak economic conditions in many regions.
As a result of these conditions, the Company has taken and will continue
to take aggressive actions to reduce manufacturing overheads and operating
expenses in order to resize the business in line with anticipated lower levels
of demand. In addition, the Company has reduced its production schedules in 1999
compared to 1998 to minimize its investments in inventories and receivables.
Based on these conditions, the Company expects to remain profitable in 1999 but
below 1998 levels. The Company will focus its efforts in 1999 on generating
strong cash flow and on its long-term growth and profit improvement initiatives.
FOREIGN CURRENCY RISK MANAGEMENT
The Company has significant manufacturing operations in the United States, the
United Kingdom, 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 Canadian dollar in
relation to the U.S. dollar and the British pound in relation to other European
currencies. Fluctuations in the value of foreign currencies create exposures
which can adversely affect the Company's results of operations.
The Company attempts to manage its transactional foreign exchange exposure
by hedging identifiable foreign currency cash flow commitments 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's
hedging policy prohibits foreign currency forward contracts for speculative
trading purposes. The Company's translation exposure resulting from translating
the financial statements of foreign subsidiaries into U.S. dollars is not
hedged. When practical, this translation impact is reduced by financing local
operations with local borrowings.
The following is a summary of foreign currency forward contracts used to
hedge currency exposures. All contracts have a maturity of less than one year.
The net notional amounts and fair value gains or losses as of December 31, 1998
stated in U.S. dollars are as follows (in millions):
- -------------------------------------------------------------
Net
Notional Average Fair
Amount Contract Value
Buy/(Sell) Rate* Gain/(Loss)
- -------------------------------------------------------------
Australian dollar $ 3.7 1.61 $(0.1)
Austrian shilling (3.5) 11.85 -
Belgian franc (3.1) 34.91 -
British pound 40.7 0.60 (0.3)
Canadian dollar (13.8) 1.53 0.1
Danish krone 16.9 6.25 (0.3)
Dutch guilder 14.3 1.89 0.1
French franc 173.0 5.74 3.8
German mark (100.6) 1.64 1.7
Greek drachma (5.6) 284.49 (0.1)
Irish punt (4.0) 0.68 (0.1)
Italian lira 32.5 1,651.70 -
Japanese yen (3.4) 103.63 0.3
Spanish peseta (6.6) 145.02 (0.1)
Other 0.5 0.2
- -------------------------------------------------------------
$141.0 $5.2
=============================================================
*per U. S. dollar
Because these contracts were entered into for hedging purposes, the gains
and losses on the contracts would largely be offset by gains and losses on the
underlying firm commitment.
Since December 31, 1998, the Brazilian currency has devalued
significantly. The devaluation will have the result of decreasing the Company's
stockholders' equity and reducing the value of sales of the Brazilian subsidiary
when translated into U.S. dollars. As of January 31, 1999, the translation of
the Brazilian financial statements resulted in a decrease to stockholders'
equity of approximately $95 million.
INTEREST RATES
The Company manages its debt structure and interest rate risk through the use of
fixed and floating rate debt. The fixed rate debt is primarily the 8 1/2% Senior
Subordinated Notes due 2006. The floating rate debt is primarily the January
1997 Credit Facility (see "Liquidity and Capital Resources"). The Company's net
exposure to interest rate risk consists of its floating rate debt which is tied
to
26
9
changes in U.S. and European libor rates. Assuming a 10% increase in interest
rates, interest expense, net for 1998 would have increased by approximately $4.6
million.
YEAR 2000
The Company has assessed the impact of the Year 2000 issue on its reporting
systems and operations. Based on its assessment, the Company has developed a
Year 2000 compliance plan, in which all key information systems are being tested
and all noncompliant software or technology is being modified or replaced. This
review included all information technology systems and embedded systems in the
Company's manufacturing equipment, facility equipment and in the Company's
products. The Company is also reviewing the Year 2000 compliance status and
compatibility of customers' and suppliers' systems which interface with the
Company's systems or could impact the Company's operations.
The Company has completed the majority of the necessary modifications to
its information technology systems and plans to complete testing of its systems
for Year 2000 compliance during 1999. During 1998, the Company reviewed a
majority of its embedded systems and identified a small percentage of systems
with Year 2000 problems. The Company expects to have these affected systems
replaced or corrected by mid-1999 and to complete testing of all systems during
1999. Based on its reviews, the Company estimates that the required costs to
modify existing computer systems and applications will be approximately $10
million to $12 million of which $5.9 million has been incurred to date. The
remaining costs will be incurred in 1999.
While the Company believes that its plans are adequate to ensure that the
Year 2000 issue will not materially impact future operations, the risks of these
plans not being adequate or the risk that the Company's major customers and
suppliers do not modify or replace their affected systems could have a material
adverse impact on the Company's results of operations or financial condition in
the future. Failure by the Company or its customers or suppliers to resolve the
Year 2000 problem could result in a temporary slowdown or cessation of
manufacturing operations at one or more of the Company's facilities and a
temporary inability of the Company to process some orders and to deliver some
finished products to customers. The Company is currently identifying and
considering various contingency options, to minimize the risks of any Year 2000
problems.
EURO CURRENCY
The Company has established the capability to trade in the Common European
currency (the "Euro") in all European locations beginning January 1, 1999. The
Company began communicating with suppliers, dealers and financial institutions
in 1998 and has formulated a transition plan to move to a Euro based business in
2001. The Company does not expect its competitive position (including pricing,
purchasing contracts and systems modifications) to be materially affected by the
change to the Euro.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
Company will be required to adopt the new statement in 2000. The Company has not
yet quantified the financial impact of adopting SFAS No. 133 and has not
determined the method of adoption. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits," which revises
disclosure requirements related to the Company's employee benefit plans and
postretirement benefits, and SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which revises disclosure requirements
related to segment reporting. SFAS No. 132 and SFAS No. 131 require disclosure
only; therefore their adoption had no impact on the Company's financial position
or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires disclosures regarding the Company's
comprehensive income defined as the total of net income and all other non-owner
changes in equity. SFAS No. 130 requires disclosure only; therefore its adoption
had no impact on the Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
Certain information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, including the information set forth under "--Outlook". Although the
Company believes that the expectations reflected in such forward looking
statements are based on reasonable assumptions, it can give no assurance that
its expectations will be achieved. Additionally, the Company's financial results
are sensitive to movement in interest rates and foreign currencies, as well as
general economic conditions, pricing and product actions taken by competitors,
production disruptions and changes in environmental, international trade and
other laws which impact the way in which it conducts its business. Important
factors that could cause actual results to differ materially from the Company's
current expectations are disclosed in conjunction with the Company's filings
with the Securities and Exchange Commission.
