AGCO CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2005
of
AGCO CORPORATION
A Delaware Corporation
IRS Employer Identification No. 58-1960019
SEC File Number 1-12930
4205 River Green Parkway
Duluth, GA 30096
(770) 813-9200
AGCO Corporations Common Stock and Junior Preferred Stock
purchase rights are registered pursuant to Section 12(b) of
the Act.
AGCO Corporation is a well-known seasoned issuer.
AGCO Corporation (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Act during the
preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
will be contained in a definitive proxy statement, portions of
which are incorporated by reference into Part III of this
Form 10-K.
The aggregate market value of AGCO Corporations Common
Stock (based upon the closing sales price quoted on the New York
Stock Exchange) held by non-affiliates as of June 30, 2005
was approximately $1.7 billion. As of March 6, 2006,
90,534,121 shares of AGCO Corporations Common Stock
were outstanding. For this purpose, directors and officers have
been assumed to be affiliates.
AGCO Corporation is a large accelerated filer.
AGCO Corporation is not a shell company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of AGCO Corporations Proxy Statement for the 2006
Annual Meeting of Stockholders are incorporated by reference
into Part III of this
Form 10-K.
TABLE OF CONTENTS
PART I
AGCO Corporation (AGCO, we,
us, or the Company) was incorporated in
Delaware in April 1991. Our executive offices are located at
4205 River Green Parkway, Duluth, Georgia 30096, and our
telephone number is
770-813-9200. Unless
otherwise indicated, all references in this
Form 10-K to the
Company include our subsidiaries.
General
We are the third largest manufacturer and distributor of
agricultural equipment and related replacement parts in the
world based on annual net sales. We sell a full range of
agricultural equipment, including tractors, combines,
self-propelled sprayers, hay tools, forage equipment and
implements and a line of diesel engines. Our products are widely
recognized in the agricultural equipment industry and are
marketed under a number of well-known brand names, including:
AGCO®,
Challenger®,
Fendt®,
Gleaner®,
Hesston®,
Massey
Ferguson®,
New
Idea®,
RoGator®,
Spra-Coupe®,
Sunflower®,
Terra-Gator®,
Valtra®
and
Whitetm
Planters. We distribute most of our products through a
combination of approximately 3,600 independent dealers and
distributors in more than 140 countries. In addition, we provide
retail financing in the United States, Canada, Brazil, Germany,
France, the United Kingdom, Australia, and Ireland through our
finance joint ventures with Coöperatieve Centrale
Raiffeisen-Boerenleenbank B.A., which we refer to as
Rabobank.
Since our formation, we have grown substantially through a
series of over 20 acquisitions. We have been able to expand and
strengthen our independent dealer network, introduce new tractor
product lines and complementary non-tractor products in new
markets and expand our replacement parts business to meet the
needs of our customers. We also have identified areas of our
business in which we can decrease excess manufacturing capacity
and eliminate duplication in administrative, sales, marketing
and production functions. Since 1991, we have completed several
restructuring initiatives in which we relocated production to
more efficient facilities, closed manufacturing facilities and
reduced operating expenses. In addition, we have continued to
focus on strategies and actions to improve our current
distribution network, improve our product offerings, reduce the
cost of our products and improve asset utilization.
Products
Our compact tractors (under 40 horsepower) are sold under
the AGCO, Challenger and Massey Ferguson brand names and
typically are used on small farms and in specialty agricultural
industries, such as dairies, landscaping and residential areas.
We also offer a full range of tractors in the utility tractor
category
(40-100 horsepower),
including two-wheel and all-wheel drive versions. We sell
utility tractors primarily under the AGCO, Challenger, Fendt,
Massey Ferguson and Valtra brand names. Utility tractors
typically are used on small and medium-sized farms and in
specialty agricultural industries, including dairies, livestock,
orchards and vineyards. In addition, we offer a full range of
tractors in the high horsepower segment (primarily
100-500 horsepower).
High horsepower tractors typically are used on larger farms and
on cattle ranches for hay production. We sell high horsepower
tractors under the AGCO, Challenger, Fendt, Massey Ferguson and
Valtra brand names. Tractors accounted for approximately 66% of
our net sales in 2005, 64% in 2004 and 58% in 2003.
We sell combines primarily under the Gleaner, Massey Ferguson,
Fendt and Challenger brand names. Depending on the market, our
combines are sold with conventional or rotary technology. All
combines are complemented by a variety of crop-harvesting heads,
available in different sizes, which are designed to maximize
harvesting speed and efficiency while minimizing crop loss.
Combines accounted for approximately 5% of our net sales in
2005, 7% in 2004 and 9% in 2003.
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We offer self-propelled, three and four-wheeled vehicles and
related equipment for use in the application of liquid and dry
fertilizers and crop protection chemicals. We manufacture
chemical sprayer equipment for use both prior to planting crops,
known as pre-emergence, and after crops emerge from the ground,
known as post-emergence, primarily under the RoGator,
Terra-Gator and Spra-Coupe brand names. We also manufacture
related equipment, including vehicles used for waste application
that are specifically designed for subsurface liquid injection
and surface spreading of biosolids, such as sewage sludge and
other farm or industrial waste that can be safely used for soil
enrichment. Application equipment accounted for approximately 6%
of our net sales in 2005, 5% in 2004 and 7% in 2003.
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Hay Tools and Forage Equipment, Implements and Other
Products |
We sell hay tools and forage equipment primarily under the
Hesston, New Idea, Massey Ferguson and Challenger brand names.
Hay and forage equipment includes both round and rectangular
balers, self-propelled windrowers, forage harvesters, disc
mowers and mower conditioners and are used for the harvesting
and packaging of vegetative feeds used in the beef cattle, dairy
and horse industries.
We also distribute a wide range of implements, planters and
other equipment for our product lines. Tractor-pulled implements
are used in field preparation and crop management. Implements
include: disk harrows, which improve field performance by
cutting through crop residue, leveling seed beds and mixing
chemicals with the soil; heavy tillage, which breaks up soil and
mixes crop residue into topsoil, with or without prior disking;
and field cultivators, which prepare a smooth seed bed and
destroy weeds. Tractor-pulled planters apply fertilizer and
place seeds in the field. Other equipment primarily includes
loaders, which are used for a variety of tasks including lifting
and transporting hay crops. We sell implements, planters and
other products primarily under the Hesston, New Idea, Massey
Ferguson, White Planters, Sunflower and Fendt brand names.
We provide a variety of precision farming technologies which are
developed, manufactured, distributed and supported on a
worldwide basis. These precision farming technologies provide
farmers with the capability to enhance productivity on the farm
by utilizing satellite global positioning systems, or GPS.
Farmers use the
Fieldstar®
precision farming system to gather information such as yield
data to produce yield maps for the purpose of developing
application maps. Many of our tractors, combines, planters,
sprayers, tillage equipment and other application equipment are
equipped to employ the Fieldstar system at the customers
option. Our
SGIStm
software converts a variety of agricultural data to provide
application plans to enhance crop yield and productivity. Our
Auto-Guide®
satellite navigation system assists parallel steering to avoid
the under and overlap of planting rows to optimize land use and
allows for more precise farming procedures from cultivation to
product application. While these products do not generate
significant revenues, we believe that these products and
services are complementary and important to promote our
machinery sales.
Our
SisuDieseltm
engines division produces diesel engines, gears and generating
sets for use in Valtra tractors and certain of our other
equipment, and for sale to third parties. The engine division
specializes in the manufacturing of off-road engines in the
50-450 horsepower range.
Hay tools and forage equipment, implements and other products
accounted for approximately 10% of our net sales in 2005 and 11%
in each of 2004 and 2003.
In addition to sales of new equipment, our replacement parts
business is an important source of revenue and profitability for
both us and our dealers. We sell replacement parts, many of
which are proprietary, for products sold under all of our brand
names. These parts help keep farm equipment in use, including
products no longer in production. Since most of our products can
be economically maintained with parts and service for a period
of ten to 20 years, each product that enters the
marketplace provides us with a potential long-term revenue
stream. In addition, sales of replacement parts typically
generate higher gross profits and historically
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have been less cyclical than new product sales. Replacement
parts accounted for approximately 13% of our net sales in 2005,
13% in 2004 and 15% in 2003.
Marketing and Distribution
We distribute products primarily through a network of
independent dealers and distributors. Our dealers are
responsible for retail sales to the equipments end user in
addition to after-sales service and support of the equipment.
Our distributors may sell our products through a network of
dealers supported by the distributor. Through our acquisitions
and dealer development activities, we have broadened our product
lines, expanded our dealer network and strengthened our
geographic presence in Europe, North America, South America and
the other markets around the world. Our sales are not dependent
on any specific dealer, distributor or group of dealers. We
intend to maintain the separate strengths and identities of our
core brand names and product lines.
We market and distribute farm machinery, equipment and
replacement parts to farmers in all European markets through a
network of approximately 1,600 independent Massey Ferguson,
Fendt, Valtra and Challenger dealers and distributors. In
certain markets, we also sell Valtra tractors and parts directly
to the end user. In some cases, dealers carry competing or
complementary products from other manufacturers. Sales in Europe
accounted for approximately 50% of our net sales in 2005, 51% in
2004 and 46% in 2003.
We market and distribute farm machinery, equipment and
replacement parts to farmers in North America through a network
of approximately 1,300 independent dealers, each representing
one or more of our brand names. Dealers may also sell
competitive and dissimilar lines of products. We sell our
RoGator and Terra-Gator sprayer brands directly to end
customers, often to fertilizer and chemical suppliers. Sales in
North America accounted for approximately 29% of our net sales
in 2005, 27% in 2004 and 34% in 2003.
We market and distribute farm machinery, equipment and
replacement parts to farmers in South America through several
different networks. In Brazil and Argentina, we distribute
products directly to approximately 400 independent dealers,
primarily supporting the Massey Ferguson, Valtra and Challenger
brand names. In Brazil, dealers are generally exclusive to one
manufacturer. Outside of Brazil and Argentina, we sell our
products in South America through independent distributors.
Sales in South America accounted for approximately 12% of our
net sales in 2005, 15% in 2004 and 12% in 2003.
Outside Europe, North America and South America, we operate
primarily through a network of approximately 250 independent
Massey Ferguson, Fendt, Valtra and Challenger dealers and
distributors, as well as associates and licensees, marketing our
products and providing customer service support in approximately
85 countries in Africa, the Middle East, Australia and Asia.
With the exception of Australia and New Zealand, where we
directly support our dealer network, we generally utilize
independent distributors, associates and licensees to sell our
products. These arrangements allow us to benefit from local
market expertise to establish strong market positions with
limited investment. In some cases, we also sell agricultural
equipment directly to governmental agencies. Sales outside
Europe, North America and South America accounted for
approximately 9% of our net sales in 2005, 7% in 2004 and 8% in
2003.
Associates and licensees provide a significant distribution
channel for our products and a source of low-cost production for
certain Massey Ferguson and Valtra products. Associates are
entities in which we have an ownership interest, most notably in
India. Licensees are entities in which we have no direct
ownership interest, most notably in Pakistan and Turkey. The
associate or licensee generally has the exclusive right to
produce and sell Massey Ferguson and Valtra equipment in its
home country but may not sell these products
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in other countries. We generally license to these associates
certain technology, as well as the right to use the Massey
Ferguson and Valtra trade names. We sell products to associates
and licensees in the form of components used in local
manufacturing operations, tractor kits supplied in completely
knocked down form for local assembly and distribution, and fully
assembled tractors for local distribution only. In certain
countries, our arrangements with associates and licensees have
evolved to where we principally provide technology, technical
assistance and quality control. In these situations, licensee
manufacturers sell certain tractor models under the Massey
Ferguson and Valtra brand names in the licensed territory and
also may become a source of low-cost production for us.
Parts inventories are maintained and distributed in a network of
master and regional warehouses throughout North America, South
America, Western Europe and Australia in order to provide timely
response to customer demand for replacement parts. Our Western
European master distribution warehouses are located in Desford,
United Kingdom; Ennery, France; and Suolahti, Finland; and our
North American master distribution warehouses are located in
Batavia, Illinois and Kansas City, Missouri.
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Dealer Support and Supervision |
We believe that one of the most important criteria affecting a
farmers decision to purchase a particular brand of
equipment is the quality of the dealer who sells and services
the equipment. We provide significant support to our dealers in
order to improve the quality of our dealer network. We monitor
each dealers performance and profitability and establish
programs that focus on continual dealer improvement. We
generally protect each existing dealers territory and will
not place the same brand with another dealer within that
protected area.
We believe that our ability to offer our dealers a full product
line of agricultural equipment and related replacement parts, as
well as our ongoing dealer training and support programs
focusing on business and inventory management, sales, marketing,
warranty and servicing matters and products, helps ensure the
vitality and increase the competitiveness of our dealer network.
We also maintain dealer advisory groups to obtain dealer
feedback on our operations.
We provide our dealers with volume sales incentives,
demonstration programs and other advertising support to assist
sales. We design our sales programs, including retail financing
incentives, and our policies for maintaining parts and service
availability with extensive product warranties to enhance our
dealers competitive position. In general, either party may
cancel dealer contracts within certain notice periods.
Wholesale Financing
Primarily in the United States and Canada, we engage in the
standard industry practice of providing dealers with floor plan
payment terms for their inventories of farm equipment for
extended periods. The terms of our wholesale finance agreements
with our dealers vary by region and product line, with fixed
payment schedules on all sales, generally ranging from one to
18 months. In the United States and Canada, dealers
typically are not required to make an initial down payment, and
our terms allow for an interest-free period generally ranging
from six to 12 months, depending on the product. We also
provide financing to dealers on used equipment accepted in
trade. We retain a security interest in a majority of the new
and used equipment we finance.
Typically, sales terms outside the United States and Canada are
of a shorter duration, generally ranging from 30 to
180 days. In many cases, we retain a security interest in
the equipment sold on extended terms. In certain international
markets, our sales are backed by letters of credit or credit
insurance.
For sales outside of the United States and Canada, we do not
normally charge interest on outstanding receivables from our
dealers and distributors. For sales to certain dealers or
distributors in the United States and Canada, where we generated
approximately 29% of our net sales in 2005, interest is
generally charged at or above prime lending rates on outstanding
receivable balances after interest-free periods. These
interest-free
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periods vary by product and generally range from six to
12 months. For the year ended December 31, 2005, 15.8%
and 11.4% of our net sales had maximum interest-free periods
ranging from one to six months and seven to 12 months,
respectively. Actual interest-free periods are shorter than
suggested by these percentages because receivables from our
dealers and distributors in the United States and Canada are due
immediately upon sale of the equipment to retail customers.
Under normal circumstances, interest is not forgiven and
interest-free periods are not extended. In May 2005, we
completed an agreement to permit transferring, on an ongoing
basis, the majority of interest-bearing receivables in North
America to our United States and Canadian retail finance joint
ventures. Upon transfer, the receivables maintain standard
payment terms, including required regular principal payments on
amounts outstanding, and interest charges at market rates. Under
this arrangement, qualified dealers may obtain additional
financing through the United States and Canadian retail finance
joint ventures.
Retail Financing
Through our retail financing joint ventures located in the
United States, Canada, Brazil, Germany, France, the United
Kingdom, Australia and Ireland, the end users of our products
are provided with a competitive and dedicated financing source.
These retail finance companies are owned 49% by us and 51% by
Rabobank. The retail finance joint ventures can tailor retail
finance programs to prevailing market conditions and such
programs can enhance our sales efforts.
Manufacturing and Suppliers
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Manufacturing and Assembly |
We manufacture our products in locations intended to optimize
capacity, technology or local costs. Furthermore, we continue to
balance our manufacturing resources with externally-sourced
machinery, components and replacement parts to enable us to
better control inventory and our supply of components. We
believe that our manufacturing facilities are sufficient to meet
our needs for the foreseeable future.
Our tractor manufacturing operations in Europe are located in
Suolahti, Finland; Beauvais, France; and Marktoberdorf, Germany.
In addition, we maintain a combine assembly facility in Randers,
Denmark. The Suolahti facility produces 65 to 280 horsepower
tractors marketed under the Valtra and Massey Ferguson brand
names. The Beauvais facility produces 65 to 225 horsepower
tractors marketed under the Massey Ferguson, Challenger and AGCO
brand names. The Marktoberdorf facility produces 50 to 310
horsepower tractors marketed under the Fendt brand name. The
Randers facility produces conventional combines under the Massey
Ferguson, Challenger and Fendt brand names. We also assemble
forklifts in our Kempten, Germany facility for sale to third
parties and assemble cabs for our Fendt tractors in Baumenheim,
Germany. We have a diesel engine manufacturing facility in
Linnavuori, Finland. We have a joint venture with Renault
Agriculture S.A. for the manufacture of driveline assemblies for
tractors produced in our facility in Beauvais. By sharing
overhead and engineering costs, this joint venture has resulted
in a decrease in the cost of these components.
Our manufacturing operations in North America are located in
Beloit, Kansas; Hesston, Kansas; Jackson, Minnesota and
Queretaro, Mexico. The Beloit facility produces tillage and
seeding equipment under the Sunflower brand name. The Hesston
facility produces hay and forage equipment marketed under the
Hesston, New Idea, Challenger and Massey Ferguson brand names,
rotary combines under the Gleaner, Massey Ferguson and
Challenger brand names, and planters under the White Planters
brand name. The Jackson facility produces high horsepower track
tractors under the Challenger brand name and self-propelled
sprayers primarily marketed under the RoGator, Terra-Gator and
Spra-Coupe brand names. In Queretaro, we assemble tractors for
distribution in the Mexican market under the Challenger and
Massey Ferguson brand names.
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Our manufacturing operations in South America are located in
Brazil. In Canoas, Rio Grande do Sul, Brazil, we manufacture and
assemble tractors, ranging from 50 to 210 horsepower, and
industrial loader-backhoes. The tractors are sold under the
Massey Ferguson and AGCO brand names. In Mogi das Cruzes, Brazil
we manufacture and assemble tractors, ranging from 65 to 180
horsepower marketed under the Valtra and Challenger brand names.
We also manufacture conventional combines primarily marketed
under the Massey Ferguson brand name in Santa Rosa, Rio Grande
do Sul, Brazil.
We externally source many of our products, components and
replacement parts. Our production strategy is intended to
minimize our research and development and capital investment
requirements and to allow us greater flexibility to respond to
changes in market conditions.
Some of the products we distribute we purchase from third-party
suppliers. We purchase standard and specialty tractors from SAME
Deutz-Fahr Group S.p.A. and distribute these tractors worldwide.
In addition, we purchase some tractor models from a licensee in
Turkey and compact tractors from Iseki & Company,
Limited, a Japanese manufacturer. We also purchase other
tractors, combines, implements and hay and forage equipment from
various third-party suppliers.
In addition to the purchase of machinery, third-party companies
supply significant components used in our manufacturing
operations, such as engines and transmissions. We select
third-party suppliers that we believe are low cost, high quality
and possess the most appropriate technology. We also assist in
the development of these products or component parts based upon
our own design requirements. Our past experience with outside
suppliers has been favorable. Although we currently depend on
outside suppliers for several of our products, we believe that,
if necessary, we could identify alternative sources of supply
without material disruption to our business.
Seasonality
Generally, retail sales by dealers to farmers are highly
seasonal and are a function of the timing of the planting and
harvesting seasons. To the extent practicable, we attempt to
ship products to our dealers and distributors on a level basis
throughout the year to reduce the effect of seasonal retail
demands on our manufacturing operations and to minimize our
investment in inventory. Our financing requirements are subject
to variations due to seasonal changes in working capital levels,
which typically increase in the first half of the year and then
decrease in the second half of the year. December is also
typically a large month for retail sales because of our
customers tax planning considerations, the increase in
availability of funds from completed harvests and the timing of
dealer incentives.
Competition
The agricultural industry is highly competitive. We compete with
several large national and international full-line suppliers, as
well as numerous short-line and specialty manufacturers with
differing manufacturing and marketing methods. Our two principal
competitors on a worldwide basis are Deere & Company
and CNH Global N.V. In certain Western European and South
American countries, we have regional competitors that have
significant market share in a single country or a group of
countries.
We believe several key factors influence a buyers choice
of farm equipment, including the strength and quality of a
companys dealers, the quality and pricing of products,
dealer or brand loyalty, product availability, the terms of
financing and customer service. We believe that we have
improved, and we continually seek to improve, in each of these
areas. Our primary focus is increasing farmers loyalty to
our dealers and overall dealer organizational quality in order
to distinguish us in the marketplace. See
Marketing and Distribution for
additional information.
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Engineering and Research
We make significant expenditures for engineering and applied
research to improve the quality and performance of our products,
to develop new products and to comply with government safety and
engine emissions regulations. Our expenditures on engineering
and research were approximately $121.7 million, or 2.2% of
net sales, in 2005, $103.7 million, or 2.0% of net sales,
in 2004 and $71.4 million, or 2.0% of net sales, in 2003.
Intellectual Property
We own and have licenses to the rights under a number of
domestic and foreign patents, trademarks, trade names and brand
names relating to our products and businesses. We defend our
patent, trademark and trade and brand name rights primarily by
monitoring competitors machines and industry publications
and conducting other investigative work. We consider our
intellectual property rights, including our rights to use our
trade and brand names, important in the operation of our
businesses. However, we do not believe we are dependent on any
single patent, trademark or trade name or group of patents or
trademarks, trade names or brand names. Our products are
distributed under our core brand names
AGCO®,
Challenger®,
Fendt®,
Gleaner®,
Hesston®,
Massey
Ferguson®,
New
Idea®,
RoGator®,
Spra-Coupe®,
Sunflower®,
Terra-Gator®,
Valtra®
and
Whitetm
Planters.
Environmental Matters and Regulation
We are subject to environmental laws and regulations concerning
emissions to the air, discharges of processed or other types of
wastewater, and the generation, handling, storage,
transportation, treatment and disposal of waste materials. These
laws and regulations are constantly changing, and the effects
that they may have on us in the future are impossible to predict
with accuracy. It is our policy to comply with all applicable
environmental, health and safety laws and regulations, and we
believe that any expense or liability we may incur in connection
with any noncompliance with any law or regulation or the cleanup
of any of our properties will not have a materially adverse
effect on us. We believe that we are in compliance in all
material respects with all applicable laws and regulations.
The United States Environmental Protection Agency has issued
regulations concerning permissible emissions from off-road
engines. We do not anticipate that the cost of compliance with
the regulations will have a material impact on us. As a result
of our acquisition of Valtra on January 5, 2004, we
acquired the SisuDiesel engine division, which specializes in
the manufacturing of off-road engines in the
40-450 horsepower
range. SisuDiesel currently complies with Com II,
Tier II and Tier III emissions requirements set by
European and United States regulatory authorities. We expect to
meet future emissions requirements through the introduction of
new technology on the engines, as necessary.
Our international operations also are subject to environmental
laws, as well as various other national and local laws, in the
countries in which we manufacture and sell our products. We
believe that we are in compliance with these laws in all
material respects and that the cost of compliance with these
laws in the future will not have a material adverse effect on us.
Regulation and Government Policy
Domestic and foreign political developments and government
regulations and policies directly affect the agricultural
industry in the United States and abroad and indirectly affect
the agricultural equipment business. The application,
modification or adoption of laws, regulations or policies could
have an adverse effect on our business.
We are subject to various federal, state and local laws
affecting our business, as well as a variety of regulations
relating to such matters as working conditions and product
safety. A variety of laws regulate our contractual relationships
with our dealers. These laws impose substantive standards on the
relationship between us and our dealers, including events of
default, grounds for termination, non-renewal of dealer
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contracts and equipment repurchase requirements. Such laws could
adversely affect our ability to terminate our dealers.
Employees
As of December 31, 2005, we employed approximately 13,000
employees, including approximately 3,750 employees in the United
States and Canada. A majority of our employees at our
manufacturing facilities, both domestic and international, are
represented by collective bargaining agreements and union
contracts with terms that expire on varying dates. We currently
do not expect any significant difficulties in renewing these
agreements.
Available Information
Our Internet address is www.agcocorp.com. We make the
following reports filed by us available, free of charge, on our
website under the heading SEC Filings in the
Company Reports section of our websites
Investors & Media section:
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annual reports on
Form 10-K;
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quarterly reports on
Form 10-Q;
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current reports on
Form 8-K; and |
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Forms 3, 4 and 5 |
The foregoing reports are made available on our website as soon
as practicable after they are filed with the Securities and
Exchange Commission (SEC).
We also provide corporate governance and other information on
our website. This information includes:
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charters for the committees of our board of directors, which are
available in the Corporate Governance section of our
websites Investors & Media
section; and |
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our code of conduct, which is available under the heading
Office of Ethics and Compliance in the
Corporate Governance section. |
In addition, in the event of any waivers of our Code of Ethics,
those waivers will be available in the Office of Ethics
and Compliance section of our website.
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Executive Officers of the Registrant
The table sets forth information as of January 31, 2006
with respect to each person who is an executive officer of the
Company.
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Name |
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Age | |
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Positions |
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Martin Richenhagen
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53 |
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President and Chief Executive Officer |
Garry L. Ball
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58 |
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Senior Vice President Engineering |
Andrew H. Beck
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42 |
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Senior Vice President Chief Financial Officer |
Norman L. Boyd
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62 |
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Senior Vice President Human Resources |
David L. Caplan
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58 |
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Senior Vice President Materials Management, Worldwide |
Gary L. Collar
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49 |
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Senior Vice President and General Manager, EAME |
Robert B. Crain
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46 |
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Senior Vice President and General Manager, North America |
Randall G. Hoffman
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54 |
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Senior Vice President Global Sales and Marketing |
Frank C. Lukacs
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47 |
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Senior Vice President Manufacturing Technologies and
Quality |
Stephen D. Lupton
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61 |
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Senior Vice President Corporate Development and
General Counsel |
Hubertus M. Muehlhaeuser
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36 |
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Senior Vice President Strategy and Integration |
Dexter E. Schaible
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56 |
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Senior Vice President Product Management, Engines
and Global Technology |
Martin Richenhagen has been President and Chief Executive
Officer since July 2004. From January 2003 to February 2004,
Mr. Richenhagen was Executive Vice President of Forbo
International SA, a flooring material business based in
Switzerland. From 1998 to December 2002, Mr. Richenhagen
was Group President of Claas KgaA mbH, a global farm equipment
manufacturer and distributor. From 1995 to 1998,
Mr. Richenhagen was Senior Executive Vice President for
Schindler Deutschland Holdings GmbH, a worldwide manufacturer
and distributor of elevators and escalators.
Garry L. Ball has been Senior Vice President
Engineering since June 2002. Mr. Ball was Senior Vice
President Engineering and Product Development from
June 2001 to June 2002. From 2000 to 2001, Mr. Ball was
Vice President of Engineering at CapacityWeb.com. From 1999 to
2000, Mr. Ball was Vice President of Construction Equipment
New Product Development at Case New Holland (CNH) Global
N.V. Prior to that, he held several key positions including Vice
President of Engineering Agricultural Tractor for New Holland
N.V., Europe, and Chief Engineer for Tractors at Ford New
Holland.
Andrew H. Beck has been Senior Vice President
Chief Financial Officer since June 2002. Mr. Beck was Vice
President, Chief Accounting Officer from January 2002 to June
2002, Vice President and Controller from April 2000 to January
2002, Corporate Controller from January 1996 to April 2000,
Assistant Treasurer from March 1995 to January 1996 and
Controller, International Operations from June 1994 to March
1995.
Norman L. Boyd has been Senior Vice President
Human Resources since June 2002. Mr. Boyd was Senior Vice
President Corporate Development for the Company from
October 1998 to June 2002, Vice President of Europe/ Africa/
Middle East Distribution from February 1997 to September 1998,
Vice President of Marketing, Americas from February 1995 to
February 1997 and Manager of Dealer Operations from January 1993
to February 1995.
David L. Caplan has been Senior Vice
President Materials Management, Worldwide since
October 2003. Mr. Caplan was Senior Director of Purchasing
of PACCAR Inc. from January 2002 to October 2003 and was
Director of Operation Support with Kenworth Truck Company from
November 1997 to January 2002.
Gary L. Collar has been Senior Vice President and General
Manager, EAME since January 2004. Mr. Collar was Vice
President, Worldwide Market Development for the Challenger
Division from May 2002
10
until January 2004. Between 1994 and 2002, Mr. Collar held
various senior executive positions with ZF Friedrichshaven A.G.,
including Vice President Business Development, North America,
from 2001 until 2002, and President and Chief Executive Officer
of ZF-Unisia Autoparts, Inc., from 1994 until 2001.
Robert B. Crain has been Senior Vice President and
General Manager, North America since January 2006.
Mr. Crain held several positions with CNH Global N.V. and
its predecessors, including Vice President of New Hollands
North America Agricultural Business from February 2004 to
December 2005, Vice President of CNH Marketing North America
Agricultural business from January 2003 to January 2004 and Vice
President and General Manager of Worldwide Operations for the
Crop Harvesting Division of CNH Global N.V., from January 1999
to December 2002.
Randall G. Hoffman has been Senior Vice
President Global Sales and Marketing since November
2005. Mr. Hoffman was the Senior Vice President and General
Manager, Challenger Division Worldwide from January 2004 to
November 2005, Vice President and General Manager, Worldwide
Challenger Division, from June 2002 to January 2004, Vice
President of Sales and Marketing, North America, from December
2001 to June 2002, Vice President, Marketing North America, from
April 2001 to November 2001, Vice President of Dealer
Operations, from June 2000 to April 2001, Director, Distribution
Development, North America, from April 2000 to June 2000,
Manager, Distribution Development, North America, from May 1998
to April 2000, and General Marketing Manager, from January 1995
to May 1998.
Frank C. Lukacs has been Senior Vice
President Manufacturing Technologies and Quality
since October 2003. Mr. Lukacs was Senior Director of
Manufacturing with Case Corporation from 1996 to October 2003.
He held various manufacturing positions with Simpson Industries
from 1987 to 1996, most recently as Senior Director
Manufacturing Engine Products Group. Prior to that,
he served in various manufacturing and general management
positions with General Motors Corporation from 1977 to 1987,
most recently as Manufacturing Supervisor and as Senior
Industrial Engineer.
Stephen D. Lupton has been Senior Vice
President Corporate Development and General Counsel
since June 2002. Mr. Lupton was Senior Vice President,
General Counsel for the Company from June 1999 to June 2002,
Vice President of Legal Services, International from October
1995 to May 1999, and Director of Legal Services, International
from June 1994 to October 1995. Mr. Lupton was Director of
Legal Services of Massey Ferguson from February 1990 to June
1994.
Hubertus M. Muehlhaeuser has been Senior Vice
President Strategy and Integration since September
2005. Previously, he spent over ten years with Arthur D. Little,
Ltd., an international management-consulting firm, where he was
made a partner in 1999. From October 2000 to May 2005, he led
that firms Global Strategy and Organization Practice as a
member of the firms global management team, and was the
firms managing director of Switzerland from April 2001 to
May 2005.
Dexter E. Schaible has been Senior Vice
President Product Management, Engines and Global
Technology since December 2005. Previously, Mr. Schaible
was Senior Vice President Product Development from
June 2002 to December 2005, Vice President of European
Harvesting from July 2001 to June 2002, Senior Vice President of
Worldwide Engineering and Development from October 1998 to July
2001, Vice President of Worldwide Product Development from
February 1997 to October 1998, Vice President of Product
Development from October 1995 to February 1997 and Director of
Product Development from September 1993 to October 1995.
Financial Information on Geographical Areas
For financial information on geographic areas, see pages 97
through 99 of this
Form 10-K under
the caption Segment Reporting which information is
incorporated herein by reference.
11
We make forward-looking statements in this report, in other
materials we file with the SEC or otherwise release to the
public, and on our website. In addition, our senior management
might make forward-looking statements orally to analysts,
investors, the media and others. Statements concerning our
future operations, prospects, strategies, financial condition,
future economic performance (including growth and earnings) and
demand for our products and services, and other statements of
our plans, beliefs, or expectations, including the statements
contained in Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
regarding industry conditions, production levels, net sales and
income, restructuring and other infrequent expenses, cost
reductions from facility rationalizations, realization of net
deferred tax assets and the fulfillment of working capital
needs, are forward-looking statements. In some cases these
statements are identifiable through the use of words such as
anticipate, believe,
estimate, expect, intend,
plan, project, target,
can, could, may,
should, will, would and
similar expressions. You are cautioned not to place undue
reliance on these forward-looking statements. The
forward-looking statements we make are not guarantees of future
performance and are subject to various assumptions, risks, and
other factors that could cause actual results to differ
materially from those suggested by these forward-looking
statements. These factors include, among others, those set forth
below and in the other documents that we file with the SEC.
There also are other factors that we may not describe, generally
because we currently do not perceive them to be material, that
could cause actual results to differ materially from our
expectations.
We expressly disclaim any obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
Our financial results depend entirely upon the agricultural
industry, and factors that adversely affect the agricultural
industry generally will adversely affect us.
Our success depends heavily on the vitality of the agricultural
industry. Historically, the agricultural industry, including the
agricultural equipment business, has been cyclical and subject
to a variety of economic factors, governmental regulations and
legislation, and weather conditions. Sales of agricultural
equipment generally are related to the health of the
agricultural industry, which is affected by farm income, debt
levels and land values, all of which reflect levels of commodity
prices, acreage planted, crop yields, demand, government
policies and government subsidies. Sales also are influenced by
economic conditions, interest rate and exchange rate levels, and
the availability of retail financing. Trends in the industry,
such as farm consolidations, may affect the agricultural
equipment market. In addition, weather conditions, such as heat
waves or droughts, and pervasive livestock diseases can affect
farmers buying decisions. Downturns in the agricultural
industry due to these or other factors are likely to result in
decreases in demand for agricultural equipment, which would
adversely affect our sales, growth, results of operations and
financial condition. During previous downturns in the farm
sector, we experienced significant and prolonged declines in
sales and profitability, and we expect our business to remain
subject to similar market fluctuations in the future.
The agricultural equipment industry is highly seasonal, and
seasonal fluctuations significantly impact results of operations
and cash flows.
The agricultural equipment business is highly seasonal, which
causes our quarterly results and our available cash flow to
fluctuate during the year. December is also typically a large
month for retail sales because of our customers tax
planning considerations, the increase in availability of funds
from completed harvests and the timing of dealer incentives. In
addition, farmers purchase agricultural equipment in the Spring
and Fall in conjunction with the major planting and harvesting
seasons. Our 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.
12
Our success depends on the introduction of new products,
which requires substantial expenditures.
Our long-term results depend upon our ability to introduce and
market new products successfully. The success of our new
products will depend on a number of factors, including:
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customer acceptance; |
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the efficiency of our suppliers in providing component parts; |
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the economy; |
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competition; and |
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the strength of our dealer networks. |
As both we and our competitors continuously introduce new
products or refine versions of existing products, we cannot
predict the level of market acceptance or the amount of market
share our new products will achieve. Any manufacturing delays or
problems with our new product launches could adversely affect
our operating results. We have experienced delays in the
introduction of new products in the past, and we cannot assure
you that we will not experience delays in the future. In
addition, introducing new products could result in a decrease in
revenues from our existing products. Consistent with our
strategy of offering new products and product refinements, we
expect to continue to use a substantial amount of capital for
further product development and refinement. We may need more
capital for product development and refinement than is available
to us, which could adversely affect our business, financial
condition or results of operations.
We face significant competition and, if we are unable to
compete successfully against other agricultural equipment
manufacturers, we would lose customers and our net sales and
profitability would decline.
The agricultural equipment business is highly competitive,
particularly in North America, Europe and Latin America. We
compete with several large national and international companies
that, like us, offer a full line of agricultural equipment. We
also compete with numerous short-line and specialty
manufacturers and suppliers of farm equipment products. Our two
key competitors, Deere & Company and CNH Global N.V.,
are substantially larger than we are and may have greater
financial and other resources. In addition, in some markets, we
compete with smaller regional competitors with significant
market share in a single country or group of countries. Our
competitors may substantially increase the resources devoted to
the development and marketing, including discounting, of
products that compete with our products. If we are unable to
compete successfully against other agricultural equipment
manufacturers, we could lose customers and our net sales and
profitability may decline. There also can be no assurances that
consumers will continue to regard our agricultural equipment
favorably, and we may be unable to develop new products that
appeal to consumers or unable to continue to compete
successfully in the agricultural equipment business. In
addition, competitive pressures in the agricultural equipment
business may affect the market prices of new and used equipment,
which, in turn, may adversely affect our sales margins and
results of operations.
Rationalization of manufacturing facilities may cause
production capacity constraints and inventory fluctuations.
The rationalization of our manufacturing facilities has at times
resulted in, and similar rationalizations in the future may
result in, temporary constraints upon our ability to produce the
quantity of products necessary to fill orders and thereby
complete sales in a timely manner. A prolonged delay in our
ability to fill orders on a timely basis could affect customer
demand for our products and increase the size of our product
inventories, causing future reductions in our manufacturing
schedules and adversely affecting our results of operations.
Moreover, our continuous development and production of new
products will often involve the retooling of existing
manufacturing facilities. This retooling may limit our
production capacity at certain times in the future, which could
adversely affect our results of operations and financial
condition.
13
We depend on suppliers for raw materials, components and
parts for our products, and any failure by our suppliers to
provide products as needed, or by us to promptly address
supplier issues, will adversely impact our ability to timely and
efficiently manufacture and sell products. We also are subject
to raw material price fluctuations, which can adversely affect
our manufacturing costs.
Our products include components and parts manufactured by
others. As a result, our ability to timely and efficiently
manufacture existing products, to introduce new products and to
shift manufacturing of products from one facility to another
depends on the quality of these components and parts and the
timeliness of their delivery to our facilities. At any
particular time, we depend on many different suppliers, and the
failure by one or more of our suppliers to perform as needed
will result in fewer products being manufactured, shipped and
sold. If the quality of the components or parts provided by our
suppliers is less than required and we do not recognize that
failure prior to the shipment of our products, we will incur
higher warranty costs. The timely supply of component parts for
our products also depends on our ability to manage our
relationships with suppliers, to identify and replace suppliers
that fail to meet our schedules or quality standards, and to
monitor the flow of components and accurately project our needs.
A significant increase in the price of any component or raw
material could adversely affect our profitability. We cannot
avoid exposure to global price fluctuations, such as occurred in
2004 with the costs of steel and related products, and our
profitability depends on, among other things, our ability to
raise equipment and parts prices sufficiently enough to recover
any such material or component cost increases.
A majority of our sales and manufacturing take place outside
the United States, and, as a result, we are exposed to risks
related to foreign laws, taxes, economic conditions, labor
supply and relations, political conditions and governmental
policies. These risks may delay or reduce our realization of
value from our international operations.
For the year ended December 31, 2005, we derived
approximately $4.2 billion or 76% of our net sales from
sales outside the United States. The primary foreign countries
in which we do business are Germany, France, Brazil, the United
Kingdom and Finland. In addition, we have significant
manufacturing operations in France, Germany, Brazil, Finland and
Denmark. Our results of operations and financial condition may
be adversely affected by the laws, taxes, economic conditions,
labor supply and relations, political conditions and
governmental policies of the foreign countries in which we
conduct business. Some of our international operations also are
subject to various risks that are not present in domestic
operations, including restrictions on dividends and the
repatriation of funds. Foreign developing markets may present
special risks, such as unavailability of financing, inflation,
slow economic growth and price controls.
Domestic and foreign political developments and government
regulations and policies directly affect the international
agricultural industry, which affects the demand for agricultural
equipment. If demand for agricultural equipment declines, our
sales, growth, results of operations and financial condition may
be adversely affected. The application, modification or adoption
of laws, regulations, trade agreements or policies adversely
affecting the agricultural industry, including the imposition of
import and export duties and quotas, expropriation and
potentially burdensome taxation, could have an adverse effect on
our business. The ability of our international customers to
operate their businesses and the health of the agricultural
industry, in general, are affected by domestic and foreign
government programs that provide economic support to farmers. As
a result, farm income levels and the ability of farmers to
obtain advantageous financing and other protections would be
reduced to the extent that any such programs are curtailed or
eliminated. Any such reductions would likely result in a
decrease in demand for agricultural equipment. For example, a
decrease or elimination of current price protections for
commodities or of subsidy payments for farmers in the European
Union, the United States, Brazil or elsewhere in South America
could negatively impact the operations of farmers in those
regions, and, as a result, our sales may decline if these
farmers delay, reduce or cancel purchases of our products.
14
Currency exchange rate and interest rate changes can
adversely affect the pricing and profitability of our
products.
We conduct operations in many areas of the world involving
transactions denominated in a variety of currencies. Our
production costs, profit margins and competitive position are
affected by the strength of the currencies in countries where we
manufacture or purchase goods relative to the strength of the
currencies in countries where our products are sold. In
addition, we are subject to currency exchange rate risk to the
extent that our costs are denominated in currencies other than
those in which we earn revenues and to risks associated with
translating the financial statements of our foreign subsidiaries
from local currencies into United States dollars. Similarly,
changes in interest rates affect our results of operations by
increasing or decreasing borrowing costs and finance income. Our
most significant transactional foreign currency exposures are
the Euro, Brazilian real and the Canadian dollar in relation to
the United States dollar. Where naturally offsetting currency
positions do not occur, we attempt to manage these risks by
economically hedging some, but not all, of our exposures through
the use of foreign currency forward exchange contracts. As with
all hedging instruments, there are risks associated with the use
of foreign currency forward exchange contracts, interest rate
swap agreements and other risk management contracts. While the
use of such hedging instruments provides us with protection from
certain fluctuations in currency exchange and interest rates, we
potentially forego the benefits that might result from favorable
fluctuations in currency exchange and interest rates. In
addition, any default by the counterparties to these
transactions could adversely affect us. Despite our use of
economic hedging transactions, currency exchange rate or
interest rate fluctuations may adversely affect our results of
operations, cash flow or financial condition.
We are subject to extensive environmental laws and
regulations, and our compliance with, or our failure to comply
with, existing or future laws and regulations could delay
production of our products or otherwise adversely affect our
business.
We are subject to increasingly stringent environmental laws and
regulations in the countries in which we operate. These
regulations govern, among other things, emissions into the air,
discharges into water, the use, handling and disposal of
hazardous substances, waste disposal and the remediation of soil
and groundwater contamination. Our costs of complying with these
or any other current or future environmental regulations may be
significant. For example, the European Union and the United
States have adopted more stringent environmental regulations
regarding emissions into the air. As a result, we will likely
incur increased capital expenses to modify our products to
comply with these regulations. Further, we may experience
production delays if we or our suppliers are unable to design
and manufacture components for our products that comply with
environmental standards established by regulators. For example,
our SisuDiesel engine division and our engine suppliers are
subject to air quality standards, and production at our
facilities could be impaired if SisuDiesel and these suppliers
are unable to timely respond to any changes in environmental
laws and regulations affecting engine emissions. Compliance with
environmental and safety regulations has added, and will
continue to add, to the cost of our products and increase the
capital-intensive nature of our business. We may be adversely
impacted by costs, liabilities or claims with respect to our
operations under existing laws or those that may be adopted in
the future. If we fail to comply with existing or future laws
and regulations, we may be subject to governmental or judicial
fines or sanctions and our business and results of operations
could be adversely affected.
Our labor force is heavily unionized, and our contractual and
legal obligations under collective bargaining agreements and
labor laws subject us to the risks of work interruption or
stoppage and could cause our costs to be higher.
Most of our employees, most notably at our manufacturing
facilities, are represented by collective bargaining agreements
and union contracts with terms that expire on varying dates.
Several of our collective bargaining agreements and union
contracts are of limited duration and, therefore, must be
re-negotiated frequently. As a result, we could incur
significant administrative expenses associated with union
representation of our employees. Furthermore, we are at greater
risk of work interruptions or stoppages than non-unionized
companies, and any work interruption or stoppage could
significantly impact the volume of goods we
15
have available for sale. In addition, collective bargaining
agreements, union contracts and labor laws may impair our
ability to reduce our labor costs by streamlining existing
manufacturing facilities and in restructuring our business
because of limitations on personnel and salary changes and
similar restrictions.
We have significant pension obligations with respect to our
employees and our available cash flow may be adversely affected
in the event that payments became due under any pension plans
that are unfunded or underfunded.
A portion of our active and retired employees participate in
defined benefit pension plans under which we are obligated to
provide prescribed levels of benefits regardless of the value of
the underlying assets, if any, of the applicable pension plan.
If our obligations under a plan are unfunded or underfunded, we
will have to use cash flow from operations and other sources to
pay our obligations either as they become due or over some
shorter funding period. As of December 31, 2005, we had
approximately $281.6 million in unfunded or underfunded
obligations related to our pension and other postretirement
health care benefits.
We have a substantial amount of indebtedness, and, as a
result, we are subject to certain restrictive covenants and
payment obligations that may adversely affect our ability to
operate and expand our business.
We have a significant amount of indebtedness. As of
December 31, 2005, we had total long-term indebtedness,
including current portions of long-term indebtedness, of
approximately $848.1 million, stockholders equity of
approximately $1,416.0 million and a ratio of long-term
indebtedness to equity of approximately 0.6 to 1.0. We also had
short-term obligations of $95.4 million, capital lease
obligations of $1.6 million, unconditional purchase or
other long-term obligations of $402.5 million, and amounts
funded under an accounts receivable securitization facility of
$462.7 million. In addition, we had guaranteed indebtedness
owed to third parties of approximately $93.8 million,
primarily related to dealer and end-user financing of equipment.
Our substantial indebtedness could have important adverse
consequences. For example, it could:
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, which would
reduce the availability of our cash flow to fund future working
capital, capital expenditures, acquisitions and other general
corporate purposes; |
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increase our vulnerability to general adverse economic and
industry conditions; |
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; |
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restrict us from introducing new products or pursuing business
opportunities; |
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place us at a competitive disadvantage compared to our
competitors that have relatively less indebtedness; |
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limit, along with the financial and other restrictive covenants
in our indebtedness, among other things, our ability to borrow
additional funds, pay cash dividends or engage in or enter into
certain transactions; and |
prevent us from selling additional receivables to our commercial
paper conduit. The European facility agreement provides that the
agent, Rabobank, has the right to terminate the securitization
facilities if our senior unsecured debt rating moves below B+ by
Standard & Poors or B1 by Moodys Investor
Services. Based on our current ratings, a downgrade of two
levels by Standard & Poors and Moodys would need
to occur.
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Item 1B. |
Unresolved Staff Comments |
Not applicable.
16
Our principal properties as of January 31, 2006, were as
follows:
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Leased | |
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Owned | |
Location |
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Description of Property |
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(Sq. Ft.) | |
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(Sq. Ft.) | |
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United States:
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Batavia, Illinois
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Parts Distribution |
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310,200 |
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Beloit, Kansas
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Manufacturing |
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164,500 |
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Duluth, Georgia
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Corporate Headquarters |
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125,000 |
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Hesston, Kansas
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Manufacturing |
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1,276,500 |
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Jackson, Minnesota
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Manufacturing |
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577,300 |
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Kansas City, Missouri
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Parts Distribution/Warehouse |
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563,900 |
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International:
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Coventry, United
Kingdom(1)
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Regional Headquarters |
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98,700 |
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Desford, United Kingdom
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Parts Distribution |
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298,000 |
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Beauvais,
France(2)
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Manufacturing |
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1,094,500 |
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Ennery, France
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Parts Distribution |
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417,500 |
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Marktoberdorf, Germany
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Manufacturing |
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677,400 |
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Baumenheim, Germany
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Manufacturing |
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471,400 |
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Randers,
Denmark(3)
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Manufacturing |
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683,000 |
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Linnavuori, Finland
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Manufacturing |
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298,900 |
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Suolahti, Finland
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Manufacturing/Parts Distribution |
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543,200 |
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Sunshine, Victoria, Australia
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Regional Headquarters/Parts Distribution |
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95,000 |
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Haedo, Argentina
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Parts Distribution/Sales Office |
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32,000 |
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Canoas, Rio Grande do Sul, Brazil
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Regional Headquarters/ Manufacturing |
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452,400 |
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Santa Rosa, Rio Grande do Sul, Brazil
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Manufacturing |
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297,100 |
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Mogi das Cruzes, Brazil
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Manufacturing |
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696,900 |
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(1) |
We closed our Coventry, England manufacturing facility in July
2003. On January 30, 2004, we sold the facility and are
leasing a portion of the facility back from the buyers under a
three-year lease. The lease is cancelable at our option during
2006, with six months required advance notice. In June 2005, we
entered into a 20-year
lease agreement for a facility that will contain our European
regional headquarters. The facility is located in Stoneleigh,
United Kingdom, and we will be leasing approximately
85,000 square feet. We anticipate moving to the new
location in October 2006. |
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(2) |
Includes our joint venture with GIMA, in which we own a 50%
interest. |
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(3) |
During 2004, we announced a plan to restructure our European
combine manufacturing operations located in Randers, Denmark.
This rationalization permanently eliminated 70% of the square
footage utilized. We are currently marketing a portion of this
property for sale. |
We consider each of our facilities to be in good condition and
adequate for its present use. We believe that we have sufficient
capacity to meet our current and anticipated manufacturing
requirements.
17
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Item 3. |
Legal Proceedings |
In October 2004, we were notified of a customer claim for costs
and damages arising out of alleged breaches of a supply
agreement. The customers initial evaluation indicated a
claim of approximately
10.5 million
(or approximately $12.5 million). We settled the matter
with the customer in December 2005, for approximately
$1.6 million.
Recently, we received a subpoena from the SEC in connection with
a non-public, fact-finding inquiry entitled In the Matter
of Certain Participants in the Oil for Food Program. This
subpoena requested documents concerning transactions under the
United Nations Oil for Food Program by AGCO Corporation and
certain of our subsidiaries. This subpoena does not imply there
have been any violations of the federal securities or other
laws, and it is not possible to predict the outcome of this
inquiry or its impact, if any, on us. We are cooperating fully
with the investigation.
We are a party to various legal claims and actions incidental to
our business. We believe that none of these claims or actions,
either individually or in the aggregate, is material to our
business or financial condition.
|
|
Item 4. |
Submission Of Matters to a Vote of Security Holders |
Not Applicable.
18
PART II
|
|
Item 5. |
Market For Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is listed on the New York Stock Exchange
(NYSE) and trades under the symbol AG. As of the
close of business on February 28, 2006, the closing stock
price was $19.55, and there were 626 stockholders of record.
(This number does not include stockholders who hold their stock
through brokers, banks and other nominees.) The following table
sets forth, for the periods indicated, the high and low sales
prices for our common stock for each quarter within the last two
years, as reported on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
21.31 |
|
|
$ |
18.16 |
|
Second Quarter
|
|
|
19.54 |
|
|
|
16.57 |
|
Third Quarter
|
|
|
21.30 |
|
|
|
18.06 |
|
Fourth Quarter
|
|
|
17.91 |
|
|
|
14.74 |
|
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
21.87 |
|
|
$ |
16.25 |
|
Second Quarter
|
|
|
22.20 |
|
|
|
18.04 |
|
Third Quarter
|
|
|
22.62 |
|
|
|
18.30 |
|
Fourth Quarter
|
|
|
22.82 |
|
|
|
19.00 |
|
DIVIDEND POLICY
We currently do not pay dividends and we have not paid a
dividend since the first quarter of 2001. We cannot provide any
assurance that we will pay dividends in the foreseeable future.
Although we currently meet all requirements, our credit facility
and the indenture governing our senior subordinated notes
contain restrictions on our ability to pay dividends in certain
circumstances.
19
|
|
Item 6. |
Selected Financial Data |
The following tables present our selected consolidated financial
data. The data set forth below should be read together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our historical
Consolidated Financial Statements and the related notes. Our
operating data and selected balance sheet data as of and for the
years ended December 31, 2005, 2004, 2003 and 2002 were
derived from the 2005, 2004, 2003 and 2002 Consolidated
Financial Statements, which have been audited by KPMG LLP,
independent registered public accounting firm. The Consolidated
Financial Statements as of December 31, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003 and
the reports thereon, are included in Item 8 in this
Form 10-K. The
historical financial data may not be indicative of our future
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004(1)(2) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except per share data) | |
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
5,449.7 |
|
|
$ |
5,273.3 |
|
|
$ |
3,495.3 |
|
|
$ |
2,922.7 |
|
|
$ |
2,545.9 |
|
Gross profit
|
|
|
933.6 |
|
|
|
952.9 |
|
|
|
616.4 |
|
|
|
531.8 |
|
|
|
439.2 |
|
Income from operations
|
|
|
274.7 |
|
|
|
323.5 |
|
|
|
184.3 |
|
|
|
103.5 |
|
|
|
97.1 |
|
Net income (loss)
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
|
$ |
(84.4 |
) |
|
$ |
22.6 |
|
Net income (loss) per common share
diluted(3)
|
|
$ |
0.35 |
|
|
$ |
1.71 |
|
|
$ |
0.98 |
|
|
$ |
(1.14 |
) |
|
$ |
0.33 |
|
Weighted average shares outstanding
diluted(3)
|
|
|
90.7 |
|
|
|
95.6 |
|
|
|
75.8 |
|
|
|
74.2 |
|
|
|
68.5 |
|
Dividends declared per common share
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004(1)(2) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except number of employees) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
220.6 |
|
|
$ |
325.6 |
|
|
$ |
147.0 |
|
|
$ |
34.3 |
|
|
$ |
28.9 |
|
Working capital
|
|
|
825.8 |
|
|
|
1,045.5 |
|
|
|
755.4 |
|
|
|
599.4 |
|
|
|
539.7 |
|
Total assets
|
|
|
3,861.2 |
|
|
|
4,297.3 |
|
|
|
2,839.4 |
|
|
|
2,349.0 |
|
|
|
2,173.3 |
|
Total long-term debt, excluding current portion
|
|
|
841.8 |
|
|
|
1,151.7 |
|
|
|
711.1 |
|
|
|
636.9 |
|
|
|
617.7 |
|
Stockholders equity
|
|
|
1,416.0 |
|
|
|
1,422.4 |
|
|
|
906.1 |
|
|
|
717.6 |
|
|
|
799.4 |
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees
|
|
|
13,023 |
|
|
|
14,313 |
|
|
|
11,278 |
|
|
|
11,555 |
|
|
|
11,325 |
|
|
|
(1) |
On January 5, 2004, we acquired the Valtra tractor and
diesel engine operations of Kone Corporation, a Finnish company,
for
604.6 million,
net of approximately
21.4 million
cash acquired (or approximately $760 million, net). The
results of operations for the Valtra acquisition have been
included in our Consolidated Financial Statements from the date
of acquisition. See Note 2 to the Consolidated Financial
Statements where the acquisition of Valtra is described more
fully. |
|
(2) |
On April 7, 2004, we sold 14,720,000 shares of our
common stock in an underwritten public offering and received net
proceeds of approximately $300.1 million. See Note 9
to the Consolidated Financial Statements where this offering is
described more fully. |
|
(3) |
During the fourth quarter of 2004, we adopted the provisions of
EITF 04-08, which
required that shares subject to issuance from contingently
convertible debt should be included in the calculation of
diluted earnings per share using the if-converted method
regardless of whether a market price trigger has been met. We
therefore included approximately 9.0 million additional
shares of common stock that may have been issued upon conversion
of our former
13/4% convertible
senior subordinated notes in our diluted earnings per share
calculation for the year ended December 31, 2004 and
0.2 million additional shares of common stock for the year
ended December 31, 2003. On June 29, 2005, we
completed an exchange of our
13/4% convertible
senior subordinates notes for new notes that provide for
settlement upon conversion in cash up to the principal amount of
the converted new notes with any excess conversion value settled
in shares of our common stock. The impact of the exchange
resulted in a reduction in the diluted weighted average shares
outstanding of approximately 9.0 million shares on a
prospective basis. In the future, dilution of weighted shares
will depend on our stock price once the market price trigger or
other specified conversion circumstances are met. See
Note 1 to the Consolidated Financial Statements where this
impact and the exchange are described more fully. |
20
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
We are a leading manufacturer and distributor of agricultural
equipment and related replacement parts throughout the world. We
sell a full range of agricultural equipment, including tractors,
combines, hay tools, sprayers, forage equipment and implements
and a line of diesel engines. Our products are widely recognized
in the agricultural equipment industry and are marketed under a
number of well-known brand names, including
AGCO®,
Challenger®,
Fendt®,
Gleaner®,
Hesston®,
Massey
Ferguson®,
New
Idea®,
RoGator®,
Spra-Coupe®,
Sunflower®,
Terra-Gator®,
Valtra®,
and
Whitetm
Planters. We distribute most of our products through a
combination of approximately 3,600 independent dealers,
distributors, associates and licensees. In addition, we provide
retail financing in the United States, Canada, Brazil, Germany,
France, the United Kingdom, Australia and Ireland through our
finance joint ventures with Rabobank.