27
10
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Net sales $2,941.4 $3,224.4 $2,317.5
Cost of goods sold 2,404.1 2,557.6 1,847.2
- ----------------------------------------------------------------------------------------------------------
Gross profit 537.3 666.8 470.3
Selling, general and administrative expenses 270.7 275.4 208.4
Engineering expenses 56.1 54.1 27.7
Nonrecurring expenses 40.0 18.2 22.3
- ----------------------------------------------------------------------------------------------------------
Income from operations 170.5 319.1 211.9
Interest expense, net 67.7 53.5 32.7
Other expense, net 28.5 19.9 7.6
- ----------------------------------------------------------------------------------------------------------
Income before income taxes, equity in net earnings of affiliates and
extraordinary loss 74.3 245.7 171.6
Provision for income taxes 27.5 87.5 59.9
- ----------------------------------------------------------------------------------------------------------
Income before equity in net earnings of affiliates and extraordinary loss 46.8 158.2 111.7
Equity in net earnings of affiliates 13.8 12.6 17.7
- ----------------------------------------------------------------------------------------------------------
Income before extraordinary loss 60.6 170.8 129.4
Extraordinary loss, net of taxes -- (2.1) (3.5)
- ----------------------------------------------------------------------------------------------------------
Net income $ 60.6 $ 168.7 $ 125.9
==========================================================================================================
Net income per common share:
Basic:
Income before extraordinary loss $ 1.01 $ 2.82 $ 2.44
Extraordinary loss -- (0.03) (0.07)
- ---------------------------------------------------------------------------------------------------------
Net Income $ 1.01 $ 2.79 $ 2.37
==========================================================================================================
Diluted:
Income before extraordinary loss $ 0.99 $ 2.74 $ 2.26
Extraordinary loss -- (0.03) (0.06)
- ---------------------------------------------------------------------------------------------------------
Net Income $ 0.99 $ 2.71 $ 2.20
==========================================================================================================
Weighted average number of common and common equivalent
shares outstanding:
Basic 59.7 60.4 53.0
==========================================================================================================
Diluted 61.2 62.1 57.4
==========================================================================================================
See accompanying notes to consolidated financial statements.
28
11
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15.9 $ 31.2
Accounts and notes receivable, net of allowances 1,016.3 997.2
Inventories, net 671.6 622.7
Other current assets 86.7 63.7
- ---------------------------------------------------------------------------------------------------------
Total current assets 1,790.5 1,714.8
Property, plant and equipment, net 417.6 403.7
Investments in affiliates 95.2 87.6
Other assets 76.6 75.8
Intangible assets, net 370.5 339.0
- ---------------------------------------------------------------------------------------------------------
Total assets $ 2,750.4 $ 2,620.9
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 287.0 $ 367.5
Accrued expenses 428.0 430.0
Other current liabilities 45.6 33.0
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 760.6 830.5
- ---------------------------------------------------------------------------------------------------------
Long-term debt 924.2 727.4
Postretirement health care benefits 24.5 24.5
Other noncurrent liabilities 59.0 46.9
- ---------------------------------------------------------------------------------------------------------
Total liabilities 1,768.3 1,629.3
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Common stock; $0.01 par value, 150,000,000 shares authorized, 59,535,921 and
62,972,423 shares issued and outstanding in 1998 and 1997, respectively 0.6 0.6
Additional paid-in capital 427.3 515.0
Retained earnings 635.8 577.6
Unearned compensation (11.1) (20.0)
Accumulated other comprehensive income (70.5) (81.6)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 982.1 991.6
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,750.4 $ 2,620.9
=========================================================================================================
See accompanying notes to consolidated financial statements.
29
12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK ADDITIONAL MINIMUM CUMULATIVE TOTAL
------------------ PAID-IN RETAINED UNEARNED PENSION TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION LIABILITY ADJUSTMENT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 50,557,040 $ 0.5 $ 307.2 $ 287.7 $ (22.6) $ (2.6) $ 18.7 $ 588.9
Net income -- -- -- 125.9 -- -- -- 125.9
Issuance of restricted stock 474,500 -- 13.7 -- (13.7) -- -- --
Conversions of subordinated
debentures into
common stock 5,916,319 0.1 37.5 -- -- -- -- 37.6
Stock options exercised 312,292 -- 1.7 -- -- -- -- 1.7
Common stock dividends
($0.04 per common share) -- -- -- (2.2) -- -- -- (2.2)
Amortization of unearned
compensation -- -- -- -- 18.5 -- -- 18.5
Additional minimum
pension liability -- -- -- -- -- 2.6 -- 2.6
Change in cumulative
translation adjustment -- -- -- -- -- -- 1.6 1.6
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 57,260,151 0.6 360.1 411.4 (17.8) -- 20.3 774.6
Net income -- -- -- 168.7 -- -- -- 168.7
Issuance of common stock,
net of offering expenses 5,175,000 -- 140.4 -- -- -- -- 140.4
Issuance of restricted stock 373,017 -- 12.7 -- (12.7) -- -- --
Stock options exercised 164,255 -- 1.8 -- -- -- -- 1.8
Common stock dividends
($0.04 per common share) -- -- -- (2.5) -- -- -- (2.5)
Amortization of unearned
compensation -- -- -- -- 10.5 -- -- 10.5
Change in cumulative
translation adjustment -- -- -- -- -- -- (101.9) (101.9)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 62,972,423 0.6 515.0 577.6 (20.0) -- (81.6) 991.6
Net income -- -- -- 60.6 -- -- -- 60.6
Repurchases of
common stock (3,487,200) -- (88.1) -- -- -- -- (88.1)
Stock options exercised 50,698 -- 0.4 -- -- -- -- 0.4
Common stock dividends
($0.04 per common share) -- -- -- (2.4) -- -- -- (2.4)
Amortization of unearned
compensation -- -- -- -- 8.9 -- -- 8.9
Change in cumulative
translation adjustment -- -- -- -- -- -- 11.1 11.1
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 59,535,921 $ 0.6 $ 427.3 $ 635.8 $ (11.1) $ -- $ (70.5) $ 982.1
===================================================================================================================================
- ---------------------------------------------------
Comprehensive
Income
- ---------------------------------------------------
Balance, December 31, 1995
Net income $ 125.9
Issuance of restricted stock
Conversions of subordinated
debentures into
common stock
Stock options exercised
Common stock dividends
($0.04 per common share)
Amortization of unearned
compensation
Additional minimum
pension liability 2.6
Change in cumulative
translation adjustment 1.6
- ---------------------------------------------------
Balance, December 31, 1996 130.1
========
Net income 168.7
Issuance of common stock,
net of offering expenses
Issuance of restricted stock
Stock options exercised
Common stock dividends
($0.04 per common share)
Amortization of unearned
compensation
Change in cumulative
translation adjustment (101.9)
- ---------------------------------------------------
Balance, December 31, 1997 66.8
========
Net income 60.6
Repurchases of
common stock
Stock options exercised
Common stock dividends
($0.04 per common share)
Amortization of unearned
compensation
Change in cumulative
translation adjustment 11.1
- ---------------------------------------------------
Balance, December 31, 1998 $ 71.7
===================================================
See accompanying notes to consolidated financial statements.
30
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 60.6 $ 168.7 $ 125.9
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss, net of taxes -- 2.1 3.5
Gain on sale of affiliate -- -- (4.7)
Depreciation and amortization 57.6 49.4 29.2
Equity in net earnings of affiliates, net of cash received (3.3) (12.6) (17.7)
Deferred income tax provision (benefit) (22.4) 53.4 20.1
Amortization of intangibles 13.2 12.1 5.8
Amortization of unearned compensation 8.9 10.5 18.5
Changes in operating assets and liabilities, net of effects from
purchase/sale of businesses:
Accounts and notes receivable, net 17.7 (94.7) 3.7
Inventories, net (17.3) (100.4) (22.6)
Other current and noncurrent assets (1.2) (10.0) (14.1)
Accounts payable (87.7) 25.5 (9.4)
Accrued expenses (15.0) (1.3) 54.3
Other current and noncurrent liabilities 0.1 (2.7) 14.2
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments (49.4) (68.7) 80.8
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11.2 100.0 206.7
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
(Purchase)/sale of businesses, net (60.6) (289.2) (347.0)
Purchase of property, plant and equipment (61.0) (72.1) (45.2)
Proceeds from sale of affiliates -- -- 45.2
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (121.6) (361.3) (347.0)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 984.4 932.2 977.8
Payments on long-term debt (798.9) (813.8) (803.2)
Payment of debt issuance costs -- (3.5) (12.5)
Proceeds from issuance of common stock 0.4 142.2 1.7
Repurchases of common stock (88.1) -- --
Dividends paid on common stock (2.4) (2.5) (2.2)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 95.4 254.6 161.6
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (0.3) (3.8) 0.4
(Decrease)increase in cash and cash equivalents (15.3) (10.5) 21.7
Cash and cash equivalents, beginning of period 31.2 41.7 20.0
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 15.9 $ 31.2 $ 41.7
===========================================================================================================================
See accompanying notes to consolidated financial statements.