Results of Operations
We sell our equipment and replacement parts to our independent
dealers, distributors and other customers. A large majority of
our sales are to independent dealers and distributors that sell
our products to the end user. To the extent practicable, we
attempt to sell products to our dealers and distributors on a
level basis throughout the year to reduce the effect of seasonal
demands on our manufacturing operations and to minimize our
investment in inventory. However, retail sales by dealers to
farmers are highly seasonal and are linked to the planting and
harvesting seasons. In certain markets, particularly in North
America, there is often a time lag, which varies based on the
timing and level of retail demand, between our sale of the
equipment to the dealer and the dealers sale to a retail
customer.
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included
in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold
|
|
|
82.9 |
|
|
|
81.9 |
|
|
|
82.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
17.1 |
|
|
|
18.1 |
|
|
|
17.6 |
|
Selling, general and administrative expenses (includes
restricted stock compensation expense comprising 0.0% of net
sales for 2005, 2004 and 2003)
|
|
|
9.6 |
|
|
|
9.7 |
|
|
|
9.5 |
|
Engineering expenses
|
|
|
2.2 |
|
|
|
2.0 |
|
|
|
2.0 |
|
Restructuring and other infrequent expenses
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
Amortization of intangibles
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5.0 |
|
|
|
6.1 |
|
|
|
5.3 |
|
Interest expense, net
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.7 |
|
Other expense, net
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in net earnings of
affiliates
|
|
|
2.9 |
|
|
|
4.2 |
|
|
|
2.8 |
|
Income tax provision
|
|
|
2.7 |
|
|
|
1.6 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net earnings of affiliates
|
|
|
0.2 |
|
|
|
2.6 |
|
|
|
1.6 |
|
Equity in net earnings of affiliates
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
0.6 |
% |
|
|
3.0 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
21
Net income for 2005 was $31.6 million, or $0.35 per
diluted share, compared to net income for 2004 of
$158.8 million, or $1.71 per diluted share. Our
results for 2005 include the following items:
|
|
|
|
|
a non-cash deferred income tax charge of $90.8 million, or
$0.95 per share, related to increasing the valuation
allowance against our United States deferred tax assets in
accordance with Statement of Financial Accounting Standard
(SFAS) No. 109, Accounting for Income
Taxes; and |
|
|
|
the redemption of our $250 million
91/2% senior
notes due 2008 at a price of approximately $261.9 million,
which included a premium of 4.75% over the face amount of the
notes. At the time of redemption, we recorded interest expense
for the premium of approximately $11.9 million, or
$0.13 per share, and approximately $2.2 million, or
$0.03 per share, for the write-off of the remaining balance
of the deferred debt issuance costs; and |
|
|
|
the exchange of our former
13/4% convertible
senior subordinated notes with new notes in June 2005 that
resulted in a reduction in the diluted weighted average shares
outstanding of approximately 9.0 million shares on a
prospective basis. |
Our results for 2004 included the following item:
|
|
|
|
|
the implementation of Emerging Issues Task Force
(EITF) Issue
No. 04-08, which
resulted in the addition of approximately 9.0 million
shares to our weighted average shares outstanding for purposes
of computing diluted net income per share. |
Net sales for 2005 were approximately 3% higher than 2004
primarily due to sales growth in the North America and
Europe/Africa/Middle East regions, as well as positive currency
translation impacts. This growth was offset by significant sales
declines in South America due to weak market demand. Income from
operations, including restructuring expenses and restricted
stock compensation, was $274.7 million in 2005 compared to
$323.5 million in 2004. The decrease in income from
operations was due primarily to the lower operating income in
South America and North America, partially offset by
improvements in our Europe/Africa/Middle East operations.
Operating margins declined in 2005 as a result of reduced
margins in South America primarily due to a significant
reduction in industry demand and the impact of the strengthening
Brazilian Real.
In our Europe/Africa/Middle East operations, income from
operations improved $55.7 million in 2005 compared to 2004.
The increase reflects higher sales outside Western Europe and
margin improvements achieved through productivity improvements,
new product introductions, expense control measures and pricing
changes. Operating income in our South American operations
decreased $89.2 million during 2005 compared to 2004, due
to sales declines resulting from the deterioration in market
conditions. Operating margins in South America declined
significantly in 2005 resulting from lower production levels,
unfavorable sales mix and the impact of the continued
strengthening of the Brazilian Real on sales outside of Brazil.
In North America, operating income decreased $15.1 million
during 2005 compared to 2004. Although higher sales volumes were
achieved from improved market conditions and sales performance
in North America, these benefits were offset by reduced margins
due to higher costs from the impact of the weak United States
dollar on products produced primarily in Brazil, higher warranty
costs and increased engineering expenses related to new product
offerings. Operating income in our Asia/ Pacific region
increased $2.1 million in 2005 compared to 2004 due to
higher sales in Asia.
Worldwide industry equipment demand declined in 2005 with the
largest reductions in Europe and South America. In North
America, industry demand remained relatively stable supported by
solid farm income, although drought conditions in certain areas
of the United States impacted demand in the latter part of the
year. In Europe, industry demand softened in the second half of
2005 as a result of lower agricultural production mainly due to
dry weather conditions in Southern Europe, as well as
uncertainty related to Common Agricultural Policy farm subsidy
reforms. In South America, industry demand declined significantly
22
in 2005 due to drought conditions in Southern Brazil and reduced
farm profits resulting from both lower commodity prices and the
continued strengthening of the Brazilian Real.
In the United States and Canada, industry unit retail sales of
tractors were relatively flat in 2005 compared to 2004,
resulting from a decrease in the compact tractor segment, offset
by increases in the utility and high horsepower segments.
Industry unit retail sales of combines increased approximately
1% when compared to the prior year. Our unit retail sales of
tractors in North America increased over 2004 levels, while our
unit retail sales of combines decreased compared to 2004 levels.
In Europe, industry unit retail sales of tractors decreased
approximately 4% in 2005 compared to 2004. Retail demand
improved in Germany, Scandinavia and Eastern Europe but declined
in Spain, France, the United Kingdom and Finland. Our unit
retail sales of tractors were relatively flat during 2005
compared to 2004. In South America, industry unit retail sales
of tractors in 2005 decreased approximately 24% compared to
2004. Retail sales of tractors in the major market of Brazil
declined approximately 38% during 2005. Industry unit retail
sales of combines during 2005 were 58% lower than the prior
year, with a decline in Brazil of approximately 73% compared to
the prior year. Our unit retail sales of tractors and combines
in South America were also significantly lower in 2005 compared
to 2004. In other international markets, our net sales for 2005
were approximately 26% higher than the prior year, particularly
in the Middle East.
Net sales for 2005 were $5,449.7 million compared to
$5,273.3 million for 2004. The increase was primarily
attributable to sales growth in the North America and Europe/
Africa/ Middle East regions, as well as positive currency
translation impacts. Currency translation positively impacted
net sales by approximately $94.6 million, primarily due to
the continued strengthening of the Brazilian Real. The following
table sets forth, for the periods indicated, the impact to net
sales of currency translation by geographical segment (in
millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change due | |
|
|
|
|
|
|
|
|
to Currency | |
|
|
|
|
|
|
Change | |
|
Translation | |
|
|
|
|
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
1,607.8 |
|
|
$ |
1,412.5 |
|
|
$ |
195.3 |
|
|
|
13.8 |
% |
|
$ |
17.9 |
|
|
|
1.3 |
% |
South America
|
|
|
648.5 |
|
|
|
796.8 |
|
|
|
(148.3 |
) |
|
|
(18.6 |
)% |
|
|
84.3 |
|
|
|
10.6 |
% |
Europe/ Africa/Middle East
|
|
|
2,988.7 |
|
|
|
2,873.0 |
|
|
|
115.7 |
|
|
|
4.0 |
% |
|
|
(11.2 |
) |
|
|
(0.4 |
)% |
Asia/ Pacific
|
|
|
204.7 |
|
|
|
191.0 |
|
|
|
13.7 |
|
|
|
7.2 |
% |
|
|
3.6 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,449.7 |
|
|
$ |
5,273.3 |
|
|
$ |
176.4 |
|
|
|
3.3 |
% |
|
$ |
94.6 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regionally, net sales in North America increased during 2005
primarily due to strong retail sales and improved product
availability. In the Europe/ Africa/ Middle East region, net
sales increased in 2005 primarily due to sales growth in
Germany, Eastern Europe and the Middle East. Net sales in South
America decreased during 2005 compared to 2004 primarily as a
result of weak market conditions in the region. In the Asia/
Pacific region, net sales increased in 2005 compared to 2004 due
to increases in industry demand in the region, particularly in
Asia. We estimate that consolidated price increases during 2005
contributed approximately 4% to the increase in net sales.
Consolidated net sales of tractors and combines, which consisted
of approximately 71% of our net sales in 2005, increased
approximately 3% in 2005 compared to 2004. Unit sales of
tractors and combines decreased approximately 6% during 2005
compared to 2004. The difference between the unit sales decrease
and the increase in net sales is the result of foreign currency
translation, pricing and sales mix changes.
23
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included
in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
$ | |
|
Net Sales | |
|
$ | |
|
Net Sales | |
|
|
| |
|
| |
|
| |
|
| |
Gross profit
|
|
$ |
933.6 |
|
|
|
17.1 |
% |
|
$ |
952.9 |
|
|
|
18.1 |
% |
Selling, general and administrative expense (including
$0.4 million and $0.5 million of restricted stock
compensation in 2005 and 2004, respectively)
|
|
|
520.7 |
|
|
|
9.6 |
% |
|
|
509.8 |
|
|
|
9.7 |
% |
Engineering expense
|
|
|
121.7 |
|
|
|
2.2 |
% |
|
|
103.7 |
|
|
|
2.0 |
% |
Restructuring and other infrequent expenses
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
Amortization of intangibles
|
|
|
16.5 |
|
|
|
0.3 |
% |
|
|
15.8 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$ |
274.7 |
|
|
|
5.0 |
% |
|
$ |
323.5 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of net sales declined during 2005
primarily due to lower gross margins in South America resulting
from lower production levels, unfavorable sales mix and negative
currency impacts. These declines were partially offset by
improved margins in the Europe/ Africa/ Middle East region,
which were positively impacted by improved productivity, new
product introductions, expense control measures and pricing
changes. Productivity improvements were achieved through
purchasing and material cost initiatives, outsourcing
initiatives, such as the outsourcing of combine manufacturing in
Europe, and enhanced production processes, resulting in material
flow and assembly improvements. Margins in North America were
impacted by the weak United States dollar on products imported
from our European and Brazilian facilities and higher warranty
costs.
Selling, general and administrative (SG&A)
expenses as a percentage of net sales decreased slightly during
2005 compared to 2004 primarily as a result of higher sales
levels and cost reduction initiatives. Engineering expenses
increased during 2005 as a result of our increase in spending to
fund product improvements and cost reduction projects.
The restructuring and other infrequent expenses in 2005
primarily related to the rationalization of our Randers, Denmark
combine manufacturing operations announced in July 2004. During
the second quarter of 2005, we completed auctions of remaining
machinery and equipment at the Randers facility and recorded a
gain associated with such actions. The gain was offset by
restructuring expenses associated with the Randers
rationalization, consisting primarily of employee retention
payments and other facility closure costs. We also recorded
restructuring expenses during 2005 associated with severance
costs, retention payments, asset write-downs and contract
termination costs related to the rationalization of our Finnish
tractor manufacturing, parts distribution and sales operations.
The restructuring expenses in 2004 primarily related to charges
incurred resulting from the Randers rationalization, as well as
costs associated with various rationalization initiatives in
Europe and the United States, offset by gains on the sale of
property, plant and equipment related to our Coventry, England
facility closure, as well as a revision to a previously
established provision, which resulted in the reduction in the
estimated costs associated with our pension plan in the United
Kingdom. See Restructuring and Other Infrequent
Expenses.
Interest expense, net was $80.0 million for 2005 compared
to $77.0 million for 2004. The increase in interest
expense, net during 2005 was due primarily to the redemption of
our $250 million
91/2% senior
notes during the second quarter of 2005. We redeemed the notes
at a price of approximately $261.9 million, which included
a premium of 4.75% over the face amount of the notes. The
premium of approximately $11.9 million and the write-off of
the remaining balance of deferred debt issuance costs associated
with the senior notes of approximately $2.2 million were
recognized in interest expense, net in the second quarter of
2005. In April 2004, we completed a common stock offering and
received net proceeds of approximately $300.1 million. We
used the net proceeds to repay borrowings under our credit
facility, as well as to repay a $100.0 million interim
bridge loan facility.
24
Other expense, net was $34.6 million in 2005 compared to
$22.1 million in 2004. Losses on sales of receivables
primarily under our securitization facilities were
$22.4 million in 2005 compared to $15.6 million in
2004. The increase during 2005 is due primarily to higher
interest rates in 2005 compared to 2004, as well as additional
outstanding funding during portions of 2005. We also experienced
foreign exchange losses during 2005 compared to foreign exchange
gains in 2004.
We recorded an income tax provision of $151.1 million in
2005 compared to $86.2 million in 2004. During the fourth
quarter of 2005, we recognized a non-cash deferred income tax
charge of $90.8 million related to increasing the valuation
allowance against our United States deferred tax assets.
Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, requires
the establishment of a valuation allowance when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. In accordance with
SFAS No. 109, we assessed the likelihood that our
deferred tax assets would be recovered from estimated future
taxable income and available income tax planning strategies and
determined that an adjustment to the valuation allowance was
appropriate. The effective tax rate excluding the non-cash
deferred income tax charge was 37.7% for 2005 compared to 38.4%
during 2004. In both years, our effective tax rate was
negatively impacted by incurring losses in tax jurisdictions
where we recorded no tax benefit. The most significant impact
related to losses incurred in the United States in 2005 and
Denmark in 2004. In 2005, we incurred losses in the United
States, in part, due to costs associated with the second quarter
redemption of our senior notes, as discussed above, as well as
lower operating margins as previously described. In 2004, we
incurred losses in Denmark primarily due to the rationalization
of our combine manufacturing operations in Randers, Denmark. At
December 31, 2005 and 2004, we had gross deferred tax
assets of $429.8 million and $430.8 million,
respectively, including $192.9 million and
$188.2 million, respectively, related to net operating loss
carryforwards. At December 31, 2005 and 2004, we had
recorded total valuation allowances as an offset to the gross
deferred tax assets of $252.8 million and
$142.9 million, respectively, primarily related to net
operating loss carryforwards in Argentina, Brazil, Denmark, and
the United States. Realization of the remaining deferred tax
assets as of December 31, 2005 depends on generating
sufficient taxable income in future periods, net of reversing
deferred tax liabilities. We believe it is more likely than not
that the remaining net deferred tax assets will be realized.
Net income for 2004 was $158.8 million, or $1.71 per
diluted share, compared to net income for 2003 of
$74.4 million, or $0.98 per diluted share. Our results
for 2004 included the following item:
|
|
|
|
|
the implementation of EITF Issue No. 04-08, which resulted
in the addition of approximately 9.0 million shares to our
weighted average shares outstanding for purposes of computing
diluted net income per share. |
Our results for 2003 included the following item:
|
|
|
|
|
restructuring and other infrequent expenses of
$27.6 million, or $0.26 per share, primarily related
to the closure of our Coventry, England manufacturing facility,
as well as the rationalization of various other manufacturing
facilities. |
Net sales for 2004 were approximately 51% higher than 2003
primarily due to the acquisition of Valtra in January 2004,
sales growth in each of our geographical segments and positive
currency translation impacts. Income from operations, including
restructuring expenses and restricted stock compensation, was
$323.5 million in 2004 compared to $184.3 million in
2003. Our operating income improved primarily due to the
contribution of Valtra of approximately $52.8 million,
higher sales volume and improved operating margins, as well as
lower restructuring and other infrequent expenses of
approximately $27.5 million compared to 2003. Offsetting
these positive factors was the impact of the weak United States
dollar, higher steel costs and additional non-cash amortization
of purchased intangible assets of approximately
$14.1 million related to the Valtra acquisition.
In our Europe/Africa/Middle East operations, operating income
improved $73.2 million in 2004 compared to 2003. The
increase reflects the contribution of Valtra, higher sales
volume, productivity gains and
25
currency translation benefits. Improved productivity and supply
chain performance in our Beauvais, France plant contributed to
better product availability and higher margins. Operating income
in our South American operations increased $65.4 million
during 2004 compared to 2003. Operating income was significantly
higher in 2004 resulting from the contribution of Valtra,
stronger end markets, production efficiencies and price
realization. In North America, operating income decreased
$7.0 million during 2004 compared to 2003. Although higher
sales volumes were achieved from improved market conditions in
North America, these benefits were offset by reduced margins due
to the impact of the weak United States dollar on products
imported from Europe and Brazil, as well as higher steel costs.
Operating income in our Asia/Pacific region increased
$9.7 million over 2003 primarily resulting from the
operating income contribution from Valtra, improved product
availability, improved market conditions and currency
translation benefits.
On January 5, 2004, we acquired the Valtra tractor and
diesel engine operations of Kone Corporation, a Finnish company,
for
604.6 million,
net of approximately
21.4 million
cash acquired (or approximately $760 million, net). Valtra
is a global tractor and off-road engine manufacturer with market
leadership positions in the Nordic region of Europe and Latin
America. This acquisition provides us with opportunity to expand
our business in significant global markets and exchange
technology between the combined companies. See
Recent Acquisitions for additional
information.
Industry demand for agricultural equipment in 2004 showed mixed
results within the major markets of the world. Conditions in the
North American market significantly improved throughout 2004 due
to record harvests, strong commodity prices and favorable tax
incentives. In Europe, demand was mixed, but relatively flat as
a whole, despite improved harvest and yields during 2004. In
South America, market demand remained strong during 2004,
however the Brazilian market experienced softening in the fourth
quarter resulting from the effects of lower commodity prices and
the weak United States dollar.
In the United States and Canada, industry unit retail sales of
tractors increased approximately 12.0% in 2004 compared to 2003,
resulting from increases in all tractor segments, with the
largest growth in the high-horsepower equipment. Industry unit
retail sales of combines increased approximately 41.0% when
compared to the prior year. Our unit retail sales of tractors
and combines in North America also increased over 2003 levels.
In Europe, industry unit retail sales of tractors increased
approximately 2.0% in 2004 compared to 2003. Retail demand
improved in France, Italy and Eastern Europe but declined in
Finland and the higher horsepower sector in Germany. Including
the impact of the Valtra acquisition in both periods, our unit
retail sales of tractors also increased during 2004 compared to
2003. In South America, industry unit retail sales of tractors
and combines in 2004 each increased approximately 8.0% compared
to 2003. Tractor demand declined slightly in Brazil but was
offset by significant increases in Argentina and other South
American markets. Including the impact of the Valtra acquisition
in both periods, our unit retail sales of tractors and combines
also increased during 2004 compared to 2003. In other
international markets, our net sales for 2004, excluding the
increase attributable to the Valtra acquisition of approximately
14.0%, were approximately 13.0% higher than the prior year,
particularly in Australia.
Net sales for 2004 were $5,273.3 million compared to
$3,495.3 million for 2003. The increase was attributable
primarily to the acquisition of Valtra in January 2004, sales
growth in each of our geographical segments and positive
currency translation impacts. Valtra generated net sales of
approximately $1,007.5 million during 2004. Currency
translation positively impacted net sales by approximately
$241.9 million, primarily due to the continued
strengthening of the Euro and Brazilian Real. The consolidation
of our GIMA joint venture beginning in July 2003 contributed to
an incremental net sales increase over the prior year of
26
approximately $35.8 million. The following table sets
forth, for the periods indicated, the impact to net sales of the
Valtra acquisition, currency translation and the consolidation
of GIMA by geographical segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change due to | |
|
|
|
|
|
|
|
|
|
|
Acquisition and | |
|
|
|
|
|
|
|
|
Currency | |
|
|
|
|
|
|
Change | |
|
Translation | |
|
|
|
|
|
|
| |
|
| |
|
|
2004 | |
|
2003 | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
1,412.5 |
|
|
$ |
1,176.2 |
|
|
$ |
236.3 |
|
|
|
20.1 |
% |
|
$ |
32.2 |
|
|
|
2.7 |
% |
South America
|
|
|
796.8 |
|
|
|
416.3 |
|
|
|
380.5 |
|
|
|
91.4 |
% |
|
|
252.7 |
|
|
|
60.7 |
% |
Europe/Africa/Middle East
|
|
|
2,873.0 |
|
|
|
1,758.8 |
|
|
|
1,114.2 |
|
|
|
63.4 |
% |
|
|
966.7 |
|
|
|
55.0 |
% |
Asia/Pacific
|
|
|
191.0 |
|
|
|
144.0 |
|
|
|
47.0 |
|
|
|
32.6 |
% |
|
|
33.6 |
|
|
|
23.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,273.3 |
|
|
$ |
3,495.3 |
|
|
$ |
1,778.0 |
|
|
|
50.9 |
% |
|
$ |
1,285.2 |
|
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regionally, net sales in North America increased during 2004
primarily due to stronger end markets, as well as favorable
response to new products and distribution. In the
Europe/Africa/Middle East region, net sales increased primarily
due to the acquisition of Valtra, incremental sales related to
the consolidation of GIMA for the full year of 2004, favorable
response to new products and distribution in the region, and
improved product availability. Net sales in South America
increased during 2004 compared to 2003 resulting from the
acquisition of Valtra, as well as significant increases in
demand in the Argentina and other South American markets and
growth in combine sales in both Brazil and Argentina. In the
Asia/Pacific region, net sales increased due to the contribution
of the Valtra acquisition and growth in most markets,
particularly in Asia and Australia. We estimate that
consolidated price increases during 2004 contributed
approximately 3% to the increase in net sales. Consolidated net
sales of tractors and combines, which consisted of approximately
71% of our sales in 2004, increased approximately 60% in 2004
compared to 2003. Unit sales of tractors and combines increased
approximately 48%, consisting of a 36% increase related to the
Valtra acquisition and a 12% increase in other equipment sales.
The difference between the unit sales increase and the increase
in net sales was the result of foreign currency translation,
pricing and sales mix changes.
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included
in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
|
|
% of Net | |
|
|
|
% of Net | |
|
|
$ | |
|
Sales | |
|
$ | |
|
Sales | |
|
|
| |
|
| |
|
| |
|
| |
Gross profit
|
|
$ |
952.9 |
|
|
|
18.1 |
% |
|
$ |
616.4 |
|
|
|
17.6 |
% |
Selling, general and administrative expense (including
$0.5 million and $0.6 million of restricted stock
compensation in 2004 and 2003, respectively)
|
|
|
509.8 |
|
|
|
9.7 |
% |
|
|
331.4 |
|
|
|
9.5 |
% |
Engineering expense
|
|
|
103.7 |
|
|
|
2.0 |
% |
|
|
71.4 |
|
|
|
2.0 |
% |
Restructuring and other infrequent expenses
|
|
|
0.1 |
|
|
|
|
|
|
|
27.6 |
|
|
|
0.8 |
% |
Amortization of intangibles
|
|
|
15.8 |
|
|
|
0.3 |
% |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$ |
323.5 |
|
|
|
6.1 |
% |
|
$ |
184.3 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit increased primarily due to the contribution of the
Valtra acquisition, higher sales volume and improved gross
margins. Gross margins improved in 2004 primarily due to
increased production and improved productivity. In particular,
improved productivity and supply chain performance in our
Beauvais, France manufacturing operations contributed to higher
margins. These positive factors were offset by lower margins in
North America due to the impact of the weak United States dollar
on products exported from our European and Brazilian facilities.
In addition, our product costs in all regions were impacted by
significant increases in steel costs in 2004. During 2004, we
increased prices in most markets, however the additional pricing
did not fully offset the higher steel costs by approximately
$10.0 million.
27
SG&A expenses increased primarily as a result of the Valtra
acquisition, the impact of currency translation and higher
pension and postretirement benefit costs. Engineering expenses
also increased as a result of the Valtra acquisition and
currency translation, as well as the introduction of new product
offerings.
The restructuring and other infrequent expenses in 2004
primarily related to charges incurred in relation to the
rationalization of our Randers, Denmark combine manufacturing
operations, as well as costs associated with various
rationalization initiatives in Europe and the United States,
offset by gains on the sale of property, plant and equipment
related to our Coventry, England facility closure, as well as a
revision to a previously established provision, which resulted
in the reduction in the estimated costs associated with our
pension plan in the United Kingdom. The restructuring expenses
in 2003 primarily related to the Coventry, England facility
closure. In addition, we recorded restructuring and other
infrequent expenses during 2003 associated with litigation
related to our pension plan in the United Kingdom. See
Restructuring and Other Infrequent
Expenses for additional information.
Interest expense, net was $77.0 million for 2004 compared
to $60.0 million for 2003. The increase in interest expense
was due primarily to higher debt levels in 2004 as a result of
the financing of the Valtra acquisition. Interest expense was
also impacted during 2004 by approximately $3.0 million of
costs associated with the repayment of our
81/2% senior
subordinated debt during the second quarter.