31
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Business
AGCO Corporation (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 Allis, Massey Ferguson, Hesston,
White, GLEANER, New Idea, AGCOSTAR, Black Machine, Landini, Tye, Farmhand,
Glencoe, Deutz (South America), IDEAL, Fendt, Spra-Coupe and Willmar. The
Company distributes its products through a combination of over 8,500 independent
dealers, distributors, associates and licensees. In addition, the Company
provides retail financing in North America, the United Kingdom, France, Germany
and Brazil through its finance joint ventures with Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland" ("The Retail Finance Joint
Ventures").
BASIS OF PRESENTATION
The consolidated financial statements represent the consolidation of all
majority owned companies. The Company records all affiliate companies
representing a 20%-50% ownership using the equity method of accounting. Other
investments representing an ownership of less than 20% are recorded at cost. All
significant inter-company transactions have been eliminated to arrive at the
consolidated financial statements.
Effective November 1, 1996, the Company sold a 51% interest in Agricredit
Acceptance Company ("Agricredit-North America"), the Company's retail finance
subsidiary in North America (Note 2). Accordingly for all periods presented, the
Company's consolidated financial statements reflect Agricredit-North America on
the equity method of accounting.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
REVENUE RECOGNITION
Sales of equipment and replacement parts are recorded by the Company when
shipped to independent dealers, distributors or other customers. Provisions for
sales incentives and returns and allowances are made at the time of sale to the
dealer for existing incentive programs. Provisions are revised in the event of
subsequent modification to the incentive programs. 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 United States currency in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and
liabilities are translated to United States dollars at period-end exchange
rates. Income and expense items are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of stockholders' equity. Gains and losses which result from
foreign currency transactions are included in the accompanying consolidated
statements of income. For subsidiaries operating in highly inflationary
economies, financial statements are remeasured into the United States dollar
with adjustments resulting from the translation of monetary assets and
liabilities reflected in the accompanying consolidated statements of income.
For 1997 and 1996, the Company accounted for its subsidiary in Brazil by
applying the highly inflationary economy provisions of SFAS No. 52, where the
U.S. dollar is substituted as the functional currency. For the year ended
December 31, 1998, the Company ceased the application of highly inflationary
accounting of its Brazilian subsidiary and established the functional currency
as the Brazilian Real.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of 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 receivable and inventory
allowances and certain accrued liabilities, principally relating to reserves for
volume discounts and sales incentives, warranty and insurance.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three months
or less to be cash equivalents.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable arise from the sale of parts and finished goods
inventory to independent dealers, distributors or other customers. Terms vary by
market, generally ranging from 30 day terms to requiring payment when the
equipment is sold to retail customers. Interest is charged on the balance
outstanding after certain interest-free periods, which generally range from 1 to
12 months.
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, 1998 and 1997 were as follows (in
millions):
- ----------------------------------------------------
1998 1997
- ----------------------------------------------------
Sales incentive discounts $ 58.4 $53.1
Doubtful accounts 49.4 44.1
- ----------------------------------------------------
$107.8 $97.2
====================================================
The Company occasionally transfers certain accounts receivable to various
financial institutions. The Company records such transfers as sales of accounts
receivable when it is considered to
32
15
have surrendered control of such receivables under the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
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.
Inventory balances at December 31, 1998 and 1997 were as follows (in
millions):
- ----------------------------------------------------------
1998 1997
- ----------------------------------------------------------
Finished goods $271.2 $267.7
Repair and replacement parts 256.7 250.2
Work in process, production parts
and raw materials 222.6 184.5
- ----------------------------------------------------------
Gross inventories 750.5 702.4
Allowance for surplus and
obsolete inventories (78.9) (79.7)
- ----------------------------------------------------------
Inventories, net $671.6 $622.7
==========================================================
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 at December 31, 1998 and 1997 consisted of
the following (in millions):
- -----------------------------------------------------------
1998 1997
- -----------------------------------------------------------
Land $ 52.2 $ 51.5
Buildings and improvements 139.7 127.7
Machinery and equipment 325.5 274.9
Furniture and fixtures 51.5 45.0
- -----------------------------------------------------------
Gross property, plant and equipment 568.9 499.1
Accumulated depreciation and
amortization (151.3) (95.4)
- -----------------------------------------------------------
Property, plant and equipment $ 417.6 $403.7
===========================================================
INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 consisted of the following (in
millions):
- ---------------------------------------------------------
1998 1997
- ---------------------------------------------------------
Goodwill $330.1 $287.1
Trademarks 66.0 66.0
Other 4.2 2.9
Accumulated amortization (29.8) (17.0)
- ---------------------------------------------------------
Intangible assets $370.5 $339.0
=========================================================
The excess of cost over net assets acquired ("goodwill") is being
amortized to income on a straight-line basis over periods ranging from 10 to 40
years. Goodwill and accumulated amortization are shown net of the excess of net
assets over cost ("negative goodwill") of $23.2 million for both 1998 and 1997
and its related accumulated amortization of $19.5 million and $17.4 million for
1998 and 1997, respectively. The Company also assigned values to certain
acquired trademarks which are being amortized to income on a straight-line basis
over 40 years. The net amortization expense included in other expense, net in
the accompanying consolidated statements of income was $13.2 million, $12.1
million and $5.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company periodically reviews the carrying values assigned to goodwill
and other intangible assets based upon expectations of future cash flows and
operating income generated by the underlying tangible assets.
ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 consisted of the following (in
millions):
- -----------------------------------------------------------
1998 1997
- -----------------------------------------------------------
Reserve for volume discounts and
sales incentives $ 93.8 $ 86.9
Warranty reserves 79.4 63.5
Accrued employee compensation
and benefits 55.7 58.4
Accrued taxes 50.1 88.7
Other 149.0 132.5
- -----------------------------------------------------------
$ 428.0 $ 430.0
===========================================================
WARRANTY RESERVES
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 upon
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.
EXTRAORDINARY LOSS
In 1997, the Company recorded an extraordinary loss of $2.1 million, net of
taxes of $1.4 million, for the write-off of unamortized debt costs related to
the March 1996 Credit Facility (Note 6) which was refinanced with the January
1997 Credit Facility (Note 6). In 1996, the Company recorded an extraordinary
loss of $3.5 million, net of taxes of $2.2 million, for the write-off of
unamortized debt
33
16
costs related to the Company's $550.0 million secured revolving credit facility
which was refinanced with the March 1996 Credit Facility.
NET INCOME PER COMMON SHARE
The computation, presentation and disclosure requirements for earnings per share
are presented in accordance with SFAS No. 128, "Earnings Per Share." Basic
earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during each period. Diluted earnings
per share assumes exercise of outstanding stock options, vesting of restricted
stock and the conversion of the Convertible Subordinated Debentures (Note 7)
into common stock during the periods outstanding.
A reconciliation of net income and the weighted average number of common
shares outstanding used to calculate basic and diluted earnings per common share
for the years ended December 31, 1998, 1997 and 1996 is as follows (in millions,
except per share data):
BASIC EARNINGS PER SHARE
- -----------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
Weighted average number of
common shares outstanding 59.7 60.4 53.0
=======================================================================
Income before extraordinary loss $60.6 $170.8 $129.4
Extraordinary loss - (2.1) (3.5)
- -----------------------------------------------------------------------
Net income 60.6 168.7 125.9
Net income per common share:
Income before extraordinary loss $1.01 $ 2.82 $ 2.44
Extraordinary loss - (0.03) (0.07)
- -----------------------------------------------------------------------
Net income $1.01 $ 2.79 $ 2.37
=======================================================================
Diluted Earnings Per Share
- -----------------------------------------------------------------------
Weighted average number of
common shares outstanding 59.7 60.4 53.0
Shares issued upon assumed
vesting of restricted stock 1.3 1.4 1.7
Shares issued upon assumed
conversion of the Convertible
Subordinated Debentures - - 2.2
Shares issued upon assumed
exercise of outstanding
stock options 0.2 0.3 0.5
- -----------------------------------------------------------------------
Weighted average number of
common and common
equivalent shares outstanding 61.2 62.1 57.4
=======================================================================
Income before extraordinary loss $60.6 $170.8 $129.4
Extraordinary loss - (2.1) (3.5)
- -----------------------------------------------------------------------
Net income 60.6 168.7 125.9
Interest expense on Convertible
Subordinated Debentures, net
of applicable income taxes - - 0.5
- -----------------------------------------------------------------------
Net income available for
common stockholders $60.6 $168.7 $126.4
=======================================================================
Net income per common share:
Income before extraordinary loss $0.99 $ 2.74 $ 2.26
Extraordinary loss - (0.03) (0.06)
- -----------------------------------------------------------------------
Net income $0.99 $ 2.71 $ 2.20
=======================================================================
COMPREHENSIVE INCOME
The Company reports comprehensive income, defined as the total of net income and
all other non-owner changes in equity and the components thereof in the
Consolidated Statements of Stockholders' Equity. The cumulative translation
adjustment is the sole component of Accumulated other comprehensive income on
the Consolidated Balance Sheets.
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 6) approximates fair value based on the
borrowing rates currently available to the Company for loans with similar terms
and average maturities. At December 31, 1998, the estimated fair value of the
Company's 8 1/2% Senior Subordinated Notes (Note 6), based on its listed market
value, was $242.6 million compared to the carrying value of $248.3 million.
The Company enters into foreign exchange forward contracts to hedge the
foreign currency exposure of certain receivables, payables and expected
purchases and sales. These contracts are for periods consistent with the
exposure being hedged and generally have maturities of one year or less. Gains
and losses on foreign exchange forward contracts are deferred and recognized in
income in the same period as the hedged transaction. The Company's 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. At December 31, 1998 and 1997, the Company had
foreign exchange forward contracts with gross notional amounts of $429.1 million
and $609.0 million, respectively. The deferred gains or losses from these
contracts were not material at December 31, 1998 and 1997.
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
notional amounts and other terms of the foreign exchange hedging contracts. The
credit and market risks under these contracts are not considered to be
significant.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company will be required to adopt the new statement in
2000. The Company has not yet quantified
34
17
the financial impact of adopting SFAS No. 133 and has not determined the method
of adoption. However, SFAS No. 133 could increase the volatility in earnings and
other comprehensive income.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits," which revises
disclosure requirements related to the Company's employee benefit plans and
postretirement benefits (Note 8), and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which revises disclosure requirements
related to segment reporting (Note 12). SFAS No. 132 and SFAS No. 131 require
disclosure only; therefore their adoption had no impact on the Company's
financial position or results of operations.
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires disclosures regarding the Company's
comprehensive income defined as the total of net income and all other non-owner
changes in equity. SFAS No. 130 requires disclosure only; therefore, its
adoption had no impact on the Company's financial position or results of
operations.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
The Company completed several acquisitions in 1998, 1997 and 1996 which were
primarily financed with borrowings under the Company's revolving credit facility
(Note 6). In most cases, the Company acquired assets and assumed liabilities
consisting primarily of accounts receivable, inventories, property, plant and
equipment, trademarks, trade names and technology, accounts payable and accrued
liabilities. The results of operations for the Company's acquisitions are
included in the Company's consolidated financial statements as of and from the
respective dates of acquisition.
Effective October 1, 1998, the Company acquired the net assets of the
Willmar product line, a brand of agricultural self-propelled sprayers, spreaders
and loaders, sold primarily in North America (the "Willmar Acquisition"). The
purchase price, which is subject to change, was for $32.5 million.
Effective July 1, 1998, the Company acquired certain assets related to the
Spra-Coupe product line, a brand of agricultural self-propelled sprayers sold
primarily in North America, for approximately $37.2 million (the "Spra-Coupe
Acquisition").
On December 4, 1997, the Company acquired the remaining 68% of
Dronningborg Industries a/s ("Dronningborg") for approximately $22.0 million
(the "Dronningborg Acquisition"). Prior to the acquisition, the Company owned
32% of Dronningborg which manufactures combine harvesters sold exclusively to
the Company for sale under the Massey Ferguson brand name.
Effective January 1, 1997, the Company acquired Xaver Fendt GmbH & Co. KG
("Fendt") for approximately $283.5 million plus approximately $38.3 million of
assumed working capital debt (the "Fendt Acquisition"). Fendt's primary business
is the manufacture and distribution of tractors through a network of independent
agricultural cooperatives, dealers and distributors in Germany and throughout
Europe and Australia. Effective December 31, 1997, the Company sold Fendt's
caravan and motor home business for approximately $10.0 million.
On December 27, 1996, the Company acquired Deutz Argentina S.A. ("Deutz
Argentina") for approximately $62.5 million (the "Deutz Argentina Acquisition").
Deutz Argentina is a manufacturer and distributor of a broad range of
agricultural equipment, engines and light trucks in Argentina and other South
American markets. Effective January 5, 1998, the Company sold 50% of its Deutz
Argentina engine business in a joint venture to produce engines for its
equipment for approximately $7.6 million.
Effective July 8, 1996, the Company acquired certain assets of Western
Combine Corporation and Portage Manufacturing, Inc., the Company's suppliers of
Massey Ferguson combines and certain other harvesting equipment sold in North
America (the "Western Combine Acquisition") for approximately $19.4 million.
Effective June 28, 1996, the Company acquired certain assets and
liabilities of the agricultural and industrial equipment business of
Iochpe-Maxion S.A. (the "Maxion Agricultural Equipment Business") for
approximately $260.0 million (the "Maxion Acquisition"). Prior to the
acquisition, the Maxion Agricultural Equipment Business was AGCO's Massey
Ferguson licensee in Brazil, manufacturing and distributing agricultural and
industrial equipment in Brazil and other South American markets.
The above acquisitions were accounted for as purchases in accordance with
Accounting Principles Board Opinion No. 16, and accordingly, each purchase price
has been allocated to the assets acquired and the liabilities assumed based on
the estimated fair values as of the acquisition dates. The purchase price
allocations for the Fendt, Dronningborg, Willmar and Spra-Coupe Acquisitions
resulted in a decrease in goodwill of $47.6 million from the amounts originally
recorded. These adjustments were a result of the completion of certain asset and
liability valuations related primarily to property, plant and equipment and
certain allowance and reserve accounts. The purchase price allocations for the
Willmar and Spra-Coupe Acquisitions are preliminary and will be completed in
1999.