Other expense, net was $22.1 million in 2004 compared to
$26.0 million in 2003. Losses on sales of receivables
primarily under our securitization facilities were
$15.6 million in 2004 compared to $14.6 million in
2003. The increase during 2004 is primarily due to higher
interest rates in 2004 compared to 2003. Offsetting this
increase were lower foreign exchange losses experienced during
2004 than in 2003.
We recorded an income tax provision of $86.2 million in
2004 compared to $41.3 million in 2003. The effective tax
rate was 38.4% for 2004 compared to 42.0% during 2003. In both
years, our effective tax rate was negatively impacted by
incurring losses in tax jurisdictions where we recorded no tax
benefit. The most significant impact related to losses incurred
in Denmark in 2004 and the United States in 2003. At
December 31, 2004 and 2003, we had deferred tax assets, net
of valuation allowances, of $287.9 million and
$287.9 million, respectively, including $188.2 million
and $211.7 million, respectively, related to net operating
loss carryforwards. At December 31, 2004 and 2003, we had
recorded total valuation allowances as an offset to the deferred
tax assets of $142.9 million and $141.7 million,
respectively, primarily related to net operating loss
carryforwards in Argentina, Denmark and the United States.
28
The following table presents unaudited interim operating
results. We believe that the following information includes all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly our results of operations for the
periods presented. The operating results for any period are not
necessarily indicative of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except per share data) | |
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,256.9 |
|
|
$ |
1,574.3 |
|
|
$ |
1,233.6 |
|
|
$ |
1,384.9 |
|
Gross profit
|
|
|
219.5 |
|
|
|
271.2 |
|
|
|
219.0 |
|
|
|
223.9 |
|
Income from
operations(1)
|
|
|
53.0 |
|
|
|
109.2 |
|
|
|
58.8 |
|
|
|
53.7 |
|
Net income
(loss)(1)
|
|
|
21.5 |
|
|
|
46.1 |
|
|
|
27.8 |
|
|
|
(63.8 |
) |
Net income (loss) per common share
diluted(1)(2)
|
|
|
0.23 |
|
|
|
0.47 |
|
|
|
0.31 |
|
|
|
(0.71 |
) |
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
1,115.7 |
|
|
$ |
1,407.0 |
|
|
$ |
1,216.5 |
|
|
$ |
1,534.1 |
|
Gross profit
|
|
|
207.7 |
|
|
|
253.8 |
|
|
|
226.6 |
|
|
|
264.8 |
|
Income from
operations(1)
|
|
|
64.2 |
|
|
|
97.9 |
|
|
|
72.1 |
|
|
|
89.3 |
|
Net
income(1)
|
|
|
25.0 |
|
|
|
48.3 |
|
|
|
34.8 |
|
|
|
50.7 |
|
Net income per common share diluted
(1)(2)
|
|
|
0.31 |
|
|
|
0.50 |
|
|
|
0.36 |
|
|
|
0.52 |
|
|
|
(1) |
For 2005, the quarters ended March 31, June 30,
September 30 and December 31 include restructuring and
other infrequent expenses (income) of $1.0 million,
$(0.8) million, $0.0 million and $0.0 million,
respectively, thereby impacting net income per common share on a
diluted basis by $0.01, $(0.01), $0.00 and $0.00, respectively. |
|
|
|
For 2004, the quarters ended March 31, June 30,
September 30 and December 31 include restructuring and
other infrequent (income) expenses of $(6.6) million,
$6.0 million, $1.7 million and $(1.0) million,
respectively, thereby impacting net income per common share on a
diluted basis by $(0.05), $0.07, $0.02 and $0.00, respectively. |
|
|
(2) |
For the quarters ended March 31, June 30,
September 30, and December 31, 2004, net income per
common share diluted amounts have been presented to
include the impact of the implementation of EITF Issue
No. 04-08, which resulted in the addition of approximately
9.0 million shares for each of the quarters ended
March 31 and June 30, 2005 and March 31,
June 30, September 30 and December 31, 2004. On
June 29, 2005, we completed an exchange of our
$201.3 million aggregate principal amount of
13/4% convertible
senior subordinated notes for new notes that provide for the
settlement upon conversion in cash up to the principal amount of
the converted new notes with any excess conversion value settled
in shares of our common stock. The impact of the exchange
resulted in a reduction in the diluted weighted averages shares
outstanding of approximately 9.0 million shares on a
prospective basis. See Note 1 to our Consolidated Financial
Statements where this impact is described more fully. |
Recent Acquisitions
On January 5, 2004, we acquired the Valtra tractor and
diesel engine operations of Kone Corporation, a Finnish company,
for
604.6 million,
net of approximately
21.4 million
cash acquired (or approximately $760 million, net). Valtra
is a global tractor and off-road engine manufacturer in the
Nordic region of Europe and Latin America. The acquisition of
Valtra provided us with the opportunity to expand our business
in significant global markets by utilizing Valtras
technology and productivity leadership in the agricultural
equipment market. The acquired assets and liabilities consisted
primarily of inventories, accounts receivable, property, plant
and equipment, technology, tradenames, trademarks, customer
relationships and patents. The results of operations for the
Valtra acquisition have been included in our Consolidated
Financial Statements from the date of acquisition. The Valtra
acquisition was accounted for in accordance with
SFAS No. 141, Business Combinations, and,
accordingly, we have allocated the purchase price to the assets
acquired and the liabilities assumed based on their fair values
as of the acquisition date. We recorded approximately
$358.4 million of goodwill and approximately
$156.9 million of other identifiable intangible assets such
as tradenames, trademarks, technology and related patents, and
customer relationship intangibles as part of the
29
purchase price allocation. We completed the initial funding of
the cash purchase price of Valtra through the issuance of our
$201.3 million aggregate principal amount of
13/4% convertible
senior subordinated notes in December 2003, funds borrowed under
revolving credit and term loan facilities that were entered into
January 5, 2004, and $100.0 million borrowed under an
interim bridge facility that was also closed on January 5,
2004. The interim bridge facility was subsequently repaid in
April 2004 upon completion of a common stock offering. See
Liquidity and Capital Resources for
additional information.
Restructuring and Other Infrequent Expenses
We recorded restructuring and other infrequent expenses of
$0.0 million, $0.1 million and $27.6 million for
the years ended December 31, 2005, 2004 and 2003,
respectively. The net charges in 2005 include a
$1.5 million gain on the sale of property, plant and
equipment related to the completion of auctions of machinery and
equipment associated with the rationalization of our Randers,
Denmark combine manufacturing operations, announced in July
2004. The gain was offset by $0.8 million of employee
retention payments and facility closure costs incurred
associated with the Randers rationalization, as well as
$0.7 million of severance, asset write-downs and other
facility closure costs related to the rationalization of our
Finnish tractor manufacturing, sales and parts operations. We
did not record an income tax benefit or provision associated
with the charges or gain relating to the Randers rationalization
during 2005. The 2004 net charges consisted of an
$8.2 million pre-tax write-down of property, plant and
equipment associated with the Randers rationalization,
$3.3 million of severance and facility closure costs
associated with the Randers rationalization, a $1.4 million
charge associated with the rationalization of certain
administrative functions within our Finnish tractor
manufacturing facility, as well as $0.5 million of charges
associated with various rationalization initiatives in Europe
and the United States initiated in 2002, 2003 and 2004. These
charges were offset by gains on the sale of our Coventry,
England manufacturing facility and related machinery and
equipment of $8.3 million, $0.9 million of
restructuring reserve reversals related to the Coventry closure
and a reversal of $4.1 million of the previously
established provision related to litigation involving our U.K.
pension plan. We did not record an income tax benefit associated
with the charges relating to the Randers rationalization during
2004. The 2003 expense consisted of a $12.0 million charge
associated with the closure of our Coventry manufacturing
facility, a $12.4 million charge associated with our U.K.
pension plan, $2.5 million of costs associated with the
closure of our DeKalb, Illinois manufacturing facility,
$1.2 million of charges associated with various functional
rationalizations initiated during 2002 and 2003 and a
$1.5 million write-down of real estate associated with our
closed Willmar, Minnesota facility, offset by a
$2.0 million gain related to the sale of machinery and
equipment at auction from the Coventry facility. See Note 3
to our Consolidated Financial Statements for additional
information.
|
|
|
Valtra European sales office rationalizations |
During the second quarter of 2005, we announced a change in our
distribution of our Valtra and Fendt products in Scandinavia by
entering into a distribution agreement with a third-party
distributor to distribute Valtra and Fendt equipment in Sweden
and Valtra equipment in Norway and Denmark. As a result of this
agreement and the decision to close other Valtra European sales
offices, we initiated the restructuring and closure of our
Valtra sales offices located in the United Kingdom, Spain,
Denmark and Norway, resulting in the termination of
approximately 24 employees. The Danish and Norwegian sales
operations were transferred to the third-party Scandinavian
equipment distributor in October 2005, which included the
transfer of certain employees, assets and lease and supplier
contracts. We recorded severance costs, asset write-downs and
other facility closure costs of approximately $0.4 million,
$0.1 million and $0.1 million, respectively, related
to these closures during 2005. During the fourth quarter of
2005, we completed the sale of property, plant and equipment
associated with the sales offices in the United Kingdom and
Norway, and recorded a gain of approximately $0.2 million,
which was reflected within Restructuring and other
infrequent expenses within our Consolidated Statements of
Operations. As of December 31, 2005, 10 of the 24 employees
had been terminated. These rationalizations were completed to
improve our ongoing cost structure and SG&A expenses. These
rationalizations are more fully described in Note 3 to our
Consolidated Financial Statements.
30
|
|
|
Valtra Finland administrative and European parts
rationalizations |
During the fourth quarter of 2004, we initiated the
restructuring of certain administrative functions within our
Finnish operations, resulting in the termination of
approximately 58 employees. During 2004, we recorded severance
costs of approximately $1.4 million associated with this
rationalization. We recorded an additional $0.1 million of
severance costs during the first quarter of 2005 associated with
this rationalization, and during the fourth quarter of 2005, we
reversed $0.1 million of previously established provisions
related to severance costs as severance claims were finalized
during the quarter. As of December 31, 2005, 56 of the 58
employees had been terminated. In addition, during 2005, we
incurred and expensed approximately $0.3 million of
contract termination costs associated with the rationalization
of our Valtra European parts distribution operations. These
rationalizations were completed to improve our ongoing cost
structure and SG&A expenses. These rationalizations are more
fully described in Note 3 to our Consolidated Financial
Statements.
|
|
|
Randers, Denmark rationalization |
In July 2004, we announced and initiated a plan to restructure
our European combine manufacturing operations located in
Randers, Denmark. The restructuring plan will reduce the cost
and complexity of the Randers manufacturing operation by
simplifying the model range and eliminating the facilitys
component manufacturing operations. Component manufacturing
operations ceased in February 2005. We now outsource
manufacturing of the majority of parts and components to
suppliers and have retained critical key assembly operations at
the Randers facility. By retaining only the facility assembly
operations, we reduced the Randers workforce by 298 employees
and permanently eliminated 70% of the square footage utilized.
Our plans also included a rationalization of the combine model
range assembled in Randers, retaining the production of the high
specification, high value combines. We estimate that the
restructuring plan will generate annual savings of approximately
$7 million to $8 million by 2006, with achieved
savings in 2005 of approximately $6.6 million. These
savings will primarily impact cost of goods sold. Total cash
restructuring costs were approximately $4 million. During
2004, we recorded an $8.2 million write-down of property,
plant and equipment, as well as $3.3 million of severance
costs, employee retention payments and facility closure costs.
We also recorded approximately $3.7 million of inventory
write-downs during 2004, reflected in costs of goods sold,
related to inventory that was identified as obsolete as a result
of the restructuring plan. During 2005, we recorded an
additional $0.8 million of restructuring costs related to
the rationalization, primarily related to employee retention
payments and other facility closure costs. During the second
quarter of 2005, we completed auctions of remaining machinery
and equipment and recorded a gain of approximately
$1.5 million associated with such actions. The gain was
reflected in Restructuring and other infrequent
expenses within our Consolidated Statements of Operations.
As of December 31, 2005, all of the 298 employees had been
terminated. The components of the restructuring expenses
incurred during 2004 and 2005 are summarized in Note 3 to
our Consolidated Financial Statements.
During 2002, we announced and initiated a restructuring plan
related to the closure of our tractor manufacturing facility in
Coventry, England and the relocation of existing production at
Coventry to our Beauvais, France and Canoas, Brazil
manufacturing facilities, resulting in the termination of 1,049
employees. The closure of this facility was consistent with our
strategy to reduce excess manufacturing capacity. In 2003, we
completed the transfer of production to our Beauvais facility,
although we experienced cost inefficiencies and production
delays primarily due to supplier delivery issues. Those issues
were largely corrected in 2004. We estimate that we have reduced
manufacturing overhead costs as a result of the Coventry
rationalization project by approximately $20 million when
adjusted for changes in production volume from year to year.
Approximately $12.0 million of restructuring and other
infrequent expenses were recorded associated with this
rationalization during 2003, primarily related to employee
retention payments. During 2004, we recorded a gain of
$6.9 million on the sale of our Coventry, England facility,
as well as gains totaling approximately $2.3 million
related to the sale of machinery and equipment at the Coventry
facility and certain Coventry closure reserve reductions. During
2004, we also recorded a $4.1 million reversal of a
previously established
31
provision related to our pension plan in the United Kingdom. The
components of the restructuring expenses incurred related to the
Coventry rationalization are summarized in Note 3 to our
Consolidated Financial Statements.
In October 2002, we applied to the High Court in London,
England, for clarification of a provision in our U.K. pension
plan that governs the value of pension payments payable to an
employee who is over 50 years old and who retires from
service in certain circumstances prior to his normal retirement
date. The primary matter before the High Court was whether
pension payments to such employees, including those who take
early retirement and those terminated due to the closure of our
Coventry facility, should be reduced to compensate for the fact
that the pension payments begin prior to a normal retirement age
of 65. In July 2003, a U.K. Court of Appeal ruled that employees
terminated as a result of the closure of the Coventry facility
do not qualify for full pensions, but ruled that other employees
might qualify.
As a result of the ruling in that case, certain employees who
took early retirement in prior years under voluntary retirement
arrangements would be entitled to additional payments, and
therefore we recorded a charge in the second quarter of 2003,
included in Restructuring and other infrequent
expenses, of approximately £7.5 million (or
approximately $12.4 million) to reflect our estimate of the
additional pension liability associated with previous early
retirement programs. Subsequently, as full details of the Court
of Appeal judgment were published, we received more detailed
legal advice regarding the specific circumstances in which the
past voluntary retirements would be subject to the Courts
ruling. Based on this advice, we completed a detailed review of
past terminations during the fourth quarter of 2004, and
concluded that the number of former employees who are considered
to be eligible to receive enhanced pensions under the
Courts ruling was lower than our initial estimate. We
therefore recorded a reversal of the established provision of
approximately £2.5 million (or approximately
$4.1 million) during the fourth quarter of 2004, which was
included in Restructuring and other infrequent
expenses in our Consolidated Statements of Operations.
In March 2003, we announced the closure of our Challenger track
tractor facility located in DeKalb, Illinois and the relocation
of production to our facility in Jackson, Minnesota. Production
at the DeKalb facility ceased in May 2003 and was relocated and
resumed in the Minnesota facility in June 2003. The DeKalb plant
assembled Challenger track tractors in the range of 235 to 500
horsepower. After a review of cost reduction alternatives, it
was determined that current and future production levels at that
time were not sufficient to support a stand-alone track tractor
site. In connection with the restructuring plan, we recorded
approximately $2.5 million of restructuring and other
infrequent expenses during 2003, which included the termination
of approximately 135 employees. We estimate that we have
reduced costs by approximately $8.0 million as a result of
the closure. We sold the DeKalb facility real estate during the
fourth quarter of 2004 for approximately $3.0 million
before associated selling costs, and recorded a net loss on the
sale of the facilities of approximately $0.1 million. The
loss was reflected in Restructuring and other infrequent
expenses in our Consolidated Statements of Operations. The
components of the restructuring expenses incurred during 2003
are more fully described in Note 3 to our Consolidated
Financial Statements.
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|
2002, 2003 and 2004 Functional Rationalizations |
In addition, during 2002 through 2004, we initiated several
rationalization plans and recorded restructuring and other
infrequent expenses which in aggregate totaled approximately
$5.0 million during 2002, 2003 and 2004. The expenses
primarily related to severance costs and certain lease
termination and other exit costs associated with the
rationalization of our European engineering and marketing
personnel, the rationalization of certain components of our
German manufacturing facilities located in Kempten and
Marktoberdorf, Germany, the rationalization of our European
combine engineering operations and the closure and consolidation
of our Valtra United States and Canadian sales organizations.
These rationalizations were completed to improve our ongoing
cost structure and to reduce cost of goods sold, as well as
engineering and SG&A expenses. These expenses are discussed
more fully in Note 3 to our Consolidated Financial
Statements.
32
Critical Accounting Policies
We prepare our Consolidated Financial Statements in conformity
with U.S. generally accepted accounting principles. In the
preparation of these financial statements, we make judgments,
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The significant accounting policies followed in the
preparation of the financial statements are detailed in
Note 1 in the notes to our Consolidated Financial
Statements. We believe that our application of the policies
discussed below involves significant levels of judgments,
estimates and complexity.
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Allowance for Doubtful Accounts |
We determine our allowance for doubtful accounts by actively
monitoring the financial condition of our customers to determine
the potential for any nonpayment of trade receivables. In
determining our allowance for doubtful accounts, we also
consider other economic factors, such as aging trends. We
believe that our process of specific review of customers
combined with overall analytical review provides an effective
evaluation of ultimate collectibility of trade receivables. Our
loss experience was approximately 0.1% of net sales in 2005.
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Discount and Sales Incentive Allowances |
Allowances for discounts and sales incentives are made at the
time of sale based on retail sales incentive programs available
to the dealer or retail customer. The cost of these programs
depends on various factors including the timing of the retail
sale and the programs in place at that time. These retail sales
incentives may also be revised between the time we record the
sale and the time the retail sale occurs. We monitor these
factors and revise our provisions when necessary. At
December 31, 2005, we had recorded an allowance for
discounts and sales incentives of approximately
$90.8 million. If we were to allow an additional 1% of
sales incentives and discounts at the time of retail sale, our
reserve would increase by approximately $6.8 million as of
December 31, 2005. Conversely, if we were to decrease our
sales incentives and discounts by 1% at the time of retail sale,
our reserve would decrease by approximately $6.8 million as
of December 31, 2005.
Inventories are valued at the lower of cost or market.
Determination of cost includes estimates for surplus and
obsolete inventory based on estimates of future sales and
production. Changes in demand and product design can impact
these estimates. We periodically evaluate and update our
assumptions when assessing the adequacy of inventory adjustments.
We establish valuation allowances for deferred tax assets when
we estimate it is more likely than not that the tax assets will
not be realized. We base these estimates on projections of
future income, including tax-planning strategies, in certain tax
jurisdictions. Changes in industry conditions and the
competitive environment may impact the accuracy of our
projections. SFAS No. 109 requires the establishment
of a valuation allowance when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. In accordance with SFAS No. 109, we
periodically assess the likelihood that our deferred tax assets
will be recovered from estimated future taxable income and
available tax planning strategies and determine if adjustments
to the valuation allowance are appropriate. As a result of these
assessments, there are certain tax jurisdictions where we do not
benefit further losses. We have not benefited losses generated
in the United States in 2003, 2004 and 2005 or with respect to
the losses incurred in Denmark in 2004. During the fourth
quarter of 2005, we recognized a non-cash deferred income tax
charge of $90.8 million related to increasing the valuation
allowance against our United States deferred tax assets. In
accordance with SFAS No. 109, we assessed the
likelihood that our United States deferred tax assets would be
recovered from future taxable income and determined that an
adjustment to the valuation allowance was appropriate. At
December 31, 2005 and 2004, we had gross deferred tax
assets of $429.8 million and $430.8 million,
33
respectively, including $192.9 million and
$188.2 million, respectively, related to net operating loss
carryforwards. At December 31, 2005 and 2004, we had
recorded total valuation allowances as an offset to the gross
deferred tax assets of $252.8 million and
$142.9 million, respectively, primarily related to net
operating loss carryforwards in Argentina, Brazil, Denmark, and
the United States. Realization of the remaining deferred tax
assets as of December 31, 2005 depends on generating
sufficient taxable income in future periods, net of reversing
deferred tax liabilities. We believe it is more likely than not
that the remaining net deferred tax assets will be realized.
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Warranty and Additional Service Actions |
We make provisions for estimated expenses related to product
warranties at the time products are sold. We base these
estimates on historical experience of the nature, frequency and
average cost of warranty claims. In addition, the number and
magnitude of additional service actions expected to be approved,
and policies related to additional service actions, are taken
into consideration. Due to the uncertainty and potential
volatility of these estimated factors, changes in our
assumptions could materially affect net income.
Our estimate of warranty obligations is reevaluated on a
quarterly basis. Experience has shown that initial data for any
product series line can be volatile; therefore, our process
relies upon long-term historical averages until sufficient data
is available. As actual experience becomes available, it is used
to modify the historical averages to ensure that the forecast is
within the range of likely outcomes. Resulting balances are then
compared with present spending rates to ensure that the accruals
are adequate to meet expected future obligations.
See Note 1 to our Consolidated Financial Statements for
more information regarding costs and assumptions for warranties.
We provide insurance reserves for our estimates of losses due to
claims for workers compensation, product liability and
other liabilities for which we are self-insured. We base these
estimates on the ultimate settlement amount of claims, which
often have long periods of resolution. We closely monitor the
claims to maintain adequate reserves.
We have defined benefit pension plans covering certain employees
principally in the United States, the United Kingdom, Germany,
Finland, Norway, France, Australia and Argentina. See
Note 8 to our Consolidated Financial Statements for more
information regarding costs and assumptions for employee
retirement benefits.
Nature of Estimates Required The measurement
of our pension obligations, costs and liabilities is dependent
on a variety of assumptions used by our actuaries as provided by
management. These assumptions include estimates of the present
value of projected future pension payments to all plan
participants, taking into consideration the likelihood of
potential future events such as salary increases and demographic
experience. These assumptions may have an effect on the amount
and timing of future contributions.
Assumptions and Approach Used The assumptions
used in developing the required estimates include the following
key factors:
|
|
|
Discount rates
|
|
Inflation |
Salary growth
|
|
Expected return on plan assets |
Retirement rates
|
|
Mortality rates |
We base the discount rate used to determine the projected
benefit obligation for our U.S. pension plans on the
Moodys Investor Service Aa bond yield as of
December 31 of each year. For our
non-U.S. plans, we
base the discount rate on comparable indices within each of
those countries, such as the
15-year iBoxx AA
corporate bond yield in the United Kingdom. The indices used in
the United States, the United Kingdom and
34
other countries were chosen to match our expected plan
obligations and related expected cash flows. The measurement
date with respect to our U.K. pension plan is September 30
of each year. Our inflation assumption is based on an evaluation
of external market indicators. The salary growth assumptions
reflect our long-term actual experience, the near-term outlook
and assumed inflation. The expected return on plan assets
assumptions reflects asset allocations, investment strategy,
historical experience and the views of investment managers.
Retirement and mortality rates are based primarily on actual
plan experience. The effects of actual results differing from
our assumptions are accumulated and amortized over future
periods and, therefore, generally affect our recognized expense
in such periods.
Our U.S. and U.K. pension plans represent approximately 92% of
our consolidated projected benefit obligation as of
December 31, 2005. If the discount rate used to determine
the 2005 projected benefit obligation for our U.S. plans
was decreased by 25 basis points, our projected benefit
obligation would have increased by approximately
$1.4 million at December 31, 2005, and our 2006
pension expense would increase by a nominal amount. If the
discount rate used to determine the 2005 projected benefit
obligation for our U.S. plans was increased by
25 basis points, our projected benefit obligation would
have decreased by approximately $1.3 million, and our 2006
pension expense would decrease by a nominal amount. If the
discount rate used to determine the projected benefit obligation
for our U.K. plan was decreased by 25 basis points, our
projected benefit obligation would have increased by
approximately $26.5 million at December 31, 2005, and
our 2006 pension expense would increase by approximately
$2.1 million. If the discount rate used to determine the
projected benefit obligation for our U.K. plan was increased by
25 basis points, our projected benefit obligation would
have decreased by approximately $24.5 million at
December 31, 2005, and our 2006 pension expense would
decrease by approximately $1.9 million.
Unrecognized actuarial losses related to our pension plans were
$251.3 million as of December 31, 2005 as compared to
$244.3 million as of December 31, 2004. The increase
in unrecognized losses between years primarily reflects
declining discount rates worldwide, partially offset by gains as
a result of better than expected asset returns and favorable
currency translation. The unrecognized actuarial losses will be
impacted in future periods by actual asset returns, discount
rate changes, currency exchange rate fluctuations, actual
demographic experience and certain other factors. These losses
will be amortized on a straight-line basis over the average
remaining service period of active employees expected to receive
benefits under most of our defined benefit pension plans. For
some plans, the population covered is predominantly inactive
participants, and losses related to those plans will be
amortized over the average remaining lifetimes of those
participants while covered by the respective plan. As of
December 31, 2005, the average amortization period was
16 years for our U.S. pension plans, and 11 years
for our
non-U.S. pension
plans. We expect our amortization of net actuarial losses to
increase approximately $1.6 million in 2006 as compared to
2005, primarily due to the decrease in discount rates.
The weighted average asset allocation of our U.S. pension
benefit plans at December 31, 2005 and 2004 are as follows:
|
|
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|
|
|
|
|
|
Asset Category |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Large cap domestic equity securities
|
|
|
47% |
|
|
|
46% |
|
International equity securities
|
|
|
12% |
|
|
|
11% |
|
Domestic fixed income securities
|
|
|
28% |
|
|
|
32% |
|
Other investments
|
|
|
13% |
|
|
|
11% |
|
|
|
|
|
|
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
|
|
|
|
|
35
The weighted average asset allocation of our
non-U.S. pension
benefit plans at December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
Asset Category |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Equity securities
|
|
|
51% |
|
|
|
49% |
|
Fixed income securities
|
|
|
38% |
|
|
|
40% |
|
Other investments
|
|
|
11% |
|
|
|
11% |
|
|
|
|
|
|
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
|
|
|
|
|
All tax-qualified pension fund investments in the United States
are held in the AGCO Corporation Master Pension Trust. Our
global pension fund strategy is to diversify investments across
broad categories of equity and fixed income securities with
appropriate use of alternative investment categories to minimize
risk and volatility. Our U.S. target allocation of
retirement fund investments is 50% large cap domestic equity
securities, 10% international equity securities, 25% domestic
fixed income securities, and 15% invested in other investments.
We have noted that over very long periods, this mix of
investments would achieve an average return in excess of 9%. In
arriving at the choice of an expected return assumption of 8%
for our U.S.-based
plans, we have tempered this historical indicator with lower
expectations for returns on equity investments in the future, as
well as considered administrative costs of the plans. To date,
we have not invested pension funds in our own stock, and we have
no intention of doing so in the future. Our
non-U.S. target
allocation of retirement fund investments is 50% equity
securities, 35% fixed income securities and 15% percent invested
in other investments. The majority of our
non-U.S. pension
fund investments are related to our pension plan in the United
Kingdom. We have noted that over very long periods, this target
mix of investments would achieve an average return in excess of
7.3%. In arriving at the choice of an expected return assumption
of 7% for our U.K. pension plan, we have tempered this
historical indicator with a slightly lower expectation of future
returns on equity investments.
As of December 31, 2005, we had approximately
$248.4 million in unfunded or underfunded obligations
related to our pension plans, due primarily to our pension plans
in the United States and the United Kingdom. In 2005, we
contributed approximately $27.3 million towards those
obligations, and we expect to fund at least approximately
$22.0 million in 2006. Future funding is dependent upon
compliance with local laws and regulations and changes to those
laws and regulations in the future, as well as the generation of
operating cash flows in the future. We currently have an
agreement in place with the trustees of the U.K. defined benefit
plan, which obligates us to fund approximately £10.0 to
£12.0 million per year (or approximately $17.0 to
$21.0 million) towards that obligation for the next
13 years. The funding arrangement is based upon the current
underfunded status and could change in the future as discount
rates, local laws and regulations and other factors change.
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Other Postretirement Benefits (Retiree Health Care and
Life Insurance) |
We provide certain postretirement health care and life insurance
benefits for certain employees principally in the United States.
See Note 8 to our Consolidated Financial Statements for
more information regarding costs and assumptions for other
postretirement benefits.
Nature of Estimates Required. The measurement of our
obligations, costs and liabilities associated with other
postretirement benefits, such as retiree health care and life
insurance, requires that we make use of estimates of the present
value of the projected future payments to all participants,
taking into consideration the likelihood of potential future
events such as health care cost increases, salary increases and
demographic experience, which may have an effect on the amount
and timing of future payments.
36
Assumptions and Approach Used. The assumptions used in
developing the required estimates include the following key
factors:
|
|
|
Health care cost trends
|
|
Inflation |
Discount rates
|
|
Expected return on plan assets |
Salary growth
|
|
Mortality rates |
Retirement rates
|
|
|
Our health care cost trend assumptions are developed based on
historical cost data, the near-term outlook, efficiencies and
other cost-mitigating actions (including further employee cost
sharing, administrative improvements and other efficiencies) and
an assessment of likely long-term trends. We base the discount
rate used to determine the projected benefit obligation for our
U.S. postretirement benefit plans on the Moodys
Investor Service Aa bond yield as of December 31 of each
year. The index used was chosen to match our expected plan
obligations and related expected cash flows. Our inflation
assumption is based on an evaluation of external market
indicators. The salary growth assumptions reflect our long-term
actual experience, the near-term outlook and assumed inflation.
Retirement and mortality rates are based primarily on actual
plan experience. The effects of actual results differing from
our assumptions are accumulated and amortized over future
periods and, therefore, generally affect our recognized expense
in such future periods.
If the discount rate used to determine the 2005 projected
benefit obligation for our U.S. postretirement benefit
plans was decreased by 25 basis points, our projected
benefit obligation would have increased by approximately
$0.9 million at December 31, 2005, and our 2006
postretirement benefit expense would increase by a nominal
amount. If the discount rate used to determine the 2005
projected benefit obligation for our U.S. postretirement
benefit plans was increased by 25 basis points, our
projected benefit obligation would have decreased by
approximately $0.9 million, and our 2006 pension expense
would decrease by a nominal amount.
Unrecognized actuarial losses related to our
U.S. postretirement benefit plans were $10.1 million
as of December 31, 2005 compared to $19.1 million as
of December 31, 2004. The decrease in losses primarily
reflects the impact of the federal Medicare subsidy under the
Medicare Modernization Act of 2003, as well as changes made to
some of our retiree welfare programs during 2004 and 2005, but
was partially offset by the reduction in the discount rate. The
unrecognized actuarial losses will be impacted in future periods
by discount rate changes, actual demographic experience, actual
health care inflation and certain other factors. These losses
will be amortized on a straight-line basis over the average
remaining service period of active employees expected to receive
benefits, or the average remaining lifetime of inactive
participants, covered under the postretirement benefit plans. As
of December 31, 2005, the average amortization period was
12 years for our U.S. postretirement benefit plans. We
expect our amortization of net actuarial losses to decrease
approximately $0.5 million in 2006 as compared to 2005,
primarily due to the federal subsidy benefits and changes made
to the postretirement programs.
For measuring the expected postretirement benefit obligation at
December 31, 2005, a 9% health care cost trend rate was
assumed for 2006, decreasing 1.0% per year to 5.0% and
remaining at that level thereafter. Changing the assumed health
care cost trend rates by one percentage point each year and
holding all other assumptions constant would have the following
effect to service and interest cost for 2005 and the accumulated
postretirement benefit obligation at December 31, 2005 (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
|
|
$ |
3.5 |
|
|
$ |
(3.0 |
) |
37
We are party to various claims and lawsuits arising in the
normal course of business. We closely monitor these claims and
lawsuits and frequently consult with our legal counsel to
determine whether or not they may, when resolved, have a
material adverse effect on our financial position or results of
operations.
|
|
|
Goodwill and Indefinite-Lived Assets |
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), establishes a
method of testing goodwill and other indefinite-lived intangible
assets for impairment on an annual basis or on an interim basis
if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Our
initial assessment and our annual assessments involve
determining an estimate of the fair value of our reporting units
in order to evaluate whether an impairment of the current
carrying amount of goodwill and other indefinite-lived
intangible assets exists. Fair values are derived based on an
evaluation of past and expected future performance of our
reporting units. A reporting unit is an operating segment or one
level below an operating segment (e.g., a component). A
component of an operating segment is a reporting unit if the
component constitutes a business for which discrete financial
information is available and our executive management team
regularly reviews the operating results of that component. In
addition, we combine and aggregate two or more components of an
operating segment as a single reporting unit if the components
have similar economic characteristics. Our reportable segments
reported under the guidance of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, are not our reporting units, with the
exception of our Asia/ Pacific geographical segment.
We utilized a combination of valuation techniques, including a
discounted cash flow approach, a market multiple approach and a
comparable transaction approach when making our initial and
subsequent annual and interim assessments. As stated above,
goodwill is tested for impairment on an annual basis and more
often if indications of impairment exist. The results of our
analyses conducted as of October 1, 2005, 2004 and 2003
indicated that no reduction in the carrying amount of goodwill
was required.
Due to the level of judgment, complexity and period of time over
which many of these items are resolved, actual results could
differ from those estimated at the time of preparation of the
financial statements. Adjustments to these estimates would
impact our financial position and future results of operations.
Liquidity and Capital Resources
Our financing requirements are subject to variations due to
seasonal changes in inventory and receivable levels. Internally
generated funds are supplemented when necessary from external
sources, primarily our revolving credit facility and accounts
receivable securitization facilities.
Our current financing and funding sources, with balances
outstanding as of December 31, 2005, are our
$201.3 million principal amount
13/4% convertible
senior subordinated notes due 2033,
200.0 million
(or approximately $237.0 million) principal amount
67/8% senior
subordinated notes due 2014, approximately $480.3 million
of accounts receivable securitization facilities, a
$300.0 million multi-currency revolving credit facility, a
$272.5 million term loan facility and a
108.9 million
(or approximately $129.0 million) term loan facility.
On December 23, 2003, we sold $201.3 million of
13/4% convertible
senior subordinated notes due 2033 under a private placement
offering. The notes were unsecured obligations and were
convertible into shares of our common stock upon satisfaction of
certain conditions, as discussed below. Interest is payable on
the notes at
13/4% per
annum, payable semi-annually in arrears in cash on June 30
and December 31 of each year. The notes were convertible
into shares of our common stock at an effective price of
$22.36 per share, subject to adjustment. On June 29,
2005, we exchanged the notes for new notes which provide for
(i) the settlement upon conversion in cash up to the
principal amount of the converted new notes with any excess
conversion value settled in shares of our common stock, and
(ii) the conversion rate to be increased under certain
circumstances if the new notes are converted in connection with
certain change of control transactions occurring prior to
December 10, 2010, but otherwise are substantially the same
as the old notes. Holders may
38
convert the notes only under the following circumstances:
(1) during any fiscal quarter, if the closing sales price
of our common stock exceeds 120% of the conversion price for at
least 20 trading days in the 30 consecutive trading days ending
on the last trading day of the preceding fiscal quarter;
(2) during the five business day period after a five
consecutive trading day period in which the trading price per
note for each day of that period was less than 98% of the
product of the closing sale price of our common stock and the
conversion rate; (3) if the notes have been called for
redemption; or (4) upon the occurrence of certain corporate
transactions. Beginning January 1, 2011, we may redeem any
of the notes at a redemption price of 100% of their principal
amount, plus accrued interest. Holders of the notes may require
us to repurchase the notes at a repurchase price of 100% of
their principal amount, plus accrued interest, on
December 31, 2010, 2013, 2018, 2023 and 2028.
The impact of the exchange completed in June 2005, as discussed
above, will be to reduce the diluted weighted average shares
outstanding in future periods. The initial reduction in the
diluted shares was approximately 9.0 million shares but
will vary in the future based on our stock price, once the
market price trigger or other specified conversion circumstances
have been met. Although we do not currently have in place a
financial facility with which to pay the cash amount due upon
maturity or conversion of the new notes, our financial position
currently is sufficiently strong enough that we would expect to
have ready access to a bank loan facility or the broader debt
and equity markets to the extent needed. Typically, convertible
securities are not converted prior to expiration unless called
for redemption, which we would not do if sufficient funds were
not available to us. As a result, we do not expect the new notes
to be converted in the foreseeable future.
On January 5, 2004, we entered into a new credit facility
that provides for a $300.0 million multi-currency revolving
credit facility, a $300.0 million United States dollar
denominated term loan and a
120.0 million
Euro denominated term loan. The maturity date of the revolving
credit facility was automatically extended from March 2008 to
December 2008 due to the redemption of our
91/2% senior
notes on June 23, 2005. We were required to prepay
approximately $22.3 million of the United States dollar
denominated term loan and
9.0 million
of the Euro denominated term loan as a result of excess proceeds
received from our common stock public offering in April 2004. We
are required to make quarterly payments towards the United
States dollar denominated term loan and Euro denominated term
loan of $0.75 million and
0.3 million,
respectively (or an amortization of one percent per annum until
the maturity date of each term loan). The maturity date for the
term loans was automatically extended from March 2008 to June
2009 due to the redemption of our
91/2% senior
notes on June 23, 2005. The revolving credit and term loan
facilities are secured by a majority of our U.S., Canadian,
Finnish and U.K. based assets and a pledge of a
portion of the stock of our domestic and material foreign
subsidiaries. Interest accrues on amounts outstanding under the
revolving credit facility, at our option, at either
(1) LIBOR plus a margin ranging between 1.50% and 2.25%
based upon our senior debt ratio or (2) the higher of the
administrative agents base lending rate or one-half of one
percent over the federal funds rate plus a margin ranging
between 0.25% and 1.0% based on our senior debt ratio. Interest
accrues on amounts outstanding under the term loans at LIBOR
plus 1.75%. The credit facility contains covenants restricting,
among other things, the incurrence of indebtedness and the
making of certain payments, including dividends. We also must
fulfill financial covenants including, among others, a total
debt to EBITDA ratio, a senior debt to EBITDA ratio and a fixed
charge coverage ratio, as defined in the facility. As of
December 31, 2005, we had total borrowings of
$401.5 million under the credit facility, which included
$272.5 million under the United States dollar denominated
term loan facility and
108.9 million
(approximately $129.0 million) under the Euro denominated
term loan facility. As of December 31, 2005, we had
availability to borrow $292.9 million under the revolving
credit facility. As of December 31, 2004, we had total
borrowings of $424.7 million under the credit facility,
which included $275.5 million under the United States
dollar denominated term loan facility and
110.1 million
(approximately $149.2 million) under the Euro denominated
term loan facility. As of December 31, 2004, we had
availability to borrow $291.2 million under the revolving
credit facility. On March 22, 2005, we amended the term
loan agreements to, among other reasons, lower the borrowing
rate by 25 basis points from LIBOR plus 2.00% to LIBOR plus
1.75%.
On April 7, 2004, we sold 14,720,000 shares of our
common stock in an underwritten public offering and received net
proceeds of approximately $300.1 million. We used the net
proceeds to repay a $100.0 million
39
interim bridge loan facility that we used in part to acquire
Valtra, to repay borrowings under our credit facility and to pay
offering related fees and expenses.
On April 23, 2004, we sold
200.0 million
of
67/8% senior
subordinated notes due 2014 and received proceeds of
approximately $234.0 million, after offering related fees
and expenses. The
67/8% senior
subordinated notes are unsecured obligations and are
subordinated in right of payment to any existing or future
senior indebtedness. Interest is payable on the notes
semi-annually on April 15 and October 15 of each year, beginning
October 15, 2004. Beginning April 15, 2009, we may
redeem the notes, in whole or in part, initially at 103.438% of
their principal amount, plus accrued interest, declining to 100%
of their principal amount, plus accrued interest, at any time on
or after April 15, 2012. In addition, before April 15,
2009, we may redeem the notes, in whole or in part, at a
redemption price equal to 100% of the principal amount, plus
accrued interest and a make-whole premium. Before April 15,
2007, we also may redeem up to 35% of the notes at 106.875% of
their principal amount using the proceeds from sales of certain
kinds of capital stock. The notes include covenants restricting
the incurrence of indebtedness and the making of certain
restricted payments, including dividends.
We used the net proceeds received from the issuance of the
67/8% senior
subordinated notes, as well as available cash, to redeem our
$250.0 million principal amount of
81/2% senior
subordinated notes on May 24, 2004.
We redeemed our $250 million
91/2% senior
notes on June 23, 2005 at a price of approximately
$261.9 million, which represented a premium of 4.75% over
the senior notes face amount. The premium of approximately
$11.9 million was reflected in interest expense, net during
the second quarter of 2005. In connection with the redemption,
we also wrote off the remaining balance of deferred debt
issuance costs of approximately $2.2 million. The funding
sources for the redemption was a combination of cash generated
from the transfer of wholesale interest-bearing receivables to
our United States and Canadian retail finance joint ventures,
AGCO Finance LLC and AGCO Finance Canada, Ltd. (as discussed
further below), revolving credit facility borrowings and
available cash on hand.
Under our securitization facilities, we sell accounts receivable
in the United States, Canada and Europe on a revolving basis to
commercial paper conduits either on a direct basis or through a
wholly-owned special purpose entity. The United States and
Canadian securitization facilities expire in April 2009 and the
European facility expires in June 2006, but each is subject to
annual renewal. As of December 31, 2005, the aggregate
amount of these facilities was $480.3 million. The
outstanding funded balance of $462.7 million as of
December 31, 2005 has the effect of reducing accounts
receivable and short-term liabilities by the same amount. Our
risk of loss under the securitization facilities is limited to a
portion of the unfunded balance of receivables sold, which is
approximately 15% of the funded amount. We maintain reserves for
doubtful accounts associated with this risk. If the facilities
were terminated, we would not be required to repurchase
previously sold receivables but would be prevented from selling
additional receivables to the commercial paper conduit. The
European facility agreement provides that the agent, Rabobank,
has the right to terminate the securitization facilities if our
senior unsecured debt rating moves below B+ by
Standard & Poors or B1 by Moodys Investor
Services. Based on our current ratings, a downgrade of two
levels by Standard & Poors or two levels by
Moodys would need to occur. We are currently in
discussions with the conduit purchaser to eliminate the
requirement to maintain certain debt rating levels from Standard
and Poors and Moodys Investors Service from the
agreement and to extend the European facility through June 2011.
These facilities allow us to sell accounts receivables through
financing conduits which obtain funding from commercial paper
markets. Future funding under securitization facilities depends
upon the adequacy of receivables, a sufficient demand for the
underlying commercial paper and the maintenance of certain
covenants concerning the quality of the receivables and our
financial condition. In the event commercial paper demand is not
adequate, our securitization facilities provide for liquidity
backing from various financial institutions, including Rabobank.
These liquidity commitments would provide us with interim
funding to allow us to find alternative sources of working
capital financing, if necessary.
In May 2005, we completed an agreement to permit transferring,
on an ongoing basis, the majority of our wholesale
interest-bearing receivables in North America to our United
States and Canadian retail finance
40
joint ventures, AGCO Finance LLC and AGCO Finance Canada, Ltd.
We have a 49% ownership interest in these joint ventures. The
transfer of the wholesale interest-bearing receivables is
without recourse to AGCO and we will continue to service the
receivables. The initial transfer of wholesale interest-bearing
receivables resulted in net proceeds of approximately
$94 million, which were used to redeem our
$250 million
91/2% senior
notes. As of December 31, 2005, the balance of
interest-bearing receivables transferred to AGCO Finance LLC and
AGCO Finance Canada, Ltd. under this agreement was approximately
$109.9 million.
Our business is subject to substantial cyclical variations,
which generally are difficult to forecast. Our results of
operations may also vary from time to time resulting from costs
associated with rationalization plans and acquisitions. As a
result, we have had to request relief from our lenders on
occasion with respect to financial covenant compliance. While we
do not currently anticipate asking for any relief, it is
possible that we would require relief in the future. Based upon
our historical working relationship with our lenders, we
currently do not anticipate any difficulty in obtaining that
relief.
Cash flow provided by operating activities was
$246.3 million during 2005, compared to $265.9 million
during 2004. The operating cash flows during 2005 reflects
approximately $109.9 million of interest-bearing
receivables that were transferred to AGCO Finance LLC and AGCO
Finance Canada Ltd., our retail finance joint ventures in North
America, as discussed above. Excluding this impact, operating
cash flows in 2005 was lower than 2004 due to lower net income
and increases in working capital.
Our working capital requirements are seasonal, with investments
in working capital typically building in the first half of the
year and then reducing in the second half of the year. We had
$825.8 million in working capital at December 31,
2005, as compared with $1,045.5 million at
December 31, 2004. Accounts receivable and inventories,
combined, at December 31, 2005 were $174.4 million
lower than at December 31, 2004. Production levels were
significantly lower than the prior year during the fourth
quarter of 2005 as a result of our initiative to reduce
inventory levels by the end of the year. In addition, cash on
hand at December 31, 2005 was lower compared to
December 31, 2004 as cash was used to fund inventory needs,
as well as the repayment of our $250 million
91/2% senior
notes, as discussed above. Production levels for 2006 are
expected to be 3% to 4% below 2005 to reflect the decline in
industry demand and our inventory reduction goals. The timing of
production has been reduced in the first half of 2006, which is
expected to reduce our seasonal increase in working capital
during 2006.
Capital expenditures for 2005 were $88.4 million compared
to $78.4 million during 2004. Capital expenditures during
2005 were used to support the development and enhancement of new
and existing products, as well as to expand our engine
manufacturing facility.
In February 2005, we made a $21.3 million investment in our
retail finance joint venture with Rabobank in Brazil, as more
fully described in Related Parties below.
Our debt to capitalization ratio, which is total long-term debt
divided by the sum of total long-term debt and
stockholders equity, was 37.5% at December 31, 2005
compared to 44.9% at December 31, 2004. The decrease is due
to lower debt levels in 2005, primarily due to the redemption of
our $250 million
91/2% senior
notes in June 2005.
From time to time, we review and will continue to review
acquisition and joint venture opportunities, as well as changes
in the capital markets. If we were to consummate a significant
acquisition or elect to take advantage of favorable
opportunities in the capital markets, we may supplement
availability or revise the terms under our credit facilities or
complete public or private offerings of equity or debt
securities.
We believe that available borrowings under the revolving credit
facility, funding under the accounts receivable securitization
facilities, available cash and internally generated funds will
be sufficient to support our working capital, capital
expenditures and debt service requirements for the foreseeable
future.
41
Contractual Obligations
The future payments required under our significant contractual
obligations, excluding foreign currency forward contracts, as of
December 31, 2005 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period | |
|
|
|
|
| |
|
|
|
|
|
|
2007 to | |
|
2009 to | |
|
2011 and | |
|
|
Total | |
|
2006 | |
|
2008 | |
|
2010 | |
|
Beyond | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt
|
|
$ |
848.1 |
|
|
$ |
6.3 |
|
|
$ |
11.2 |
|
|
$ |
389.8 |
|
|
$ |
440.8 |
|
Interest payments related to long-term debt
(1)
|
|
|
211.6 |
|
|
|
46.2 |
|
|
|
91.3 |
|
|
|
51.3 |
|
|
|
22.8 |
|
Capital lease obligations
|
|
|
1.6 |
|
|
|
1.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
150.5 |
|
|
|
27.9 |
|
|
|
36.8 |
|
|
|
19.7 |
|
|
|
66.1 |
|
Unconditional purchase
obligations(2)
|
|
|
160.2 |
|
|
|
63.0 |
|
|
|
70.8 |
|
|
|
17.8 |
|
|
|
8.6 |
|
Other short-term and long-term obligations
(3)
|
|
|
341.4 |
|
|
|
95.4 |
|
|
|
42.6 |
|
|
|
41.6 |
|
|
|
161.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
1,713.4 |
|
|
$ |
239.8 |
|
|
$ |
253.3 |
|
|
$ |
520.2 |
|
|
$ |
700.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration |
|
|
|
|
Per Period |
|
|
|
|
|
|
|
|
|
|
|
2007 to | |
|
2009 to | |
|
2011 and |
|
|
Total | |
|
2006 | |
|
2008 | |
|
2010 | |
|
Beyond |
|
|
| |
|
| |
|
| |
|
| |
|
|
Standby letters of credit and similar instruments
|
|
$ |
7.1 |
|
|
$ |
7.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Guarantees
|
|
|
93.8 |
|
|
|
78.2 |
|
|
|
11.2 |
|
|
|
4.4 |
|
|
|
|
|
Standby repurchase obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commercial commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial commitments and lines of credit
|
|
$ |
100.9 |
|
|
$ |
85.3 |
|
|
$ |
11.2 |
|
|
$ |
4.4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Estimated interest payments are calculated assuming current
interest rates over minimum maturity periods specified in debt
agreements. Debt may be repaid sooner or later than such minimum
maturity periods. |
|
(2) |
Unconditional purchase obligations exclude routine purchase
orders entered into in the normal course of business. As a
result of the rationalization of our European combine
manufacturing operations during 2004, we entered into an
agreement with a third-party manufacturer to produce certain
combine model ranges over a five-year period. The agreement
provides that we will purchase a minimum quantity of 200
combines per year, at a cost of approximately
16.2 million
per year (or approximately $19.2 million) through May 2009. |
|
(3) |
Other short-term and long-term obligations include estimates of
future minimum contribution requirements under our U.S. and
non-U.S. defined
benefit pension and postretirement plans. These estimates are
based on current legislation in the countries we operate within
and are subject to change. |
Off-Balance Sheet Arrangements
At December 31, 2005, we were obligated under certain
circumstances to purchase, through the year 2010, up to
$11.3 million of equipment upon expiration of certain
operating leases between AGCO Finance LLC and AGCO Finance
Canada Ltd., our retail finance joint ventures in North America,
and end users. We also maintain a remarketing agreement with
these joint ventures whereby we are obligated to repurchase
repossessed inventory at market values. We have an agreement
with AGCO Finance LLC which limits our purchase obligations
under this arrangement to $6.0 million in the aggregate per
calendar year. We believe that any losses, which might be
incurred on the resale of this equipment, will not materially
impact our financial position or results of operations.
42
From time to time, we sell certain trade receivables under
factoring arrangements to financial institutions throughout the
world. We evaluate the sale of such receivables pursuant to the
guidelines of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities a Replacement of FASB Statement
No. 125, and have determined that these facilities
should be accounted for as off-balance sheet transactions in
accordance with SFAS No. 140.
At December 31, 2005, we guaranteed indebtedness owed to
third parties of approximately $82.5 million, primarily
related to dealer and end-user financing of equipment. We
believe the credit risk associated with these guarantees is not
material to our financial position.
At December 31, 2005, we had foreign currency forward
contracts to buy an aggregate of approximately
$78.5 million United States dollar equivalents and foreign
currency forward contracts to sell an aggregate of approximately
$100.0 million United States dollar equivalents. All
contracts have a maturity of less than one year. See
Foreign Currency Risk Management for
additional information.
In October 2004 we were notified of a customer claim for costs
and damages arising out of alleged breaches of a supply
agreement. The customers initial evaluation indicated a
claim of approximately
10.5 million
(or approximately $12.5 million). We settled the matter
with the customer in December 2005, for approximately
$1.6 million.
As a result of recent Brazilian tax legislative changes
impacting value added taxes (VAT), we have recorded
a reserve of approximately $21.4 million against our
outstanding balance of Brazilian VAT taxes receivable as of
December 31, 2005, due to the uncertainty as to our ability
to collect the amounts outstanding.
Related Parties
Rabobank, a AAA rated financial institution based in the
Netherlands, is a 51% owner in our retail finance joint ventures
which are located in the United States, Canada, Brazil, Germany,
France, the United Kingdom, Australia and Ireland. Rabobank is
also the principal agent and participant in our revolving credit
facility and our securitization facilities. The majority of the
assets of our retail finance joint ventures represent finance
receivables. The majority of the liabilities represent notes
payable and accrued interest. Under the various joint venture
agreements, Rabobank or its affiliates are obligated to provide
financing to the joint venture companies, primarily through
lines of credit. We do not guarantee the debt obligations of the
retail finance joint ventures other than a portion of the retail
portfolio in Brazil that is held outside the joint venture by
Rabobank Brazil. Prior to 2005, our joint venture in Brazil had
an agency relationship with Rabobank whereby Rabobank provided
the funding. In February 2005, we made a $21.3 million
investment in our retail finance joint venture with Rabobank
Brazil. With the additional investment, the joint ventures
organizational structure is now more comparable to our other
retail finance joint ventures and will result in the gradual
elimination of our solvency guarantee to Rabobank for the
portfolio that was originally funded by Rabobank Brazil. As of
December 31, 2005, the solvency requirement for the
portfolio held by Rabobank was approximately $8.6 million.
Our retail finance joint ventures provide retail financing and
wholesale financing to our dealers. The terms of the financing
arrangements offered to our dealers are similar to arrangements
they provide to unaffiliated third parties. As discussed
previously, at December 31, 2005 we were obligated under
certain circumstances to purchase through the year 2010 up to
$11.3 million of equipment upon expiration of certain
operating leases between AGCO Finance LLC and AGCO Finance
Canada Ltd, our retail joint ventures in North America, and end
users. We also maintain a remarketing agreement with these joint
ventures, as discussed under Off-Balance Sheet
Arrangements. In addition, as part of sales incentives
provided to end users, we may from time to time subsidize
interest rates of retail financing provided by our retail joint
ventures. The cost of those programs is recognized at the time
of sale to our dealers.
43
During 2005 and 2004, we had net sales of approximately
$153.8 million and $162.8 million, respectively, to
BayWa Corporation, a German distributor, in the ordinary course
of business. The President and CEO of BayWa Corporation is a
member of our Board of Directors.
During 2005, we made license fee payments and purchased raw
materials, including engines, totaling approximately
$184.5 million from Caterpillar Inc., in the ordinary
course of business. One of the Group Presidents of Caterpillar
Inc. is also a member of our Board of Directors.
During 2005 and 2004, we purchased approximately
$4.4 million and $2.4 million, respectively, of
equipment components from our manufacturing joint venture, Deutz
AGCO Motores SA, at prices approximating cost.
Outlook
Our operations are subject to the cyclical nature of the
agricultural industry. Sales of our 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, farm industry related legislation and
general economic conditions.
Worldwide industry conditions for retail sales of agricultural
equipment are expected to be modestly below 2005 levels. In
North America, record farm income from the previous two years
should support demand at relatively high levels in 2006.