In addition, the purchase price allocations for the Deutz Argentina,
Fendt, Western Combine, Spra-Coupe and Willmar Acquisitions included liabilities
associated with certain costs to integrate the acquired businesses into the
Company's operations. These costs related to the consolidation of certain
acquired manufacturing operations into existing Company facilities and the
integration of certain sales and marketing functions. As of December 31, 1998,
the Company had established liabilities totaling $13.0 million for employee
severance and relocation and other integration costs and had incurred $6.5
million of expenses charged against these liabilities.
35
18
DISPOSITIONS
Effective November 1, 1996, the Company entered into an agreement with De Lage
Landen International, B.V., a wholly-owned subsidiary of Rabobank Nederland, to
be its joint venture partner in Agricredit-North America, the Company's
wholly-owned retail finance subsidiary in North America (the "Agricredit-North
America Joint Venture"). As a result of the agreement, the Company sold a 51%
interest in Agricredit-North America to Rabobank Nederland. The Company received
total consideration of approximately $44.3 million in the transaction and
recorded a gain, before taxes, of approximately $4.7 million. Under the
Agricredit-North America Joint Venture, Rabobank Nederland has a 51% interest
and the Company retained a 49% interest in the finance company. Substantially
all of the net assets of Agricredit-North America were transferred to the
Agricredit-North America Joint Venture. Proceeds from the transaction were used
to repay outstanding borrowings under the Company's revolving credit facility.
Effective February 5, 1999, the Company sold its manufacturing plant in
Haedo, Argentina (the "Haedo Sale") for approximately $19.0 million. The Company
received $12.3 million of the purchase price in December 1998 in the form of a
deposit and will receive the remaining balance in December 1999. The Haedo Sale
included property, plant and equipment at the plant in addition to the transfer
of manufacturing hourly and salaried employees. The Haedo Sale is not expected
to have a material impact on the Company's financial position or results of
operations.
3. CHARGES FOR NONRECURRING EXPENSES
The results of operations for 1998 included nonrecurring expenses of $40.0
million, or $0.41 per common share on a diluted basis. The nonrecurring
expenses primarily related to severance, pension and postretirement benefit
expense and related costs associated with reductions in the Company's worldwide
permanent workforce. Approximately 1,225 of the 1,400 employees identified for
termination were terminated as of December 31, 1998. Of the $40.0 million total
expense, $9.1 million had been incurred as of December 31, 1998.
The results of operations for 1997 included nonrecurring expenses of $18.2
million, or $0.19 per common share on a diluted basis. These nonrecurring
expenses included $15.0 million related to the restructuring of the Company's
European operations and certain costs associated with the integration of the
Deutz Argentina and Fendt operations. The nonrecurring expenses for 1997 also
included $3.2 million related to executive severance costs. The costs included
for these restructuring and integration activities in 1997 primarily related to
the centralization and rationalization of certain manufacturing, selling and
administrative functions in addition to the rationalization of a certain portion
of the Company's European dealer network. Excluding the executive severance
costs, the nonrecurring expenses for 1997 included $9.2 million for employee
related costs, consisting of employee severance, and $4.7 million of payroll
costs incurred through December 31, 1997 for employees that were subsequently
terminated. Of the $18.2 million total expense, $13.4 million had been incurred
as of December 31, 1998.
The results of operations for 1996 included nonrecurring expenses of $22.3
million, or $0.25 per common share on a diluted basis. These nonrecurring
expenses included $15.0 million related to the restructuring of the Company's
European operations and the integration and restructuring of the Company's
Brazilian operations, acquired in the Maxion Acquisition (Note 2) in June 1996.
In addition, the nonrecurring expenses included $7.3 million related to
executive severance costs. The nonrecurring expenses for the integration and
restructuring activities in 1996 included costs associated with the
rationalization and centralization of certain manufacturing, parts warehousing,
sales, and administrative functions. The $15.0 million recorded in 1996 included
$9.0 million for employee related costs, including severance costs, and $6.0
million for other nonrecurring costs. Included in the $9.0 million of employee
related costs was $1.3 million of payroll costs incurred through December 31,
1996 for personnel that were subsequently terminated. All costs associated with
the 1996 nonrecurring expenses have been incurred.
4. INVESTMENTS IN AFFILIATES
At December 31, 1998 and 1997, the Company's investments in affiliates primarily
consisted of (i) the Retail Finance Joint Ventures which includes the
Agricredit-North America Joint Venture (Note 2), (ii) the Company's 50%
investments in manufacturing joint ventures with various unrelated manufacturers
to produce hay and forage equipment in North America, driveline assemblies in
Europe, and engines in South America and (iii) certain other minority
investments in farm equipment manufacturers and licensees.
Investments in affiliates as of December 31, 1998 and 1997 were as follows
(in millions):
- -------------------------------------------------------
1998 1997
- -------------------------------------------------------
Retail Finance Joint Ventures $ 61.2 $ 55.6
Manufacturing joint ventures 24.2 23.4
Other 9.8 8.6
- -------------------------------------------------------
$ 95.2 $ 87.6
=======================================================
The Company's equity in net earnings of affiliates for 1998, 1997, and
1996 were as follows (in millions):
- -------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------
Retail Finance Joint Ventures $ 11.4 $ 10.9 $ 14.8
Other 2.4 1.7 2.9
- -------------------------------------------------------------------
$ 13.8 $ 12.6 $ 17.7
===================================================================
The manufacturing joint ventures of the Company primarily sell their
products to the joint venture partners at prices which result in operating at or
near breakeven on an annual basis.
36
19
Summarized combined financial information of the Retail Finance Joint
Ventures as of and for the years ended December 31, 1998 and 1997 were as
follows (in millions):
- ------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------
Total assets $ 1,340.2 $ 1,239.2
Total liabilities 1,220.8 1,128.9
Partner's equity 119.4 110.3
For the Year Ended December 31, 1998 1997
- ------------------------------------------------------------
Revenues $ 136.6 $ 126.8
Costs 102.2 94.6
- ------------------------------------------------------------
Income before income taxes $ 34.4 $ 32.2
============================================================
5. 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.
The sources of income before income taxes, equity in net earnings of
affiliates and extraordinary loss were as follows for the years ended December
31, 1998, 1997 and 1996 (in millions):
- ---------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------
United States $ (9.4) $ 51.7 $ 31.9
Foreign 83.7 194.0 139.7
- ---------------------------------------------------------------------
Income before income taxes,
equity in net earnings of
affiliates and extraordinary
loss $ 74.3 $ 245.7 $ 171.6
=====================================================================
The provision (benefit) for income taxes by location of the taxing
jurisdiction for the years ended December 31, 1998, 1997 and 1996 consisted of
the following (in millions):
- -------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------
Current:
United States:
Federal $ 0.6 $ (2.6) $ 9.7
State 0.2 (0.8) 0.5
Foreign 49.1 37.5 29.6
- -------------------------------------------------------------------
49.9 34.1 39.8
- -------------------------------------------------------------------
Deferred:
United States:
Federal (6.1) 19.0 (1.1)
State (0.8) 2.6 0.1
Foreign (15.5) 31.8 21.1
- -------------------------------------------------------------------
(22.4) 53.4 20.1
- -------------------------------------------------------------------
Provision for income taxes $ 27.5 $ 87.5 $ 59.9
===================================================================
Certain foreign operations of the Company are subject to United States as
well as foreign income tax regulations. Therefore, the preceding sources of
income before income taxes by location and the provision (benefit) for income
taxes by taxing jurisdiction are not directly related.