However, higher fuel and fertilizer input costs and lower crop
prices are expected to negatively impact farm income and
equipment demand compared to 2005. In Europe, equipment demand
is expected to continue to decline in 2006 resulting from lower
commodity prices, higher input costs and concerns over subsidy
reforms. In South America, equipment demand is expected to
remain at low levels due to the impact of the strong Brazilian
Real, high farm debt levels and drought conditions in Argentina.
Based on this market outlook, net sales for the full year of
2006 are expected to be slightly below 2005 resulting from lower
industry demand, planned dealer inventory reductions and
currency translation, partially offset by pricing increases and
market share improvements. Operating margins are targeted to
improve in 2006 due to the achievement of further cost reduction
and productivity initiatives. 2006 results will also be impacted
by lower interest costs due to lower debt levels. We also are
targeting improvements in working capital utilization in 2006 by
lowering seasonal increases in dealer and Company inventories
throughout 2006 through the leveling of production and dealer
deliveries compared to 2005.
Foreign Currency Risk Management
We have significant manufacturing operations in France, Germany,
Brazil, Finland and Denmark, and we purchase a portion of our
tractors, combines and components from third-party foreign
suppliers, primarily in various European countries and in Japan.
We also sell products in over 140 countries throughout the
world. The majority of our net sales outside the United States
is denominated in the currency of the customer location, with
the exception of sales in the Middle East, Africa, Asia and
parts of South America where net sales are primarily denominated
in British pounds, Euros or United States dollars. See
Note 15 to our Consolidated Financial Statements for net
sales by customer location. Our most significant transactional
foreign currency exposures are the Euro, Brazilian Real and the
Canadian dollar in relation to the United States dollar.
Fluctuations in the value of foreign currencies create
exposures, which can adversely affect our results of operations.
We attempt to manage our transactional foreign exchange exposure
by economically hedging foreign currency cash flow forecasts and
commitments arising from the settlement of receivables and
payables and from future purchases and sales. Where naturally
offsetting currency positions do not occur, we hedge certain,
but not all, of our exposures through the use of foreign
currency forward contracts. Our hedging policy prohibits foreign
currency forward contracts for speculative trading purposes. Our
translation exposure resulting from translating the financial
statements of foreign subsidiaries into United States dollars is
not hedged. Our most significant translation exposures are the
Euro, the British pound and the Brazilian Real in
44
relation to the United States dollar. When practical, this
translation impact is reduced by financing local operations with
local borrowings.
All derivatives are recognized on our consolidated balance
sheets at fair value. On the date a derivative contract is
entered into, we designate the derivative as either (1) a
fair value hedge of a recognized liability, (2) a cash flow
hedge of a forecasted transaction, (3) a hedge of a net
investment in a foreign operation, or (4) a non-designated
derivative instrument. We have engaged in the past and currently
engage in derivatives that are non-designated derivative
instruments. Changes in fair value of non-designated derivative
contracts are reported in current earnings.
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, 2005 stated in
United States dollars are as follows (in millions, except
average contract rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net | |
|
|
|
|
|
|
Notional | |
|
Average | |
|
|
|
|
Amount | |
|
Contract | |
|
Fair Value | |
|
|
Buy/(Sell) | |
|
Rate* | |
|
Gain/(Loss) | |
|
|
| |
|
| |
|
| |
Australian dollar
|
|
$ |
(26.0 |
) |
|
|
1.36 |
|
|
$ |
|
|
Brazilian Real
|
|
|
30.5 |
|
|
|
2.35 |
|
|
|
0.1 |
|
British pound
|
|
|
2.3 |
|
|
|
0.57 |
|
|
|
(0.1 |
) |
Canadian dollar
|
|
|
(47.1 |
) |
|
|
1.16 |
|
|
|
0.2 |
|
Euro
|
|
|
29.8 |
|
|
|
0.82 |
|
|
|
(0.7 |
) |
Japanese yen
|
|
|
15.9 |
|
|
|
117.86 |
|
|
|
|
|
Mexican peso
|
|
|
(17.4 |
) |
|
|
10.65 |
|
|
|
|
|
New Zealand dollar
|
|
|
(1.4 |
) |
|
|
1.45 |
|
|
|
|
|
Norwegian krone
|
|
|
(4.0 |
) |
|
|
6.35 |
|
|
|
0.2 |
|
Polish zloty
|
|
|
(1.3 |
) |
|
|
3.32 |
|
|
|
|
|
South African rand
|
|
|
(0.7 |
) |
|
|
6.33 |
|
|
|
|
|
Swedish krona
|
|
|
(2.1 |
) |
|
|
8.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Per United States 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.
Interest Rates
We manage interest rate risk through the use of fixed rate debt
and may in the future utilize interest rate swap contracts. We
have fixed rate debt from our senior subordinated notes and our
convertible senior subordinated notes. Our floating rate
exposure is related to our revolving credit facility and our
securitization facilities, which are tied to changes in United
States and European LIBOR rates. Assuming a 10.0% increase in
interest rates, interest expense, net and the cost of our
securitization facilities for the year ended December 31,
2005 would have increased by approximately $5.0 million.
We had no interest rate swap contracts outstanding during the
years ended December 31, 2005, 2004 and 2003.
45
Accounting Changes
In June 2005, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 154, Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes, and Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements
(SFAS No. 154). SFAS No. 154
changes the requirements for the accounting for, and reporting
of, a change in accounting principle. Previously, most voluntary
changes in accounting principles were required to be recognized
by way of a cumulative effect adjustment within net income
during the period of the change. SFAS No. 154 requires
retrospective application to prior periods financial
statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change.
SFAS No. 154 is effective for accounting changes made
in fiscal years beginning after December 15, 2005; however,
the Statement does not change the transition provisions of any
existing accounting pronouncements. We do not believe the
adoption of SFAS No. 154 will have a material effect
on our consolidated results of operations or financial position.
In April 2005, the SEC adopted a new rule that changes the
adoption dates of SFAS No. 123R (Revised 2004),
Share-Based Payment
(SFAS No. 123R), which is a revision of
SFAS No. 123. The SECs new rule allows companies
to implement SFAS No. 123R at the beginning of their
next fiscal year, instead of the next reporting period, that
begins after June 15, 2005. The rule does not change the
accounting required by SFAS No. 123R; it only changes
the dates for compliance with the standard. We adopted
SFAS No. 123R using the modified prospective method
effective January 1, 2006. We terminated our executive and
director long-term incentive plans at the end of 2005, and the
outstanding awards under those plans have been forfeited. The
decision to terminate the plans and related forfeitures was made
primarily to avoid recognizing compensation cost in our future
financial statements upon adoption of SFAS No. 123R
for these awards and to establish a new long-term incentive
program. We plan to grant awards under a new long-term incentive
program during 2006 subject to approval of our stockholders at
our annual stockholders meeting in April 2006. If
approved, we currently estimate that the application of the
expensing provisions of SFAS No. 123R will result in a
pre-tax expense during 2006 of approximately $7 to
$8 million.
In March 2005, the FASB issued FASB Interpretation
(FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations An Interpretation of
FASB Statement No. 143 (FIN 47),
which will result in (a) more consistent recognition of
liabilities relating to asset retirement obligations,
(b) more information about expected future cash outflows
associated with those obligations, and (c) more information
about investments in long-lived assets because additional asset
retirement costs will be recognized as part of the carrying
amounts of the assets. FIN 47 clarifies that the term
conditional asset retirement obligation as used in
SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event
that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing
and (or) method of settlement. Uncertainty about the timing
and (or) method of settlement of a conditional asset
retirement obligation should be factored into the measurement of
the liability when sufficient information exists. FIN 47
also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. Our adoption
of FIN 47 as of December 31, 2005 did not have a
material impact on our consolidated results of operations or
financial position.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs-An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151
amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, Inventory
Pricing (ARB No. 43), to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among
other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight and
rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005
and is required to be adopted in the first quarter of 2006. We
do not
46
believe that the adoption of SFAS 151 will have a material
impact on our consolidated results of operations or financial
condition.
On October 22, 2004, the American Jobs Creation Act of 2004
(AJCA) was enacted. The AJCA provides a deduction
for income from qualified domestic production activities, which
will be phased in from 2005 through 2010. The AJCA also provides
for a two-year phase out of the existing extra-territorial
income exclusion (ETI) for foreign sales that was
viewed to be inconsistent with international trade protocols by
the European Union. Under the guidance in FASB Staff Position
No. 109-1, Application of FASB Statement
No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, the deduction will be
treated as a special deduction as described in
SFAS No. 109, Accounting for Income Taxes.
As such, the special deduction has no effect on deferred tax
assets and liabilities existing at the enactment date. In
December 2004, the FASB issued Staff Position No. 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004. The AJCA provides multi-national
companies an election to deduct from taxable income 85% of
eligible dividends repatriated from foreign subsidiaries. The
AJCA generally allows companies to take advantage of this
special deduction from November 2004 through the end of calendar
year 2005. We did not propose a qualifying plan of repatriation
for 2005 or 2004.
On May 19, 2004, the FASB issued FASB Staff Position
No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP
No. 106-2). FSP No. 106-2 relates to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act) signed into law on December 8,
2003. The Act introduced a prescription drug benefit under
Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. Based upon the final
regulations released in January 2005, during the third quarter
of 2005, we reviewed the provisions of our postretirement health
care plans with our actuaries to determine whether the benefits
offered by our plans met the statutory definition of
actuarially equivalent prescription drug benefits
that qualify for the federal subsidy. Based upon this review, we
believe that two of our plans qualify for the subsidy. In
accordance with FSP No. 106-2, we began reflecting the
impact of the anticipated subsidies as of July 1, 2005 on a
prospective basis, and revalued our projected benefit obligation
as of July 1, 2005 to (1) incorporate the benefit
associated with the federal subsidy expected to be received and
(2) reduce the discount rate from 5.75% as of
December 31, 2004 to 5.25% as of July 1, 2005. The
revised obligation as of July 1, 2005 reflects a reduction
of approximately $5.0 million due to the impact of the
federal subsidy, offset by an increase of approximately
$1.8 million due to the change in the discount rate. During
the last six months of 2005, our net postretirement cost was
reduced by approximately $0.3 million due to the impact of
the expected federal subsidy. The reduction was evenly split
between reduced interest cost and lower amortization of net
actuarial losses. See Note 8 to our Consolidated Financial
Statements for further information.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The Quantitative and Qualitative Disclosures about Market Risk
information required by this Item set forth under the captions
Managements Discussion and Analysis of Financial
Condition and Results of Operations Foreign Currency
Risk Management and
Interest Rates
on pages 44 and 45 under Item 7 of this
Form 10-K is
incorporated herein by reference.
47
|
|
Item 8. |
Financial Statements and Supplementary Data |
The following Consolidated Financial Statements of AGCO and its
subsidiaries for each of the years in the three-year period
ended December 31, 2005 are included in this Item:
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
49 |
|
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
|
|
|
50 |
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
51 |
|
Consolidated Statements of Stockholders Equity for the
years ended
|
|
|
|
|
December 31, 2005, 2004 and 2003
|
|
|
52 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
|
|
|
53 |
|
Notes to Consolidated Financial Statements
|
|
|
54 |
|
The information under the heading Quarterly Results
of Item 7 on page 29 of this
Form 10-K is
incorporated herein by reference.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
AGCO Corporation:
We have audited the accompanying consolidated balance sheets of
AGCO Corporation and subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2005. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule as listed in Item 15(a)(2). These consolidated
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of AGCO Corporation and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of AGCO Corporations internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO), and our report dated
March 9, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Atlanta, Georgia
March 9, 2006
49
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
$ |
5,449.7 |
|
|
$ |
5,273.3 |
|
|
$ |
3,495.3 |
|
Cost of goods sold
|
|
|
4,516.1 |
|
|
|
4,320.4 |
|
|
|
2,878.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
933.6 |
|
|
|
952.9 |
|
|
|
616.4 |
|
Selling, general and administrative expenses (includes
restricted stock compensation expense of $0.4 million,
$0.5 million and $0.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively)
|
|
|
520.7 |
|
|
|
509.8 |
|
|
|
331.4 |
|
Engineering expenses
|
|
|
121.7 |
|
|
|
103.7 |
|
|
|
71.4 |
|
Restructuring and other infrequent expenses
|
|
|
|
|
|
|
0.1 |
|
|
|
27.6 |
|
Amortization of intangibles
|
|
|
16.5 |
|
|
|
15.8 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
274.7 |
|
|
|
323.5 |
|
|
|
184.3 |
|
Interest expense, net
|
|
|
80.0 |
|
|
|
77.0 |
|
|
|
60.0 |
|
Other expense, net
|
|
|
34.6 |
|
|
|
22.1 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in net earnings of
affiliates
|
|
|
160.1 |
|
|
|
224.4 |
|
|
|
98.3 |
|
Income tax provision
|
|
|
151.1 |
|
|
|
86.2 |
|
|
|
41.3 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net earnings of affiliates
|
|
|
9.0 |
|
|
|
138.2 |
|
|
|
57.0 |
|
Equity in net earnings of affiliates
|
|
|
22.6 |
|
|
|
20.6 |
|
|
|
17.4 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.35 |
|
|
$ |
1.84 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.35 |
|
|
$ |
1.71 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common equivalent shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
90.4 |
|
|
|
86.2 |
|
|
|
75.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
90.7 |
|
|
|
95.6 |
|
|
|
75.8 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
50
AGCO CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
220.6 |
|
|
$ |
325.6 |
|
|
Accounts and notes receivable, net
|
|
|
655.7 |
|
|
|
823.2 |
|
|
Inventories, net
|
|
|
1,062.5 |
|
|
|
1,069.4 |
|
|
Deferred tax assets
|
|
|
39.7 |
|
|
|
127.5 |
|
|
Other current assets
|
|
|
107.7 |
|
|
|
58.8 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,086.2 |
|
|
|
2,404.5 |
|
Property, plant and equipment, net
|
|
|
561.4 |
|
|
|
593.3 |
|
Investment in affiliates
|
|
|
164.7 |
|
|
|
114.5 |
|
Deferred tax assets
|
|
|
84.1 |
|
|
|
146.1 |
|
Other assets
|
|
|
56.6 |
|
|
|
70.1 |
|
Intangible assets, net
|
|
|
211.5 |
|
|
|
238.2 |
|
Goodwill
|
|
|
696.7 |
|
|
|
730.6 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,861.2 |
|
|
$ |
4,297.3 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
6.3 |
|
|
$ |
6.9 |
|
|
Accounts payable
|
|
|
590.9 |
|
|
|
601.9 |
|
|
Accrued expenses
|
|
|
561.8 |
|
|
|
660.3 |
|
|
Other current liabilities
|
|
|
101.4 |
|
|
|
89.9 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,260.4 |
|
|
|
1,359.0 |
|
Long-term debt, less current portion
|
|
|
841.8 |
|
|
|
1,151.7 |
|
Pensions and postretirement health care benefits
|
|
|
241.7 |
|
|
|
247.3 |
|
Other noncurrent liabilities
|
|
|
101.3 |
|
|
|
116.9 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,445.2 |
|
|
|
2,874.9 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding in 2005 and 2004
|
|
|
|
|
|
|
|
|
|
Common stock; $0.01 par value, 150,000,000 shares
authorized, 90,508,221 and 90,394,292 shares issued and
outstanding in 2005 and 2004, respectively
|
|
|
0.9 |
|
|
|
0.9 |
|
|
Additional paid-in capital
|
|
|
894.7 |
|
|
|
893.2 |
|
|
Retained earnings
|
|
|
825.4 |
|
|
|
793.8 |
|
|
Unearned compensation
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
Accumulated other comprehensive loss
|
|
|
(304.9 |
) |
|
|
(265.3 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,416.0 |
|
|
|
1,422.4 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
3,861.2 |
|
|
$ |
4,297.3 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
51
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional | |
|
|
|
Deferred | |
|
Accumulated | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Minimum | |
|
Cumulative | |
|
Gains | |
|
Other | |
|
Total | |
|
Comprehensive | |
|
|
| |
|
Paid-In | |
|
Retained | |
|
Unearned | |
|
Pension | |
|
Translation | |
|
(Losses) on | |
|
Comprehensive | |
|
Stockholders | |
|
Income | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Compensation | |
|
Liability | |
|
Adjustment | |
|
Derivatives | |
|
Loss | |
|
Equity | |
|
(Loss) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2002
|
|
|
75,197,285 |
|
|
|
$ 0.8 |
|
|
|
$ 587.6 |
|
|
|
$ 560.6 |
|
|
|
$ (0.7 |
) |
|
|
$ (93.9 |
) |
|
|
$ (332.2 |
) |
|
|
$ (4.6 |
) |
|
|
$ (430.7 |
) |
|
|
$ 717.6 |
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74.4 |
|
|
|
$ 74.4 |
|
|
Issuance of restricted stock
|
|
|
14,150 |
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
Stock options exercised
|
|
|
198,220 |
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
Additional minimum pension liability, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.5 |
) |
|
|
|
|
|
|
|
|
|
|
(34.5 |
) |
|
|
(34.5 |
) |
|
|
(34.5 |
) |
|
Deferred gains and losses on derivatives, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
|
(0.8 |
) |
|
Deferred gains and losses on derivatives held by affiliates, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.7 |
|
|
|
2.7 |
|
|
|
2.7 |
|
|
|
2.7 |
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143.8 |
|
|
|
|
|
|
|
143.8 |
|
|
|
143.8 |
|
|
|
143.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
75,409,655 |
|
|
|
0.8 |
|
|
|
590.3 |
|
|
|
635.0 |
|
|
|
(0.5 |
) |
|
|
(128.4 |
) |
|
|
(188.4 |
) |
|
|
(2.7 |
) |
|
|
(319.5 |
) |
|
|
906.1 |
|
|
|
185.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158.8 |
|
|
|
158.8 |
|
|
Issuance of common stock, net of offering expenses
|
|
|
14,720,000 |
|
|
|
0.1 |
|
|
|
299.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299.5 |
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
7,487 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
Stock options exercised
|
|
|
257,150 |
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
Additional minimum pension liability, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
(18.9 |
) |
|
|
(18.9 |
) |
|
|
(18.9 |
) |
|
Deferred gains and losses on derivatives held by affiliates, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
|
3.8 |
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.3 |
|
|
|
|
|
|
|
69.3 |
|
|
|
69.3 |
|
|
|
69.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
90,394,292 |
|
|
|
0.9 |
|
|
|
893.2 |
|
|
|
793.8 |
|
|
|
(0.2 |
) |
|
|
(147.3 |
) |
|
|
(119.1 |
) |
|
|
1.1 |
|
|
|
(265.3 |
) |
|
|
1,422.4 |
|
|
|
213.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.6 |
|
|
|
31.6 |
|
|
Issuance of restricted stock
|
|
|
4,449 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
Stock options exercised
|
|
|
109,480 |
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
Amortization of unearned compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
Additional minimum pension liability, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
(2.8 |
) |
|
|
(2.8 |
) |
|
Deferred gains and losses on derivatives held by affiliates, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
2.8 |
|
|
Change in cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39.6 |
) |
|
|
|
|
|
|
(39.6 |
) |
|
|
(39.6 |
) |
|
|
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
90,508,221 |
|
|
|
$ 0.9 |
|
|
|
$ 894.7 |
|
|
|
$ 825.4 |
|
|
|
$ (0.1 |
) |
|
|
$ (150.1 |
) |
|
|
$ (158.7 |
) |
|
|
$ 3.9 |
|
|
|
$ (304.9 |
) |
|
|
$ 1,416.0 |
|
|
|
$ (8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
52
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
89.4 |
|
|
|
84.3 |
|
|
|
58.8 |
|
|
|
Deferred debt issuance cost amortization
|
|
|
7.2 |
|
|
|
13.2 |
|
|
|
5.4 |
|
|
|
Amortization of intangibles
|
|
|
16.5 |
|
|
|
15.8 |
|
|
|
1.7 |
|
|
|
Restricted stock compensation
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
Equity in net earnings of affiliates, net of cash received
|
|
|
(14.5 |
) |
|
|
(6.1 |
) |
|
|
(0.8 |
) |
|
|
Deferred income tax provision (benefit)
|
|
|
107.9 |
|
|
|
14.5 |
|
|
|
(12.3 |
) |
|
|
Gain on sale of property, plant and equipment
|
|
|
(3.0 |
) |
|
|
(8.7 |
) |
|
|
|
|
|
|
Write-down of property, plant and equipment
|
|
|
0.3 |
|
|
|
9.5 |
|
|
|
1.6 |
|
|
|
Changes in operating assets and liabilities, net of effects from
purchase of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
|
103.6 |
|
|
|
(39.9 |
) |
|
|
11.5 |
|
|
|
|
Inventories, net
|
|
|
(42.1 |
) |
|
|
(65.1 |
) |
|
|
13.8 |
|
|
|
|
Other current and noncurrent assets
|
|
|
(22.3 |
) |
|
|
(10.5 |
) |
|
|
(20.4 |
) |
|
|
|
Accounts payable
|
|
|
39.8 |
|
|
|
53.2 |
|
|
|
(16.5 |
) |
|
|
|
Accrued expenses
|
|
|
(44.6 |
) |
|
|
38.5 |
|
|
|
(50.9 |
) |
|
|
|
Other current and noncurrent liabilities
|
|
|
(23.7 |
) |
|
|
8.1 |
|
|
|
21.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
214.7 |
|
|
|
107.1 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
246.3 |
|
|
|
265.9 |
|
|
|
88.0 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(88.4 |
) |
|
|
(78.4 |
) |
|
|
(78.7 |
) |
|
|
Proceeds from sales of property, plant and equipment
|
|
|
10.5 |
|
|
|
46.0 |
|
|
|
14.9 |
|
|
|
Sale/(purchase) of businesses, net of cash acquired
|
|
|
0.4 |
|
|
|
(765.7 |
) |
|
|
1.5 |
|
|
|
(Investments in)/proceeds from sale of unconsolidated
affiliates, net
|
|
|
(23.4 |
) |
|
|
1.0 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(100.9 |
) |
|
|
(797.1 |
) |
|
|
(57.8 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt obligations
|
|
|
670.2 |
|
|
|
1,450.5 |
|
|
|
1,372.8 |
|
|
|
Repayments of debt obligations
|
|
|
(901.1 |
) |
|
|
(1,036.9 |
) |
|
|
(1,288.5 |
) |
|
|
Proceeds from issuance of common stock
|
|
|
1.4 |
|
|
|
303.0 |
|
|
|
2.5 |
|
|
|
Payment of debt issuance costs
|
|
|
|
|
|
|
(21.1 |
) |
|
|
(9.8 |
) |
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(229.5 |
) |
|
|
695.5 |
|
|
|
77.0 |
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
(20.9 |
) |
|
|
14.3 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(105.0 |
) |
|
|
178.6 |
|
|
|
112.7 |
|
Cash and cash equivalents, beginning of year
|
|
|
325.6 |
|
|
|
147.0 |
|
|
|
34.3 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
220.6 |
|
|
$ |
325.6 |
|
|
$ |
147.0 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
53
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Operations and Summary of Significant Accounting Policies |
AGCO Corporation (AGCO or the Company)
is a leading manufacturer and distributor of agricultural
equipment and related replacement parts throughout the world.
The Company sells a full range of agricultural equipment,
including tractors, combines, hay tools, sprayers, forage
equipment and implements. The Companys products are widely
recognized in the agricultural equipment industry and are
marketed under a number of well-known brand names including:
AGCO®,
Challenger®,
Fendt®,
Gleaner®,
Hesston®,
Massey
Ferguson®,
New
Idea®,
RoGator®,
Spra-Coupe®,
Sunflower®,
Terra-Gator®,
Valtra®
and
Whitetm
Planters. The Company distributes most of its products through a
combination of approximately 3,600 independent dealers and
distributors. In addition, the Company provides retail financing
in the United States, Canada, Brazil, Germany, France, the
United Kingdom, Australia and Ireland through its retail finance
joint ventures with Coöperative Centrale
Raiffeisen-Boerenleenbank B.A., Rabobank.
The Consolidated Financial Statements represent the
consolidation of all wholly-owned companies, majority-owned
companies and joint ventures where the Company has been
determined as the primary beneficiary under Financial Accounting
Standards Board (FASB) Interpretation No. 46R,
Consolidation of Variable Interest Entities
(FIN 46R). The Company records investments in
all other affiliate companies using the equity method of
accounting. Other investments representing an ownership of less
than 20% are recorded at cost. All significant intercompany
balances and transactions have been eliminated in the
Consolidated Financial Statements.
Certain prior period amounts have been reclassified to conform
to the current period presentation.
Sales of equipment and replacement parts are recorded by the
Company when title and risks of ownership have been transferred
to an independent dealer, distributor or other customer. Payment
terms vary by market and product with fixed payment schedules on
all sales. The terms of sale generally require that a purchase
order or order confirmation accompany all shipments. Title
generally passes to the dealer or distributor upon shipment and
the risk of loss upon damage, theft or destruction of the
equipment is the responsibility of the dealer, distributor or
third-party carrier. In certain foreign countries, the Company
retains a form of title to goods delivered to dealers until the
dealer makes payment so that the Company can recover the goods
in the event of customer default on payment. This occurs as the
laws of some foreign countries do not provide for a
sellers retention of a security interest in goods in the
same manner as established in the United States Uniform
Commercial Code. The only right the Company retains with respect
to the title are those enabling recovery of the goods in the
event of customer default on payment. The dealer or distributor
may not return equipment or replacement parts while its contract
with the Company is in force. Replacement parts may be returned
only under promotional and annual return programs. Provisions
for returns under these programs are made at the time of sale
based on the terms of the program and historical returns
experience. The Company may provide certain sales incentives to
dealers and distributors. Provisions for sales incentives are
made at the time of sale for existing incentive programs. These
provisions are revised in the event of subsequent modification
to the incentive program.
In the United States and Canada, all equipment sales to dealers
are immediately due upon a retail sale of the equipment by the
dealer. If not already paid by the dealer in the United States
and Canada, installment payments are required generally
beginning seven to 13 months after shipment with the
remaining outstanding equipment balance generally due within 12
to 18 months of shipment. Interest generally is charged on
the outstanding balance six to 12 months after shipment.
Sales terms of some highly seasonal
54
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
products provide for payment and due dates based on a specified
date during the year regardless of the shipment date. Equipment
sold to dealers in the United States and Canada is paid in full
on average within 12 months of shipment. Sales of
replacement parts generally are payable within 30 days of
shipment with terms for some larger seasonal stock orders
generally requiring payment within six months of shipment.
In other international markets, equipment sales are generally
payable in full within 30 to 180 days of shipment. Payment
terms for some highly seasonal products have a specified due
date during the year regardless of the shipment date. Sales of
replacement parts generally are payable within 30 to
90 days of shipment with terms for some larger seasonal
stock orders generally payable within six months of shipment.
In certain markets, particularly in North America, there is a
time lag, which varies based on the timing and level of retail
demand, between the date the Company records a sale and when the
dealer sells the equipment to a retail customer.
|
|
|
Foreign Currency Translation |
The financial statements of the Companys 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
included in Accumulated other comprehensive loss in
stockholders equity. Gains and losses, which result from
foreign currency transactions, are included in the accompanying
Consolidated Statements of Operations.
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. The estimates made by management primarily
relate to accounts and notes receivable, inventories, deferred
income tax valuation allowances, intangible assets and certain
accrued liabilities, principally relating to reserves for volume
discounts and sales incentives, warranty, product liability and
workers compensation obligations and pensions and
postretirement benefits.
|
|
|
Cash and Cash Equivalents |
The Company considers all investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents
at December 31, 2005 and 2004 of $146.3 million and
$233.0 million, respectively, consisted of overnight
repurchase agreements with financial institutions.
|
|
|
Accounts and Notes Receivable |
Accounts and notes receivable arise from the sale of equipment
and replacement parts to independent dealers, distributors or
other customers. Payments due under the Companys terms of
sale generally range from one to 18 months and are not
contingent upon the sale of the equipment by the dealer or
distributor to a retail customer. Under normal circumstances,
payment terms are not extended and equipment may not be
returned. In certain regions, including the United States and
Canada, the Company is obligated to repurchase equipment and
replacement parts upon cancellation of a dealer or distributor
contract. These obligations are required by national, state or
provincial laws and require the Company to repurchase dealer or
distributors unsold inventory, including inventory for
which the receivable has already been paid.
55
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For sales outside of the United States and Canada, the Company
does not normally charge interest on outstanding receivables
with its dealers and distributors. For sales to certain dealers
or distributors in the United States and Canada, where
approximately 29% of the Companys net sales were generated
in 2005, interest is charged at or above prime lending rates on
outstanding receivable balances after interest-free periods.
These interest-free periods vary by product and generally range
from six to 12 months. For the year ended December 31,
2005, 15.8% and 11.4% of the Companys net sales had
maximum interest-free periods ranging from one to six months and
seven to 12 months, respectively. Actual interest-free
periods are shorter than above because the equipment receivable
from dealers or distributors in the United States and Canada is
due immediately upon sale of the equipment to a retail customer.
Under normal circumstances, interest is not forgiven and
interest-free periods are not extended. In May 2005, the Company
completed an agreement to permit transferring, on an ongoing
basis, the majority of interest-bearing receivables in North
America to its United States and Canadian retail finance joint
ventures. Upon transfer, the receivables maintain standard
payment terms, including required regular principal payments on
amounts outstanding, and interest charges at market rates. Under
this arrangement, qualified dealers may obtain additional
financing through the United States and Canadian retail finance
joint ventures.
Accounts and notes receivable are shown net of allowances for
sales incentive discounts available to dealers and for doubtful
accounts. Cash flows related to the collection of receivables
are reported within Cash flows from operating
activities within the Companys Consolidated
Statements of Cash Flows. Accounts and notes receivable
allowances at December 31, 2005 and 2004 were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Sales incentive discounts
|
|
$ |
90.8 |
|
|
$ |
84.7 |
|
Doubtful accounts
|
|
|
39.7 |
|
|
|
54.9 |
|
|
|
|
|
|
|
|
|
|
$ |
130.5 |
|
|
$ |
139.6 |
|
|
|
|
|
|
|
|
The Company transfers certain accounts receivable to various
financial institutions primarily under its accounts receivable
securitization facilities (Note 4). The Company records
such transfers as sales of accounts receivable when it is
considered to have surrendered control of such receivables under
the provisions of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a Replacement of SFAS No. 125
(SFAS No. 140).
Inventories are valued at the lower of cost or market using the
first-in, first-out
method. Market is net realizable value for finished goods and
repair and replacement parts. For work in process, production
parts and raw materials, market is replacement cost. At
December 31, 2005 and 2004, the Company had recorded
$79.7 million and $105.8 million as adjustments for
surplus and obsolete inventories. These adjustments are
reflected within Inventories, net.
Inventories, net at December 31, 2005 and 2004 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Finished goods
|
|
$ |
477.3 |
|
|
$ |
432.5 |
|
Repair and replacement parts
|
|
|
310.9 |
|
|
|
313.2 |
|
Work in process
|
|
|
63.3 |
|
|
|
103.6 |
|
Raw materials
|
|
|
211.0 |
|
|
|
220.1 |
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$ |
1,062.5 |
|
|
$ |
1,069.4 |
|
|
|
|
|
|
|
|
56
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash flows related to the sale of inventories are reported
within Cash flows from operating activities within
the Companys Consolidated Statements of Cash Flows.
|
|
|
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 ten to 40 years for buildings and improvements,
three to 15 years for machinery and equipment and three to
ten years for furniture and fixtures. Expenditures for
maintenance and repairs are charged to expense as incurred.
Property, plant and equipment, net at December 31, 2005 and
2004 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
47.3 |
|
|
$ |
50.8 |
|
Buildings and improvements
|
|
|
220.2 |
|
|
|
216.4 |
|
Machinery and equipment
|
|
|
606.3 |
|
|
|
588.5 |
|
Furniture and fixtures
|
|
|
139.0 |
|
|
|
121.4 |
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
|
|
1,012.8 |
|
|
|
977.1 |
|
Accumulated depreciation and amortization
|
|
|
(451.4 |
) |
|
|
(383.8 |
) |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
561.4 |
|
|
$ |
593.3 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Other Intangible Assets |
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), establishes a
method of testing goodwill and other indefinite-lived intangible
assets for impairment on an annual basis or on an interim basis
if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. The
Companys initial assessment and its annual assessments
involve determining an estimate of the fair value of the
Companys reporting units in order to evaluate whether an
impairment of the current carrying amount of goodwill and other
indefinite-lived intangible assets exists. Fair values are
derived based on an evaluation of past and expected future
performance of the Companys reporting units. A reporting
unit is an operating segment or one level below an operating
segment, for example, a component. A component of an operating
segment is a reporting unit if the component constitutes a
business for which discrete financial information is available
and the Companys executive management team regularly
reviews the operating results of that component. In addition,
the Company combines and aggregates two or more components of an
operating segment as a single reporting unit if the components
have similar economic characteristics. The Companys
reportable segments reported under the guidance of
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, are not its reporting
units, with the exception of its Asia/ Pacific geographical
segment.
The Company utilized a combination of valuation techniques,
including a discounted cash flow approach, a market multiple
approach and a comparable transaction approach when making its
initial and subsequent annual and interim assessments. As stated
above, goodwill is tested for impairment on an annual basis and
more often if indications of impairment exist. The results of
the Companys analyses conducted as of October 1,
2005, 2004 and 2003, indicated that no reduction in the carrying
amount of goodwill was required.
57
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the carrying amount of acquired intangible assets
during 2005 and 2004 are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks | |
|
|
|
|
|
|
|
|
and | |
|
Customer | |
|
Patents and | |
|
|
Gross carrying amounts: |
|
Tradenames | |
|
Relationships | |
|
Technology | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2003
|
|
$ |
31.8 |
|
|
$ |
3.5 |
|
|
$ |
1.1 |
|
|
$ |
36.4 |
|
Acquisitions
|
|
|
1.0 |
|
|
|
72.3 |
|
|
|
46.7 |
|
|
|
120.0 |
|
Foreign currency translation
|
|
|
0.1 |
|
|
|
5.9 |
|
|
|
3.6 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
32.9 |
|
|
|
81.7 |
|
|
|
51.4 |
|
|
|
166.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(6.3 |
) |
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
32.7 |
|
|
$ |
81.5 |
|
|
$ |
45.1 |
|
|
$ |
159.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks | |
|
|
|
|
|
|
|
|
and | |
|
Customer | |
|
Patents and | |
|
|
Accumulated amortization: |
|
Tradenames | |
|
Relationships | |
|
Technology | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2003
|
|
$ |
2.5 |
|
|
$ |
1.0 |
|
|
$ |
0.2 |
|
|
$ |
3.7 |
|
Amortization expense
|
|
|
1.2 |
|
|
|
7.7 |
|
|
|
6.9 |
|
|
|
15.8 |
|
Foreign currency translation
|
|
|
|
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
3.7 |
|
|
|
9.4 |
|
|
|
7.8 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
1.2 |
|
|
|
8.3 |
|
|
|
7.0 |
|
|
|
16.5 |
|
Foreign currency translation
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
4.8 |
|
|
$ |
17.7 |
|
|
$ |
13.5 |
|
|
$ |
36.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks | |
|
|
|
|
|
|
|
|
and | |
|
|
|
|
|
|
Unamortized intangible assets: |
|
Tradenames | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
$ |
53.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
93.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
88.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes certain acquired intangible assets
primarily on a straight-line basis over their estimated useful
lives, which range from three to 30 years. The acquired
intangible assets have a weighted average useful life as follows:
|
|
|
Intangible Asset |
|
Weighted-Average Useful Life |
|
|
|
Trademarks and tradenames |
|
30 years |
Technology and patents |
|
7 years |
Customer relationships |
|
10 years |
For the years ended December 31, 2005, 2004 and 2003,
acquired intangible asset amortization was $16.5 million,
$15.8 million and $1.7 million, respectively. The
Company estimates amortization of existing intangible assets
will be $16.0 million for 2006, $15.5 million for
2007, $15.3 million for each of 2008 and 2009 and
$15.2 million for 2010.
58
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with SFAS No. 142, the Company
determined that two of its trademarks have an indefinite useful
life. The Massey Ferguson trademark has been in existence since
1952 and was formed from the merger of Massey-Harris
(established in the 1890s) and Ferguson (established in
the 1930s). The Massey Ferguson brand is currently sold in
over 140 countries worldwide, making it one of the most widely
sold tractor brands in the world. As a result of the
Companys acquisition of Valtra in January 2004
(Note 2), the Company identified the Valtra trademark as an
indefinite-lived asset. The Valtra trademark has been in
existence since the late 1990s, but is a derivative of the
Valmet trademark which has been in existence since 1951. Valtra
and Valmet are used interchangeably in the marketplace today and
Valtra is recognized to be the tractor line of the Valmet name.
The Valtra brand is currently sold in approximately 50 countries
around the world. Both the Massey Ferguson brand and the Valtra
brand are primary product lines of the Companys business
and the Company plans to use these trademarks for an indefinite
period of time. The Company plans to continue to make
investments in product development to enhance the value of these
brands into the future. There are no legal, regulatory,
contractual, competitive, economic or other factors that the
Company is aware of that the Company believes would limit the
useful lives of the trademarks. The Massey Ferguson and Valtra
trademark registrations can be renewed at a nominal cost in the
countries in which the Company operates.
Changes in the carrying amount of goodwill during the years
ended December 31, 2005, 2004 and 2003 are summarized as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North | |
|
South | |
|
Europe/Africa/ | |
|
|
|
|
America | |
|
America | |
|
Middle East | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Balance as of December 31, 2002
|
|
$ |
167.3 |
|
|
$ |
35.1 |
|
|
$ |
104.7 |
|
|
$ |
307.1 |
|
Adjustment to purchase price allocations
|
|
|
(1.8 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
(1.9 |
) |
Foreign currency translation
|
|
|
|
|
|
|
7.2 |
|
|
|
19.3 |
|
|
|
26.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
165.5 |
|
|
|
42.3 |
|
|
|
123.9 |
|
|
|
331.7 |
|
Acquisitions
|
|
|
|
|
|
|
68.8 |
|
|
|
289.6 |
|
|
|
358.4 |
|
Foreign currency translation
|
|
|
|
|
|
|
9.7 |
|
|
|
30.8 |
|
|
|
40.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
165.5 |
|
|
|
120.8 |
|
|
|
444.3 |
|
|
|
730.6 |
|
Adjustment related to income taxes
|
|
|
8.5 |
|
|
|
|
|
|
|
(3.8 |
) |
|
|
4.7 |
|
Foreign currency translation
|
|
|
|
|
|
|
16.2 |
|
|
|
(54.8 |
) |
|
|
(38.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
174.0 |
|
|
$ |
137.0 |
|
|
$ |
385.7 |
|
|
$ |
696.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, 2004 and 2003, the Company reviewed its long-lived
assets for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may
not be recoverable in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
(SFAS No. 144). Under
SFAS No. 144, an impairment loss is recognized when
the undiscounted future cash flows estimated to be generated by
the asset to be held and used are not sufficient to recover the
unamortized balance of the asset. An impairment loss would be
recognized based on the difference between the carrying values
and estimated fair value. The estimated fair value is determined
based on either the discounted future cash flows or other
appropriate fair value methods with the amount of any such
deficiency charged to income in the current year. If the asset
being tested for recoverability was acquired in a business
combination, intangible assets resulting from the acquisition
that are related to the asset are included in the assessment.
Estimates of future cash flows are based on many factors,
including current operating results, expected market trends and
competitive influences. The Company also evaluates the
amortization periods assigned to its intangible assets to
determine whether events or changes in circumstances warrant
revised estimates of useful lives. Assets to be disposed of by
sale are reported at the lower of the carrying amount or
59
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value, less estimated costs to sell. During 2004, the
Company recorded a write-down of property, plant and equipment
to its fair value of $8.2 million in conjunction with
assets related to the rationalization of its Randers, Denmark
combine manufacturing facility. During 2003, the Company
recorded a write-down of property, plant and equipment to its
fair value of $2.0 million in conjunction with assets held
for sale primarily related to its rationalization and closure of
its DeKalb, Illinois tractor manufacturing facility. See
Note 3 for additional information.
Accrued expenses at December 31, 2005 and 2004 consisted of
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Reserve for volume discounts and sales incentives
|
|
$ |
118.2 |
|
|
$ |
128.6 |
|
Warranty reserves
|
|
|
122.8 |
|
|
|
135.0 |
|
Accrued employee compensation and benefits
|
|
|
126.5 |
|
|
|
137.2 |
|
Accrued taxes
|
|
|
77.6 |
|
|
|
114.0 |
|
Other
|
|
|
116.7 |
|
|
|
145.5 |
|
|
|
|
|
|
|
|
|
|
$ |
561.8 |
|
|
$ |
660.3 |
|
|
|
|
|
|
|
|
The warranty reserve activity for the years ended
December 31, 2005, 2004 and 2003 consisted of the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Balance at beginning of the year
|
|
$ |
135.0 |
|
|
$ |
98.5 |
|
|
$ |
83.7 |
|
Acquisitions
|
|
|
|
|
|
|
14.9 |
|
|
|
|
|
Accruals for warranties issued during the year
|
|
|
126.0 |
|
|
|
111.5 |
|
|
|
76.4 |
|
Settlements made (in cash or in kind) during the year
|
|
|
(128.1 |
) |
|
|
(97.6 |
) |
|
|
(72.1 |
) |
Foreign currency translation
|
|
|
(10.1 |
) |
|
|
7.7 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$ |
122.8 |
|
|
$ |
135.0 |
|
|
$ |
98.5 |
|
|
|
|
|
|
|
|
|
|
|
The Companys agricultural equipment products are generally
under warranty against defects in material and workmanship for a
period of one to four years. The Company accrues for future
warranty costs at the time of sale based on historical warranty
experience.
Under the Companys 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 Companys estimates of the aggregate liabilities for
the claims incurred.
The Company accounts for all stock-based compensation awarded
under its Non-employee Director Incentive Plan (the
Director Plan), Long-Term Incentive Plan (the
LTIP) and Stock Option Plan (the Option
Plan) as prescribed under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and also provides
the disclosures required under SFAS No. 123,
60
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting for Stock-Based Compensation
(SFAS No. 123), and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(SFAS No. 148). APB No. 25 requires
no recognition of compensation expense for options granted under
the Option Plan as long as certain conditions are met. There was
no compensation expense recorded under APB No. 25 for the
Option Plan. APB No. 25 requires recognition of
compensation expense under the Director Plan and the LTIP at the
time the award is earned. Refer to Note 10 for additional
information.
There were no grants under the Option Plan during the years
ended December 31, 2005, 2004 and 2003. For disclosure
purposes only, under SFAS No. 123, the Company
estimated the fair value of grants under the Companys
Option Plan using the Black-Scholes option pricing model and the
Barrier option model for awards granted under the Director Plan
and the LTIP. Based on these models, the weighted average fair
value of options granted under the Option Plan and the weighted
average fair value of awards granted under the Director Plan and
the LTIP, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Director Plan
|
|
$ |
12.93 |
|
|
$ |
17.67 |
|
|
$ |
14.46 |
|
LTIP
|
|
|
15.05 |
|
|
|
16.21 |
|
|
|
13.82 |
|
Option Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions under Black-Scholes and Barrier
option models:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life of awards (years)
|
|
|
4.4 |
|
|
|
4.7 |
|
|
|
4.3 |
|
Risk-free interest rate
|
|
|
4.0 |
% |
|
|
3.2 |
% |
|
|
2.9 |
% |
Expected volatility
|
|
|
41.9 |
% |
|
|
48.6 |
% |
|
|
50.2 |
% |
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the grants and awards are amortized over the
vesting period for stock options and awards earned under the
Director Plan and LTIP and over the performance period for
unearned awards under the Director Plan and LTIP. The following
table illustrates the effect on net income and earnings per
common share if the Company had applied the fair value
recognition provisions of SFAS No. 123 and
SFAS No. 148 (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(17.6 |
) |
|
|
(7.7 |
) |
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
14.2 |
|
|
$ |
151.4 |
|
|
$ |
67.5 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.35 |
|
|
$ |
1.84 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
0.16 |
|
|
$ |
1.76 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.35 |
|
|
$ |
1.71 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
0.16 |
|
|
$ |
1.63 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
The 2004 and 2003 diluted as reported and pro forma earnings per
share include the impact of the contingently convertible senior
subordinated notes. The 2005 pro forma earnings per share
include the impact of the cancellation of awards under the
Director Plan and LTIP in December 2005 (Note 10).
61
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Research and Development Expenses |
Research and development expenses are expensed as incurred and
are included in engineering expenses in the Consolidated
Statements of Operations.
The Company expenses all advertising costs as incurred.
Cooperative advertising costs are normally expensed at the time
the revenue is earned. Advertising expenses for the years ended
December 31, 2005, 2004 and 2003 totaled approximately
$35.8 million, $37.2 million and $26.0 million,
respectively.
|
|
|
Shipping and Handling Expenses |
All shipping and handling fees charged to customers are included
as a component of net sales. Shipping and handling costs are
included as a part of cost of goods sold, with the exception of
certain handling costs included in selling, general and
administrative expenses in the amount of $18.6 million,
$16.8 million and $14.6 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
Interest expense, net for the years ended December 31,
2005, 2004 and 2003 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest expense
|
|
$ |
96.0 |
|
|
$ |
92.3 |
|
|
$ |
70.7 |
|
Interest income
|
|
|
(16.0 |
) |
|
|
(15.3 |
) |
|
|
(10.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
80.0 |
|
|
$ |
77.0 |
|
|
$ |
60.0 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes are accounted for under the asset and liability
method, as prescribed under the provisions of
SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
|
|
|
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 common share assumes exercise
of outstanding stock options and vesting of restricted stock
when the effects of such assumptions are dilutive.
During the fourth quarter of 2004, the Emerging Issues Task
Force (EITF) reached a consensus on EITF Issue
No. 04-08, Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effect on
Diluted Earnings per Share
(EITF 04-08).
EITF 04-08
requires that shares subject to issuance from contingently
convertible debt should be included in the calculation of
diluted earnings per share using the if-converted method
regardless of whether a market price trigger has been met. The
Company
62
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adopted EITF 04-08
during the fourth quarter of 2004 and included approximately
9.0 million additional shares of common stock that may have
been issued upon conversion of the Companys former
13/4% convertible
senior subordinated notes in its diluted earnings per share
calculation for the year ended December 31, 2004 and
0.2 million additional shares of common stock for the year
ended December 31, 2003. In addition, diluted earnings per
share is required to be restated for each period that the
convertible debt was outstanding. The Companys convertible
senior subordinated notes were issued on December 23, 2003.
As the Company is not benefiting losses in the United States for
tax purposes, the interest expense associated with the
convertible senior subordinated notes included in the diluted
earnings per share calculation does not reflect a tax benefit.
On June 29, 2005, the Company completed an exchange of its
$201.3 million aggregate principal amount of
13/4% convertible
senior subordinated notes. The Company exchanged its existing
convertible notes for new notes that provide for (i) the
settlement upon conversion in cash up to the principal amount of
the converted new notes with any excess conversion value settled
in shares of the Companys common stock, and (ii) the
conversion rate to be increased under certain circumstances if
the new notes are converted in connection with certain change of
control transactions occurring prior to December 10, 2010,
but otherwise are substantially the same as the old notes. The
impact of the exchange resulted in a reduction in the diluted
weighted average shares outstanding of approximately
9.0 million shares on a prospective basis. In the future,
dilution of weighted shares outstanding will depend on the
Companys stock price once the market price trigger or
other specified conversion circumstances are met (Note 7).
A reconciliation of net income and weighted average common
shares outstanding for purposes of calculating basic and diluted
earnings per share is as follows (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
90.4 |
|
|
|
86.2 |
|
|
|
75.2 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$ |
0.35 |
|
|
$ |
1.84 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
31.6 |
|
|
$ |
158.8 |
|
|
$ |
74.4 |
|
|
After-tax interest expense on contingently convertible senior
subordinated notes
|
|
|
|
|
|
|
4.6 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income for purposes of determining dilutive net income per
share
|
|
$ |
31.6 |
|
|
$ |
163.4 |
|
|
$ |
74.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
90.4 |
|
|
|
86.2 |
|
|
|
75.2 |
|
|
Dilutive stock options and restricted stock awards
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
Weighted average assumed conversion of contingently convertible
senior subordinated notes
|
|
|
|
|
|
|
9.0 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common share equivalents
outstanding for purposes of computing diluted earnings per share
|
|
|
90.7 |
|
|
|
95.6 |
|
|
|
75.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$ |
0.35 |
|
|
$ |
1.71 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
Stock options to purchase 0.5 million, 0.5 million,
and 0.7 million shares for the years ended
December 31, 2005, 2004 and 2003, respectively, were
outstanding but not included in the calculation of weighted
average common and common equivalent shares outstanding because
the option exercise prices were higher than the average market
price of the Companys common stock during the related
period.
63
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Comprehensive Income (Loss) |
The Company reports comprehensive income (loss), 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 components of other comprehensive
income (loss) and the related tax effects for the years ended
December 31, 2005, 2004 and 2003 are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
| |
|
|
Before-tax | |
|
Income | |
|
After-tax | |
|
|
Amount | |
|
Taxes | |
|
Amount | |
|
|
| |
|
| |
|
| |
Additional minimum pension liability
|
|
$ |
(3.2 |
) |
|
$ |
0.4 |
|
|
$ |
(2.8 |
) |
Unrealized gain on derivatives held by affiliates
|
|
|
4.7 |
|
|
|
(1.9 |
) |
|
|
2.8 |
|
Foreign currency translation adjustments
|
|
|
(39.6 |
) |
|
|
|
|
|
|
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total components of other comprehensive loss
|
|
$ |
(38.1 |
) |
|
$ |
(1.5 |
) |
|
$ |
(39.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
| |
|
|
Before-tax | |
|
Income | |
|
After-tax | |
|
|
Amount | |
|
Taxes | |
|
Amount | |
|
|
| |
|
| |
|
| |
Additional minimum pension liability
|
|
$ |
(27.4 |
) |
|
$ |
8.5 |
|
|
$ |
(18.9 |
) |
Unrealized gain on derivatives held by affiliates
|
|
|
6.3 |
|
|
|
(2.5 |
) |
|
|
3.8 |
|
Foreign currency translation adjustments
|
|
|
69.3 |
|
|
|
|
|
|
|
69.3 |
|
|
|
|
|
|
|
|
|
|
|
Total components of other comprehensive income
|
|
$ |
48.2 |
|
|
$ |
6.0 |
|
|
$ |
54.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
|
| |
|
|
Before-tax | |
|
Income | |
|
After-tax | |
|
|
Amount | |
|
Taxes | |
|
Amount | |
|
|
| |
|
| |
|
| |
Additional minimum pension liability
|
|
$ |
(50.3 |
) |
|
$ |
15.8 |
|
|
$ |
(34.5 |
) |
Unrealized loss on derivatives
|
|
|
(1.4 |
) |
|
|
0.6 |
|
|
|
(0.8 |
) |
Unrealized gain on derivatives held by affiliates
|
|
|
4.5 |
|
|
|
(1.8 |
) |
|
|
2.7 |
|
Foreign currency translation adjustments
|
|
|
143.8 |
|
|
|
|
|
|
|
143.8 |
|
|
|
|
|
|
|
|
|
|
|
Total components of other comprehensive income
|
|
$ |
96.6 |
|
|
$ |
14.6 |
|
|
$ |
111.2 |
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts reported in the Companys 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 Companys credit
facility (Note 7) approximates fair value based on the
borrowing rates currently available to the Company for loans
with similar terms and average maturities. At December 31,
2005, the estimated fair values of the Companys
67/8% senior
subordinated notes and
13/4% convertible
notes (Note 7), based on their listed market values, were
$246.4 million and $187.2 million, respectively,
compared to their carrying values of $237.0 million and
$201.3 million, respectively. At December 31, 2004,
the estimated fair values of the Companys
91/2% senior
notes,
67/8% senior
subordinated notes and
13/4% convertible
notes, based on their listed market values, were
$266.3 million, $284.6 million and
$236.2 million, respectively, compared to their carrying
values of $250.0 million, $271.1 million and
$201.3 million, respectively.
The Company enters into foreign currency forward contracts to
hedge the foreign currency exposure of certain receivables,
payables and committed purchases and sales. These contracts are
for periods consistent with the exposure being hedged and
generally have maturities of one year or less. At
December 31, 2005 and
64
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004, the Company had foreign currency forward contracts
outstanding with gross notional amounts of $255.3 million
and $743.6 million, respectively. The Company had an
unrealized loss on foreign currency forward contracts at
December 31, 2005 and 2004 of $0.3 million and
$3.6 million , respectively, which are reflected in the
Companys Consolidated Statements of Operations. These
foreign currency forward contracts do not subject the
Companys 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 currency forward
contracts for speculative trading purposes.
The notional amounts of foreign exchange forward contracts do
not represent amounts exchanged by the parties and therefore are
not a measure of the Companys risk. The amounts exchanged
are calculated on the basis of the notional amounts and other
terms of the contracts. The credit and market risks under these
contracts are not considered to be significant.
In June 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20, Accounting Changes, and Statement
No. 3, Reporting Accounting Changes in Interim Financial
Statements (SFAS No. 154).
SFAS No. 154 changes the requirements for the
accounting for, and reporting of, a change in accounting
principle. Previously, most voluntary changes in accounting
principles were required to be recognized by way of a cumulative
effect adjustment within net income during the period of the
change. SFAS No. 154 requires retrospective
application to prior periods financial statements, unless
it is impracticable to determine either the period-specific
effects or the cumulative effect of the change.
SFAS No. 154 is effective for accounting changes made
in fiscal years beginning after December 15, 2005; however,
the Statement does not change the transition provisions of any
existing accounting pronouncements. The Company does not believe
the adoption of SFAS No. 154 will have a material
effect on its consolidated results of operations or financial
position.
In April 2005, the SEC adopted a new rule that changes the
adoption dates of SFAS No. 123R (Revised 2004),
Share-Based Payment
(SFAS No. 123R), which is a revision of
SFAS No. 123. The SECs new rule allows companies
to implement SFAS No. 123R at the beginning of their
next fiscal year, instead of the next reporting period, that
begins after June 15, 2005. The rule does not change the
accounting required by SFAS No. 123R; it only changes
the dates for compliance with the standard. The Company adopted
SFAS No. 123R using the modified prospective method
effective January 1, 2006. The Company terminated its
executive and director long-term incentive plans at the end of
2005, and the outstanding awards under those plans have been
forfeited. The decision to terminate the plans and related
forfeitures was made primarily to avoid recognizing compensation
cost in the Companys future financial statements upon
adoption of SFAS 123R for these awards and to establish a
new long-term incentive program. The Company plans to grant
awards under a new long-term incentive program during 2006
subject to approval of the Companys stockholders at its
annual stockholders meeting in April 2006. If approved,
the Company currently estimates that the application of the
expensing provisions of SFAS No. 123R will result in a
pre-tax expense during 2006 of approximately $7 to
$8 million.