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 income for the years ended December 31, 1998,
1997 and 1996 is as follows (in millions):
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Provision for income taxes at
United States federal
statutory rate of 35% $ 26.0 $ 86.0 $ 60.1
State and local income taxes,
net of federal income
tax benefit (0.4) 1.8 0.3
Taxes on foreign income which
differ from the United States
statutory rate (0.3) (0.5) (0.8)
Foreign losses with no tax benefit 4.3 1.8 -
Benefit of foreign sales corporation (1.3) (1.0) (0.9)
Other (0.8) (0.6) 1.2
- ----------------------------------------------------------------------------
$ 27.5 $ 87.5 $ 59.9
============================================================================
The significant components of the net deferred tax assets at December 31,
1998 and 1997 were as follows (in millions):
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------
Deferred Tax Assets:
Net operating loss carryforwards $ 63.6 $ 56.7
Sales incentive discounts 15.5 5.4
Inventory valuation reserves 13.1 11.5
Postretirement benefits 7.2 10.3
Other 77.3 47.5
Valuation allowance (75.0) (66.4)
- --------------------------------------------------------------
Total deferred tax assets 101.7 65.0
- --------------------------------------------------------------
Deferred Tax Liabilities:
Tax over book depreciation 35.9 28.4
Tax over book amortization
of goodwill 21.9 7.1
Other 11.8 10.0
- --------------------------------------------------------------
Total deferred tax liabilities 69.6 45.5
- --------------------------------------------------------------
Net deferred tax assets 32.1 19.5
Less: Current portion of deferred
tax liability (asset) (22.9) 1.6
- --------------------------------------------------------------
Noncurrent net deferred tax assets $ 9.2 $ 21.1
==============================================================
37
20
At December 31, 1998, the Company has recorded a net deferred tax asset of
$32.1 million. Realization of the asset is dependent on generating sufficient
taxable income in future periods. Management believes that it is more likely
than not that the deferred tax asset will be realized. As reflected in the
preceding table, the Company established a valuation allowance of $75.0 million
and $66.4 million as of December 31, 1998 and 1997, respectively. The majority
of the valuation allowance relates to net operating loss carryforwards in
certain foreign entities where there is an uncertainty regarding their
realizability.
The Company has net operating loss carryforwards of $163.5 million as of
December 31, 1998, with expiration dates as follows: 1999 - $12.0 million, 2000
- - $29.7 million, 2001 - $26.0 million, 2002 - $14.9 million, 2003 - $11.7
million, thereafter and unlimited - $69.2 million. The Company paid income taxes
of $87.8 million, $42.0 million and $23.1 million for the years ended December
31, 1998, 1997, and 1996, respectively.
6. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998 and 1997 (in
millions):
- ---------------------------------------------------
1998 1997
- ---------------------------------------------------
Revolving credit facility $ 661.2 $ 460.7
Senior Subordinated Notes 248.3 248.1
Other long-term debt 14.7 18.6
- ---------------------------------------------------
Total long-term debt $ 924.2 $ 727.4
===================================================
In January 1997, the Company replaced its $650.0 million unsecured
revolving credit facility (the "March 1996 Credit Facility") with a new credit
facility (the "January 1997 Credit Facility"), which allowed for borrowings up
to $1.2 billion. In March 1997, the lending commitment for the January 1997
Credit Facility was reduced by $141.2 million which represented the proceeds to
the Company, net of underwriting discounts, from the Company's common stock
offering (Note 9). Effective January 1, 1999, the lending commitment under the
January 1997 Credit Facility reduced to $1.0 billion. Aggregate borrowings
outstanding under the January 1997 Credit Facility are subject to a borrowing
base limitation and may not at any time exceed the sum of 90% of eligible
accounts receivable and 60% of eligible inventory. Interest accrues on
borrowings outstanding under the January 1997 Credit Facility primarily at LIBOR
plus an applicable margin, as defined. At December 31, 1998, interest rates on
the outstanding borrowings ranged from 3.8% to 6.1%, and the weighted average
interest rate during 1998 was 6.3%. The January 1997 Credit Facility contains
certain covenants, including covenants restricting the incurrence of
indebtedness and the making of certain restrictive payments, including
dividends. In addition, the Company must maintain certain financial covenants
including, among others, a debt to capitalization ratio, a fixed charge coverage
ratio and a ratio of debt to cash flow, as defined. At December 31, 1998, $661.2
million was outstanding under the January 1997 Credit Facility and available
borrowings, based on the lending commitment of $1.0 billion, were $338.6
million.
In March 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 on or after March 15,
2001 initially at 104.25% of their principal amount, plus accrued interest,
declining ratably to 100% of their principal amount plus accrued interest, on or
after March 15, 2003. The Notes include certain covenants, including covenants
restricting the incurrence of indebtedness and the making of certain restrictive
payments, including dividends. The net proceeds from the sale of the Notes were
used to repay outstanding indebtedness.
At December 31, 1998, the aggregate scheduled maturities of long-term debt
are primarily in the year 2002 and thereafter. The scheduled maturities in years
1999 through 2001 are not material. Cash payments for interest were $79.0
million, $70.9 million and $54.1 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company has arrangements with various banks to issue 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, 1998, outstanding letters of credit totaled
$22.2 million, of which $0.3 million was issued under the January 1997 Credit
Facility. At December 31, 1997, outstanding letters of credit totaled $28.9
million, of which $1.8 million was issued under the January 1997 Credit
Facility.
7. CONVERTIBLE SUBORDINATED DEBENTURES
In June 1995, the Company exchanged all outstanding Convertible Preferred Stock
into $66.8 million of 6.5% Convertible Subordinated Debentures due 2008 (the
"Convertible Subordinated Debentures"). The Convertible Subordinated Debentures
were convertible at any time at the option of the holder into shares of the
Company's common stock at a conversion rate of 157.85 shares of common stock for
each $1,000 principal amount of the debentures. All the remaining outstanding
Convertible Subordinated Debentures were converted into common stock during
1996.
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.
38
21
Net annual pension and postretirement cost and the measurement assumptions
for the plans for the years ended December 31, 1998, 1997 and 1996 are set forth
below (in millions):
- ---------------------------------------------------------------------------------
Pension Benefits
- ---------------------------------------------------------------------------------
1998 1997 1996
Service cost $ 8.4 $ 6.5 $ 5.2
Interest cost 25.1 24.4 22.3
Expected return on plan assets (29.7) (27.2) (25.5)
Amortization of prior service cost 0.5 0.5 0.5
Special termination benefits 6.7 - -
- ---------------------------------------------------------------------------------
Net annual pension costs $ 11.0 $ 4.2 $ 2.5
=================================================================================
Weighted average discount rate 6.1% 7.0% 8.4%
Weighted average expected
long-term rate of return on
plan assets 7.6% 8.0% 9.5%
Rate of increase in future
compensation 4.0% 4.0% 5.0%
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Postretirement Benefits
1998 1997 1996
- ---------------------------------------------------------------------------------
Service cost $ 0.9 $ 0.8 $ 0.9
Interest cost 1.3 1.2 1.3
Amortization of transition
and prior service cost (0.6) (0.6) (0.7)
Amortization of unrecognized
net gain (0.8) (0.7) (0.4)
Special termination benefits 0.5 - -
- ---------------------------------------------------------------------------------
Net annual postretirement costs $ 1.3 $ 0.7 $ 1.1
=================================================================================
Weighted average discount rate 7.0% 7.3% 7.5%
- ---------------------------------------------------------------------------------
The following tables set forth reconciliations of the changes in benefit
obligations, plan assets and funded status as of December 31, 1998 and 1997 (in
millions):
- ----------------------------------------------------------------------------------------
Postretirement
Pension Benefits Benefits
Change in benefit obligation 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Benefit obligation at
beginning of year $ 364.0 $ 299.5 $ 18.9 $ 18.6
Service cost 8.4 6.5 0.9 0.8
Interest cost 25.1 24.4 1.3 1.3
Plan participant
contributions 3.0 2.7 - -
Actuarial (gain) loss 50.6 46.3 1.3 (1.1)
Acquisitions - 17.0 - -
Amendments - - 0.5 -
Curtailments - - 0.2 -
Special termination
benefits 6.7 - 0.5 -
Benefits paid (18.6) (19.7) (1.3) (0.7)
Foreign currency exchange
rate changes 4.2 (12.7) - -
- ----------------------------------------------------------------------------------------
Benefit obligation at
end of year $ 443.4 $ 364.0 $ 22.3 $ 18.9
========================================================================================
- ----------------------------------------------------------------------------------------
Postretirement
Pension Benefits Benefits
Change in plan assets 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Fair value of plan assets
at beginning of year $ 352.5 $ 302.3 $ - $ -
Actual return of
plan assets 33.3 68.2 - -
Employer contributions 11.6 9.5 1.3 0.7
Plan participant
contributions 3.0 2.7 - -
Benefits paid (18.6) (19.7) (1.3) (0.7)
Foreign currency exchange
rate changes 2.9 (10.5) - -
- ----------------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 384.7 $ 352.5 $ - $ -
========================================================================================
Funded status $ (58.7) $ (11.5) $ (22.3) $ (18.9)
Unrecognized net
obligation 0.9 0.9 0.4 0.4
Unrecognized net
loss (gain) 58.0 10.0 (2.8) (5.2)
Unrecognized prior
service cost 2.2 2.6 0.2 (0.8)
- ----------------------------------------------------------------------------------------
Net amount recognized $ 2.4 $ 2.0 $ (24.5) $ (24.5)
========================================================================================
Amounts recognized in
Consolidated Balance Sheet:
Prepaid benefit cost $ 20.5 $ 19.0 $ - $ -
Accrued benefit liability (19.4) (17.0) (24.5) (24.5)
Intangible asset 1.3 - - -
- ----------------------------------------------------------------------------------------
Net amount recognized $ 2.4 $ 2.0 $ (24.5) $ (24.5)
========================================================================================
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 $433.8 million, $420.5 million and
$374.3 million, respectively, as of December 31, 1998 and $48.1 million, $48.1
million and $30.7 million, respectively, as of December 31, 1997.
For measuring the expected postretirement benefit obligation, a 9.0%
health care cost trend rate was assumed for 1998, decreasing 0.75% per year to
6% and remaining at that level thereafter. For 1997, a 9.75% health care cost
trend rate was assumed. 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
39
22
cost and the accumulated postretirement benefit obligation at December 31, 1998
(in millions):
- -------------------------------------------------------------------------
One One
percentage percentage
point point
increase decrease
- -------------------------------------------------------------------------
Effect on service and interest cost $0.3 $(0.2)
Effect on accumulated benefit obligation $2.1 $(1.8)
- -------------------------------------------------------------------------
The Company maintains a separate defined contribution 401(k) savings plan
covering certain salaried employees in the United States. Under the plan, the
Company contributes a specified percentage of each eligible employee's
compensation. The Company contributed $1.6 million, $1.7 million and $1.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
9. COMMON STOCK
At December 31, 1998, the Company had 150.0 million authorized shares of common
stock with a par value of $0.01, with 59.5 million shares of common stock
outstanding, 1.4 million shares reserved for issuance under the Company's 1991
Stock Option Plan (Note 10), 0.1 million shares reserved for issuance under the
Company's Nonemployee Director Stock Incentive Plan (Note 10) and 2.3 million
shares reserved for issuance under the Company's Long-Term Incentive Plan (Note
10).
In December 1997, the Company's Board of Directors authorized the
repurchase of up to $150.0 million of its outstanding common stock. As of
December 31, 1998, the Company repurchased approximately 3.5 million shares of
its common stock at a cost of approximately $88.1 million. The purchases are
made through open market transactions, and the timing and number of shares
purchased depend on various factors, such as price and other market conditions.
In March 1997, the Company completed a public offering of 5.2 million
shares of its common stock (the "Offering"). The net proceeds to the Company
from the Offering were approximately $140.4 million, after deduction of
underwriting discounts and commissions and other expenses. The Company used the
proceeds from the Offering to reduce a portion of the borrowings outstanding
under the Company's revolving credit facility.
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.
10. STOCK PLANS
The Company's Nonemployee Director Stock Incentive Plan (the "Director Plan")
provides for restricted stock awards to nonemployee 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, 1998, 68,500 shares have been
contingently awarded to plan participants, 29,500 shares awarded under the
Director Plan had been earned and 16,500 shares have vested.
The Company's Long-Term Incentive Plan (the "LTIP") provides for
restricted stock awards to executives based on increases in the price of the
Company's common stock. The awarded shares are earned in specified increments
for each 20% 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 generally carries a five
40
23
year vesting period with one-third of each award vesting on the last day of the
36th, 48th and 60th month, respectively, after each award is earned. When the
restricted shares are vested, a cash bonus equal to 40% of the value of the
vested 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 the time the awarded shares are earned, the market value of the stock
is 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 of $12.0
million, $14.8 million and $25.8 million for the years ended December 31, 1998,
1997 and 1996, respectively, consisting of amortization of the stock award and
the related cash bonus. The compensation expense in 1996 included $5.8 million
of accelerated vesting related to executive severance.
Additional information regarding the LTIP for the years ended December 31,
1998, 1997 and 1996 is as follows:
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
Shares awarded but not
earned at January 1 965,000 1,597,500 -
Shares awarded, net of
forfeitures (37,500) (270,000) 2,070,000
Shares earned - (362,500) (472,500)
- -------------------------------------------------------------------------
Shares awarded but not
earned at December 31 927,500 965,000 1,597,500
Shares available for grant 1,367,500 1,330,000 60,000
- -------------------------------------------------------------------------
Total shares reserved
for issuance 2,295,000 2,295,000 1,657,500
- -------------------------------------------------------------------------
Shares vested during year 375,833 194,000 792,500
=========================================================================
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 an additional 20% of such
options vest ratably over a four-year period and expire not later than ten years
from the date of grant. In 1998, the Option Plan was amended to increase the
number of shares authorized for issuance by 1,600,000 shares.
Stock option transactions during the three years ended December 31, 1998,
1997 and 1996 were as follows:
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Options outstanding at
January 1 797,968 787,250 899,190
Options granted 586,700 193,900 229,720
Options exercised (50,698) (164,255) (312,292)
Options canceled (95,676) (18,927) (29,368)
- ---------------------------------------------------------------------------------------------------
Options outstanding at
December 31 1,238,294 797,968 787,250
====================================================================================================
Options available for
grant at December 31 1,375,481 266,505 441,478
====================================================================================================
Option price ranges
per share:
Granted $8.31-27.00 $ 31.25 $ 25.50
Exercised 1.52-27.00 1.52-31.25 1.52-25.50
Canceled 11.75-31.25 14.63-31.25 14.63-25.50
Weighted average option prices per share:
Granted $ 22.08 $ 31.25 $ 25.50
Exercised 9.52 10.36 5.58
Canceled 23.78 21.68 18.94
Outstanding at
December 31 20.39 18.87 14.14
- ---------------------------------------------------------------------------------------------------
At December 31, 1998, the outstanding options had a weighted average
remaining contractual life of approximately 8.3 years and there were 607,946
options currently exercisable with option prices ranging from $1.52 to $31.25
and with a weighted average exercise price of $16.84.
The Company accounts for the Director Plan, the LTIP, and the Option Plan
under the provisions of Accounting Principles Board No. 25. The following pro
forma information is based on estimating the fair value of grants under the
above plans based upon the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." For the Option Plan, the fair value of each option
granted since 1995 has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rate of 5.6% for 1998, 6.1% for 1997 and 5.7%
for 1996, expected life for the option plan of 7 years, expected dividend yield
of 2.0%, and expected volatility of 46% for 1998 and 35.0% for 1997 and 1996.
For the Director Plan and LTIP, the fair value of each award granted since 1995
has been estimated using the Black-Scholes option
41
24
pricing model with the same assumptions above for the risk free interest rate,
expected dividend yield, and expected volatility. Under these assumptions for
the Option Plan, the weighted average fair value of options granted in 1998,
1997 and 1996 was $12.18, $15.75, and $12.22, respectively. Under these
assumptions for the Director Plan and the LTIP, the weighted average fair value
of awards granted in 1998 and 1997 under the Director Plan, including the
related cash bonus, was $43.47 and $39.96, respectively, and the weighted
average fair value of awards granted in 1996 under the LTIP, including the
related cash bonus, was $31.36. There were no awards under the Director Plan in
1996 or under the LTIP in 1998 or 1997. The fair value of the grants and awards
would be amortized over the vesting period for stock options and earned awards
under the Director Plan and LTIP and over the performance period for unearned
awards under the Director Plan and LTIP. Accordingly, the Company's pro forma
net income and net income per common share, assuming compensation cost was
determined under SFAS No. 123, would have been the following (in millions):
- ------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
(in millions, except per share data)
Net income $57.4 $166.5 $123.9
Net income per common
share - diluted $0.94 $ 2.60 $ 2.16
- ------------------------------------------------------------------
Because the SFAS No. 123 method of accounting has not been applied to
grants and awards prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
11. COMMITMENTS AND CONTINGENCIES
The Company leases land, buildings, machinery, equipment and furniture under
various noncancelable operating lease agreements. At December 31, 1998, future
minimum lease payments under non-cancelable operating leases were as follows (in
millions):
- ------------------------------------------------
1999 $10.6
2000 7.8
2001 5.9
2002 3.8
2003 3.2
Thereafter 12.8
- ------------------------------------------------
$44.1
================================================
Total lease expense under noncancelable operating leases was $15.9
million, $16.8 million, and $16.2 million, for the years ended December 31,
1998, 1997 and 1996, respectively.
At December 31, 1998, the Company was obligated under certain
circumstances to purchase through the year 2001 up to $79.1 million of equipment
upon expiration of certain operating leases between Agricredit-North America and
end users. Purchases to date have been or are expected to be sold to third
parties at amounts approximating the purchase price. Management believes that
any losses which might be incurred on the resale of this equipment will not be
material.
The Company is 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, when resolved, will not have a
material adverse effect on the financial position or results of operations of
the Company.
42
25
12. SEGMENT REPORTING
The Company has four geographic reportable segments: North America; South
America; Europe/Africa/Middle East; and Asia/Pacific. Each segment distributes a
full range of agricultural equipment and related replacement parts. The
accounting policies of the segments are the same as described in the summary of
significant accounting policies. The Company evaluates segment performance based
on income from operations. Sales for each segment are based on the location of
the third-party customer. All intercompany transactions between segments have
been eliminated. The Company's selling, general and administrative expenses and
engineering expenses are charged to each segment based on the region 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 1998, 1997
and 1996 are as follows (in millions):
- ------------------------------------------------------------------------------------------------------------------------
Europe/Africa/ Asia/
North America South America Middle East Pacific Consolidated
- ------------------------------------------------------------------------------------------------------------------------
1998
Net Sales $940.9 $315.3 $1,597.8 $ 87.4 $2,941.4
Income from operations 57.0 13.5 136.2 15.8 222.5
Depreciation and amortization 14.3 8.9 32.9 1.5 57.6
Assets 876.7 260.9 922.5 30.2 2,090.3
Capital expenditures 14.5 6.4 40.1 - 61.0
- ------------------------------------------------------------------------------------------------------------------------
1997
Net Sales $956.6 $334.3 $1,781.4 $152.1 $3,224.4
Income from operations 108.3 19.3 192.4 32.1 352.1
Depreciation and amortization 11.1 9.4 27.2 1.7 49.4
Assets 799.9 245.2 926.4 33.6 2,005.1
Capital expenditures 20.4 7.2 44.4 0.1 72.1
- ------------------------------------------------------------------------------------------------------------------------
1996
Net Sales $862.6 $100.3 $1,184.9 $169.7 $2,317.5
Income from operations 94.1 (0.3) 125.1 35.3 254.2
Depreciation and amortization 9.3 2.9 15.1 1.9 29.2
Assets 715.8 253.4 614.3 39.7 1,623.2
Capital expenditures 12.2 0.8 32.0 0.2 45.2
- ------------------------------------------------------------------------------------------------------------------------
A reconciliation from the segment information to the consolidated balances
for income from operations and assets is set forth below (in millions):
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
Segment income from operations $ 222.5 $ 352.1 $ 254.2
Restricted stock compensation expense (12.0) (14.8) (20.0)
Nonrecurring expenses (40.0) (18.2) (22.3)
- -----------------------------------------------------------------------------------
Consolidated income from operations $ 170.5 $ 319.1 $ 211.9
===================================================================================
Segment assets $ 2,090.3 $ 2,005.1 $ 1,623.2
Cash and cash equivalents 15.9 31.2 41.7
Receivables from affiliates 15.2 18.5 12.5
Investments in affiliates 95.2 87.6 80.5
Other current and noncurrent assets 163.3 139.5 153.0
Intangible assets 370.5 339.0 205.6
- -----------------------------------------------------------------------------------
Consolidated total assets $ 2,750.4 $ 2,620.9 $ 2,116.5
===================================================================================
43
26
Net sales by customer location for the years ended December 31, 1998, 1997
and 1996 were as follows (in millions):
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
Net Sales:
United States $ 759.0 $ 738.5 $ 690.0
Canada 142.4 182.6 153.8
Germany 449.3 470.5 141.3
France 321.5 347.8 231.2
United Kingdom and Ireland 122.2 179.5 217.1
Other Europe 540.3 614.6 422.4
South America 315.3 334.3 100.3
Middle East 115.8 105.7 92.3
Asia 36.7 87.8 102.7
Australia 50.7 64.3 67.0
Africa 48.7 63.3 80.6
Mexico, Central America and Caribbean 39.5 35.5 18.8
- -----------------------------------------------------------------------------------
$ 2,941.4 $ 3,224.4 $ 2,317.5
===================================================================================
Net sales by product for the years ended December 31, 1998, 1997 and 1996
were as follows (in millions):
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
Net sales:
Tractors $ 1,838.8 $ 1,990.6 $ 1,393.0
Combines 293.5 330.5 262.5
Other machinery 318.5 389.7 258.6
Replacement parts 490.6 513.6 403.4
- -----------------------------------------------------------------------------------
$ 2,941.4 $ 3,224.4 $ 2,317.5
===================================================================================
44
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGCO Corporation:
We have audited the accompanying consolidated balance sheets of AGCO
CORPORATION AND SUBSIDIARIES as of December 31,1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Arthur Anderson LLP
Atlanta, Georgia
February 3, 1999
45