In March 2005, the FASB issued FASB Interpretation
(FIN) No. 47, Accounting for Conditional
Asset Retirement Obligations An Interpretation of
FASB Statement No. 143 (FIN 47),
which will result in (a) more consistent recognition of
liabilities relating to asset retirement obligations,
(b) more information about expected future cash outflows
associated with those obligations, and (c) more information
about investments in long-lived assets because additional asset
retirement costs will be recognized as part of the carrying
amounts of the assets. FIN 47 clarifies that the term
conditional asset retirement obligation as used in
SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event
that may or may not be within the control of the entity. The
obligation to perform the asset retirement
65
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
activity is unconditional even though uncertainty exists about
the timing and (or) method of settlement. Uncertainty about
the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the
measurement of the liability when sufficient information exists.
FIN 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 is effective no later than
the end of fiscal years ending after December 15, 2005. The
Companys adoption of FIN 47 as of December 31,
2005 did not have a material impact on the Companys
consolidated results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs An Amendment of ARB
No. 43, Chapter 4 (SFAS 151).
SFAS 151 amends the guidance in Accounting Research
Bulletin No. 43, Chapter 4, Inventory
Pricing (ARB No. 43), to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Among
other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight and
rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005
and is required to be adopted in the first quarter of 2006. The
Company currently does not believe that the adoption of
SFAS 151 will have a material impact on its consolidated
results of operations or financial condition.
On October 22, 2004, the American Jobs Creation Act of 2004
(AJCA) was enacted. The AJCA provides a deduction
for income from qualified domestic production activities, which
will be phased in from 2005 through 2010. The AJCA also provides
for a two-year phase out of the existing extra-territorial
income exclusion (ETI) for foreign sales that was
viewed to be inconsistent with international trade protocols by
the European Union. Under the guidance in FASB Staff Position
No. 109-1, Application of FASB Statement
No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, the deduction will be
treated as a special deduction as described in
SFAS No. 109, Accounting for Income Taxes.
As such, the special deduction has no effect on deferred tax
assets and liabilities existing at the enactment date. In
December 2004, the FASB issued Staff Position No. 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004. The AJCA provides multi-national
companies an election to deduct from taxable income 85% of
eligible dividends repatriated from foreign subsidiaries. The
AJCA generally allows companies to take advantage of this
special deduction from November 2004 through the end of calendar
year 2005. The Company did not propose a qualifying plan of
repatriation for 2005 or 2004.
On May 19, 2004, the FASB issued FASB Staff Position
No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP
No. 106-2). FSP No. 106-2 relates to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act) signed into law on December 8,
2003. The Act introduced a prescription drug benefit under
Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare. Based upon the final
regulations released in January 2005, during the third quarter
of 2005, the Company reviewed the provisions of its
postretirement health care plans with its actuaries to determine
whether the benefits offered by its plans met the statutory
definition of actuarially equivalent prescription
drug benefits that qualify for the federal subsidy. Based upon
this review, the Company believes that two of its plans qualify
for the subsidy. In accordance with FSP No. 106-2, the
Company began reflecting the impact of the anticipated subsidies
as of July 1, 2005 on a prospective basis, and revalued its
projected benefit obligation as of July 1, 2005 to
(1) incorporate the benefit associated with the federal
subsidy expected to be received and (2) reduce the discount
rate from 5.75% as of December 31, 2004 to 5.25% as of
July 1, 2005. The revised obligation as of July 1,
2005 reflects a reduction of approximately $5.0 million due
to the impact of the federal subsidy, offset by an increase of
approximately $1.8 million due to the change in the
discount rate. During the last six months of 2005, the
Companys net
66
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
postretirement cost was reduced by approximately
$0.3 million due to the impact of the expected federal
subsidy. The reduction was evenly split between reduced interest
cost and lower amortization of net actuarial losses
(Note 8).
On January 5, 2004, the Company acquired the Valtra tractor
and diesel engine operations of Kone Corporation, a Finnish
company, for
604.6 million,
net of approximately
21.4 million
cash acquired (or approximately $760 million, net). Valtra
is a global tractor and off-road engine manufacturer in the
Nordic region of Europe and Latin America. The acquisition of
Valtra provided the Company with the opportunity to expand its
business in significant global markets by utilizing
Valtras technology and productivity leadership in the
agricultural equipment market. The results of operations for the
Valtra acquisition have been included in the Companys
Consolidated Financial Statements as of and from the date of
acquisition. The Company completed the initial funding of the
cash purchase price of Valtra through the issuance of
$201.3 million principal amount of
13/4% convertible
senior subordinated notes in December 2003, funds borrowed under
revolving credit and term loan facilities that were entered into
January 5, 2004, and $100.0 million borrowed under an
interim bridge facility that was also closed on January 5,
2004. The interim bridge facility was subsequently repaid in
April 2004 upon completion of a common stock offering
(Note 9).
The Valtra acquisition was accounted for in accordance with
SFAS No. 141, Business Combinations, and
accordingly, the Company allocated the purchase price to the
assets acquired and the liabilities assumed based on their fair
values as of the acquisition date. The following table presents
the allocation of the acquisition cost, including professional
fees and other related acquisition costs, to the assets acquired
and liabilities assumed, based upon their fair value:
|
|
|
|
|
|
|
|
(in millions) | |
Cash and cash equivalents
|
|
$ |
27.1 |
|
Accounts receivable
|
|
|
146.2 |
|
Inventories
|
|
|
155.5 |
|
Other current and noncurrent assets
|
|
|
12.5 |
|
Property, plant and equipment
|
|
|
175.0 |
|
Intangible assets
|
|
|
156.9 |
|
Goodwill
|
|
|
358.4 |
|
|
|
|
|
|
Total assets acquired
|
|
|
1,031.6 |
|
|
|
|
|
Accounts payable
|
|
|
77.9 |
|
Accrued expenses
|
|
|
78.1 |
|
Other current liabilities
|
|
|
24.3 |
|
Pension and postretirement benefits
|
|
|
19.6 |
|
Other noncurrent liabilities
|
|
|
34.2 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
234.1 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
797.5 |
|
|
|
|
|
The net assets acquired included transaction costs incurred
during 2004 and 2003.
67
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded approximately $358.4 million of
goodwill and approximately $156.9 million of other
identifiable intangible assets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
Intangible Asset |
|
Amount | |
|
Useful Life | |
|
|
| |
|
| |
Tradename
|
|
$ |
1.0 |
|
|
|
10 years |
|
Tradename
|
|
|
36.9 |
|
|
|
Indefinite |
|
Technology and patents
|
|
|
46.7 |
|
|
|
7 years |
|
Customer relationships
|
|
|
72.3 |
|
|
|
10 years |
|
|
|
|
|
|
|
|
|
|
$ |
156.9 |
|
|
|
|
|
|
|
|
|
|
|
|
The acquired intangible assets have a weighted average useful
life of approximately nine years.
At the date of acquisition, there were two components of
tax-deductible goodwill specifically related to the operations
of Valtra Finland. The first component of tax deductible
goodwill of approximately $201.1 million relates to
goodwill for financial reporting purposes, and this asset will
generate deferred income taxes in the future as the asset is
amortized for income tax purposes. The second component of
tax-deductible goodwill of approximately $157.7 million,
relates to tax deductible goodwill in excess of goodwill for
financial reporting purposes. The tax benefits associated with
this excess will be applied to reduce the amount of goodwill for
financial reporting purposes in the future, if and when such tax
benefits are realized for income tax return purposes. During
2005, the Company realized approximately $3.8 million in
tax benefits associated with the excess tax basis deductible
goodwill, thus resulting in the reduction of goodwill for
financial reporting purposes.
The following pro forma data summarizes the results of
operations for the year ended December 31, 2003, as if the
Valtra acquisition had occurred at January 1, 2003. The
unaudited pro forma information has been prepared for
comparative purposes only and does not purport to represent what
the results of operations of the Company actually would have
been had the transaction occurred on the date indicated or what
the results of operations may be in any future period. The
following pro forma information also excludes the impact of
equity and debt offerings that were completed by the Company
during the second quarter of 2004 (Notes 7
and 9) (in millions, except per share data):
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2003 | |
|
|
| |
Net sales
|
|
$ |
4,446.2 |
|
Income before cumulative effect of a change in accounting
principle
|
|
|
75.1 |
|
Net income
|
|
|
75.1 |
|
Net income per common share basic
|
|
$ |
1.00 |
|
Net income per common share diluted
|
|
$ |
0.99 |
|
The pro forma diluted earnings per share includes the impact of
the contingently convertible senior subordinated note
(Note 1).
|
|
3. |
Restructuring and Other Infrequent Expenses |
The Company recorded restructuring and other infrequent expenses
of $0.0 million, $0.1 million and $27.6 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. The net charges in 2005 include a
$1.5 million gain on the sale of property, plant and
equipment related to the completion of auctions of machinery and
equipment associated with the rationalization of the Randers,
Denmark combine manufacturing operations, announced in July
2004. The gain was offset by $0.8 million of employee
retention payments and facility closure costs incurred
associated with the Randers rationalization, as well as
68
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.7 million of severance and other facility closure costs
related to the rationalization of the Companys Finnish
tractor manufacturing, sales and parts operations. The Company
did not record an income tax benefit or provision associated
with the charges or gain relating to the Randers rationalization
during 2005. The 2004 net charges consisted of an
$8.2 million pre-tax write-down of property, plant and
equipment associated with the Randers rationalization,
$3.3 million of severance and facility closure costs
associated with the Randers rationalization, a $1.4 million
charge associated with the rationalization of certain
administrative functions within the Companys Finnish
tractor manufacturing facility, as well as $0.5 million of
charges associated with various rationalization initiatives in
Europe and the United States initiated in 2002, 2003 and 2004.
These charges were offset by gains on the sale of the
Companys Coventry, England manufacturing facility and
related machinery and equipment of $8.3 million,
$0.9 million of restructuring reserve reversals related to
the Coventry closure and a reversal of $4.1 million of the
previously established provision related to the Companys
U.K. pension plan. The Company did not record an income tax
benefit associated with the charges relating to the Randers
rationalization during 2004. The 2003 expense consisted of a
$12.0 million charge associated with the closure of the
Companys Coventry manufacturing facility, a
$12.4 million charge associated with its U.K. pension plan,
$2.5 million of costs associated with the closure of the
Companys DeKalb, Illinois manufacturing facility,
$1.2 million of charges associated with various functional
rationalizations initiated during 2002 and 2003 and a
$1.5 million write-down of real estate associated with the
Companys closed Willmar, Minnesota facility, offset by a
$2.0 million gain related to the sale of machinery and
equipment at auction from the Coventry facility.
|
|
|
Valtra European sales office rationalizations |
During the second quarter of 2005, the Company announced a
change in its distribution of its Valtra and Fendt products in
Scandinavia by entering into a distribution agreement with a
third-party distributor to distribute Valtra and Fendt equipment
in Sweden and Valtra equipment in Norway and Denmark. As a
result of this agreement and the decision to close other Valtra
European sales offices, the Company initiated the restructuring
and closure of its Valtra sales offices located in the United
Kingdom, Spain, Denmark and Norway, resulting in the termination
of approximately 24 employees. The Danish and Norwegian sales
operations were transferred to the third-party Scandinavian
equipment distributor in October 2005, which included the
transfer of certain employees, assets and lease and supplier
contracts. The Company recorded severance costs, asset
write-downs and other facility closure costs of approximately
$0.4 million, $0.1 million and $0.1 million,
respectively, related to these closures during 2005. During the
fourth quarter of 2005, the Company completed the sale of
property, plant and equipment associated with the sales offices
in the United Kingdom and Norway, and recorded a gain of
approximately $0.2 million, which was reflected within
Restructuring and other infrequent expenses within
the Companys Consolidated Statements of Operations.
Approximately $0.2 million of severance and other facility
closure costs had been paid as of December 31, 2005, and 10
of the 24 employees had been terminated. The remaining
$0.3 million of severance and other facility closure costs
will be paid through 2006.
|
|
|
Valtra Finland administrative and European parts
rationalizations |
During the fourth quarter of 2004, the Company initiated the
restructuring of certain administrative functions within its
Finnish operations, resulting in the termination of
approximately 58 employees. During 2004, the Company recorded
severance costs of approximately $1.4 million associated
with this rationalization. The Company recorded an additional
$0.1 million of costs during the first quarter of 2005
associated with this rationalization, and incurred and paid
$0.8 million of severance costs during 2005. During the
fourth quarter of 2005, the Company reversed $0.1 million
of previously established provisions related to severance costs
as severance claims were finalized during the quarter. As of
December 31, 2005, 56 of the 58 employees had been
terminated. The remaining $0.6 million of severance
payments accrued at December 31, 2005 will be paid through
2009. In addition, during 2005, the Company incurred and
expensed approximately
69
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.3 million of contract termination costs associated with
the rationalization of its Valtra European parts distribution
operations.
|
|
|
Randers, Denmark Rationalization |
In July 2004, the Company announced and initiated a plan related
to the restructuring of its European combine manufacturing
operations located in Randers, Denmark, to include the
elimination of the facilitys component manufacturing
operations, as well as the rationalization of the combine model
range to be assembled in Randers. The restructuring plan will
reduce the cost and complexity of the Randers manufacturing
operations, by simplifying the model range. The Company now
outsources manufacturing of the majority of parts and components
to suppliers and has retained critical key assembly operations
at the Randers facility. Component manufacturing operations
ceased in February 2005. The components of the restructuring
expenses are summarized in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down | |
|
|
|
|
|
|
|
|
|
|
of Property, | |
|
|
|
Employee | |
|
Facility | |
|
|
|
|
Plant and | |
|
Employee | |
|
Retention | |
|
Closure | |
|
|
|
|
Equipment | |
|
Severance | |
|
Payments | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2004 provision
|
|
$ |
8.2 |
|
|
$ |
1.1 |
|
|
$ |
2.1 |
|
|
$ |
0.1 |
|
|
$ |
11.5 |
|
|
Less: Non-cash expense
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash expense
|
|
|
|
|
|
|
1.1 |
|
|
|
2.1 |
|
|
|
0.1 |
|
|
|
3.3 |
|
2004 cash activity
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
(0.6 |
) |
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004
|
|
|
|
|
|
|
0.9 |
|
|
|
1.8 |
|
|
|
0.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 provision
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.9 |
|
2005 provision reversal
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
2005 cash activity
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(2.1 |
) |
|
|
(0.4 |
) |
|
|
(3.4 |
) |
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The write-down of certain property, plant and equipment within
the component manufacturing operation represents the impairment
of real estate and machinery and equipment resulting from the
restructuring, as the rationalization eliminated a majority of
the square footage utilized in the facility. The impairment
charge was based upon the estimated fair value of the assets
compared to their carrying value. The estimated fair value of
the property, plant and equipment was based on current
conditions in the market. The carrying value of the property,
plant and equipment was approximately $11.6 million before
the $8.2 million impairment charge. The machinery,
equipment and tooling was disposed of or sold. A portion of the
buildings, land and improvements are being marketed for sale.
The impaired property, plant and equipment associated with the
Randers rationalization is reported within the Companys
Europe/ Africa/ Middle East segment. During the second quarter
of 2005, the Company completed auctions of remaining machinery
and equipment and recorded a gain of approximately $1.5 million
associated with such actions. The gain was reflected within
Restructuring and other infrequent expenses within
the Companys Consolidated Statements of Operations. The
severance costs relate to the termination of 298 employees. As
of December 31, 2005, all of the 298 employees had been
terminated. The employee retention payments relate to incentives
paid to Randers employees who remained employed until certain
future termination dates and were accrued over the term of the
retention period. During the third quarter of 2005, the Company
reversed $0.1 million of previously established provisions
related to retention payments as employee retention claims were
finalized during the quarter. The facility closure costs include
certain noncancelable operating lease terminations and other
facility exit costs. The Company also recorded a write-down of
approximately $3.7 million of inventory, reflected in
70
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
costs of goods sold, during 2004, related to inventory that was
identified as obsolete as a result of the rationalization.
During the second quarter of 2002, the Company announced and
initiated a restructuring plan related to the closure of its
tractor manufacturing facility in Coventry, England and the
relocation of existing production at Coventry to the
Companys Beauvais, France and Canoas, Brazil manufacturing
facilities. The closure of this facility was consistent with the
Companys strategy to reduce excess manufacturing capacity.
This particular facility manufactured transaxles and assembled
tractors in the range of 50 110 horsepower. The
trend towards higher horsepower tractors resulting from the
consolidation of farms had caused this product segment of the
industry to decline over recent years, which negatively impacted
the facilitys utilization. The components of the
restructuring expenses are summarized in the following table (in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee | |
|
Facility | |
|
|
|
|
Employee | |
|
Retention | |
|
Closure | |
|
|
|
|
Severance | |
|
Payments | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balances as of December 31, 2002
|
|
$ |
8.2 |
|
|
$ |
18.0 |
|
|
$ |
2.1 |
|
|
$ |
28.3 |
|
2003 provision
|
|
|
|
|
|
|
10.2 |
|
|
|
1.8 |
|
|
|
12.0 |
|
2003 cash activity
|
|
|
(8.9 |
) |
|
|
(26.7 |
) |
|
|
(2.5 |
) |
|
|
(38.1 |
) |
Foreign currency translation
|
|
|
1.2 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003
|
|
|
0.5 |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 provision reversal
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(0.5 |
) |
|
|
(0.9 |
) |
2004 cash activity
|
|
|
(0.5 |
) |
|
|
(1.4 |
) |
|
|
(0.8 |
) |
|
|
(2.7 |
) |
Foreign currency translation
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2004
|
|
|
|
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 cash activity
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2005
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2003, the Company sold certain machinery and equipment of
the Coventry facility at auction and, as a result of those
sales, recognized a net gain of approximately $2.0 million.
This gain was reflected in Restructuring and other
infrequent expenses in the Companys Consolidated
Statements of Operations for the year ended December 31,
2003. On January 30, 2004, the Company sold the land,
buildings and improvements of the Coventry facility for
approximately $41.0 million, and as a result of that sale,
recognized a net gain, after selling costs, of approximately
$6.9 million. This gain was reflected in
Restructuring and other infrequent expenses in the
Companys Consolidated Statements of Operations for the
year ended December 31, 2004. The Company will lease part
of the facility back from the buyers for a period of up to three
years, with the ability to exit the lease within two years from
the date of the sale. The Company intends to exit the lease
during 2006, and is required to give six months advance notice.
The Company received approximately $34.4 million of the
sale proceeds on January 30, 2004 and the remaining
$6.6 million on January 28, 2005. In addition, the
Company completed the auctions of the remaining machinery and
equipment, as well as finalized the sale of the facility (and
associated selling costs) during the second quarter of 2004, and
recorded an additional $1.4 million in net gains related to
such actions. The net gains were reflected in
Restructuring and other infrequent expenses in the
Companys Consolidated Statements of Operations for the
year ended December 31, 2004.
The employee severance costs relate to the termination of 1,049
employees. All employees had been terminated as of
December 31, 2004. The employee retention payments relate
to incentives paid to Coventry employees who remained employed
until certain future termination dates and were accrued over the
term of
71
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the retention period. The facility closure costs include certain
noncancelable operating lease terminations and other facility
exit costs. During 2004, the Company reversed approximately
$0.9 million of provisions related to the restructuring
that had been previously established. The reversals were
necessary to adequately reflect more accurate estimates of
remaining obligations related to retention payments, lease
termination payouts and other exit costs, as some employees had
been redeployed or had been terminated earlier than estimated,
and as some supplier and rental contracts had been finalized and
terminated earlier than anticipated.
In October 2002, the Company applied to the High Court in
London, England, for clarification of a provision in its U.K.
pension plan that governs the value of pension payments payable
to an employee who is over 50 years old and who retires
from service in certain circumstances prior to his normal
retirement date. The primary matter before the High Court was
whether pension payments to such employees, including those who
take early retirement and those terminated due to the closure of
the Companys Coventry facility, should be reduced to
compensate for the fact that the pension payments begin prior to
a normal retirement age of 65. In July 2003, a U.K. Court of
Appeal ruled that employees terminated as a result of the
closure of the Coventry facility do not qualify for full
pensions, but ruled that other employees might qualify.
As a result of the ruling in that case, certain employees who
took early retirement in prior years under voluntary retirement
arrangements would be entitled to additional payments, and
therefore the Company recorded a charge in the second quarter of
2003, included in Restructuring and other infrequent
expenses, of approximately £7.5 million (or
approximately $12.4 million) to reflect its estimate of the
additional pension liability associated with previous early
retirement programs. Subsequently, as full details of the Court
of Appeal judgment were published, the Company received more
detailed legal advice regarding the specific circumstances in
which the past voluntary retirements would be subject to the
Courts ruling. Based on this advice, the Company completed
a detailed review of past terminations during the fourth quarter
of 2004, and concluded that the number of former employees who
are considered to be eligible to receive enhanced pensions under
the Courts ruling was lower than the Companys
initial estimate. The Company therefore recorded a reversal of
the established provision of approximately
£2.5 million (or approximately $4.1 million)
during the fourth quarter of 2004, which was included in
Restructuring and other infrequent expenses in the
Companys Consolidated Statements of Operations.
In March 2003, the Company announced the closure of the
Challenger track tractor facility located in DeKalb, Illinois
and the relocation of production to its facility in Jackson,
Minnesota. Production at the DeKalb facility ceased in May 2003
and was relocated and resumed in the Minnesota facility in June
2003. The DeKalb plant assembled Challenger track tractors in
the range of 235 to 500 horsepower. After a review of cost
reduction alternatives, it was determined that current and
future production levels at that time were not sufficient to
support a stand-alone track tractor site. In connection with the
restructuring plan, the
72
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company recorded approximately $2.5 million of
restructuring and other infrequent expenses during 2003. The
components of the restructuring expenses are summarized in the
following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility | |
|
|
|
|
|
|
Write-down | |
|
|
|
|
|
Relocation | |
|
|
|
|
|
|
of Property, | |
|
|
|
Employee | |
|
and | |
|
Facility | |
|
|
|
|
Plant and | |
|
Employee | |
|
Retention | |
|
Transition | |
|
Closure | |
|
|
|
|
Equipment | |
|
Severance | |
|
Payments | |
|
Costs | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2003 provision
|
|
$ |
0.5 |
|
|
$ |
0.5 |
|
|
$ |
0.2 |
|
|
$ |
0.8 |
|
|
$ |
0.5 |
|
|
$ |
2.5 |
|
|
Less: Non-cash expense
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash expense
|
|
|
|
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
2.0 |
|
2003 cash activity
|
|
|
|
|
|
|
(0.5 |
) |
|
|
(0.2 |
) |
|
|
(0.8 |
) |
|
|
(0.5 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2003
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The write-down of property, plant and equipment represented the
impairment of real estate resulting from the facility closure
and was based upon the estimated fair value of the assets
compared to their carrying value. The estimated fair value of
the real estate was determined based on current conditions in
the market. The carrying value of the real estate was
approximately $3.5 million before the impairment charge of
$0.5 million was recorded. The impaired real estate
associated with the DeKalb rationalization was reported within
the Companys North American segment. The severance costs
relate to the termination of 134 employees, following the
completion of production at the DeKalb facility. As of
December 31, 2003, all employees had been terminated. The
employee retention payments relate to incentives paid to DeKalb
employees who remained employed until certain future termination
dates and were accrued over the term of the retention period.
The severance costs were also accrued over the term of the
retention period, as employees were entitled to severance
payments only if they remained in service through their
scheduled termination dates. Certain employees relocated to the
Jackson, Minnesota facility, and costs associated with their
relocation were expensed as incurred. A portion of the machinery
and equipment and all tooling located at DeKalb were relocated
to the Jackson, Minnesota facility during the second quarter of
2003. The remaining portion of machinery and equipment was
disposed of or was sold. The Company sold the DeKalb facility
real estate during the fourth quarter of 2004, for approximately
$3.0 million before associated selling costs, and recorded
a net loss on the sale of the facilities of approximately
$0.1 million. The loss was reflected in Restructuring
and other infrequent expenses in the Companys
Consolidated Statements of Operations.
|
|
|
2002, 2003 and 2004 Functional Rationalizations |
During 2002 through 2004, the Company initiated several
rationalization plans and recorded restructuring and other
infrequent expenses in total of approximately $5.0 million
during 2002, 2003 and 2004. The expenses primarily related to
severance costs and certain lease termination and other exit
costs associated with the rationalization of the Companys
European engineering and marketing personnel, certain components
of the Companys German manufacturing facilities located in
Kempten and Marktoberdorf, Germany, the rationalization of the
Companys European combine engineering operations and the
closure and consolidation of the Companys Valtra United
States and Canadian sales offices into its existing United
States and Canadian sales organizations. The Company did not
record any costs associated with these rationalizations during
2005. Of the $5.0 million of total costs, approximately
$4.0 million relate to severance costs associated with the
termination of approximately 215 employees in total. At
December 31, 2005, all accrued expenses had been incurred
and paid.
73
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2001, the Company permanently closed its manufacturing
facility in Willmar, Minnesota, consolidating its operations
with other closed facilities into its Jackson, Minnesota
manufacturing plant. During the fourth quarter of 2003, the
Company wrote down the carrying value of the real estate of its
Willmar, Minnesota facility, totaling approximately
$2.3 million, to its estimated fair value, and recorded an
impairment charge of approximately $1.5 million, which was
reflected in Restructuring and other infrequent
expenses in the Companys Consolidated Statements of
Operations. The estimated fair value of the real estate was
determined based on current conditions in the market. The
impaired property, plant and equipment associated with the
Willmar facility closure was reported within the Companys
North American segment. During the fourth quarter of 2004, the
Company sold a portion of its Willmar facility for approximately
$0.8 million.
|
|
4. |
Accounts Receivable Securitization |
At December 31, 2005 and 2004, the Company has accounts
receivable securitization facilities in the United States,
Canada, and Europe totaling approximately $480.3 million
and $499.1 million, respectively. During 2004, the Company
amended certain provisions of its United States and Canadian
receivable securitization facilities including the expansion of
the facilities by an additional $30.0 million and
$10.0 million, respectively, and to eliminate the
requirement to maintain certain debt rating levels from Standard
and Poors and Moodys Investor Services. Outstanding
funding under these facilities totaled approximately
$462.7 million at December 31, 2005 and
$458.9 million at December 31, 2004. The funded
balance has the effect of reducing accounts receivable and
short-term liabilities by the same amount.
Under these facilities, wholesale accounts receivable are sold
on a revolving basis to commercial paper conduits either on a
direct basis or through a wholly-owned special purpose
U.S. subsidiary. The Company has reviewed its accounting
for its securitization facilities and its wholly-owned special
purpose U.S. entity in accordance with
SFAS No. 140 and FIN 46R. Due to the fact that
the receivables sold to the commercial paper conduits are an
insignificant portion of the conduits total asset
portfolios and such receivables are not siloed, consolidation is
not appropriate under FIN 46R, as the Company does not
absorb a majority of losses under such transactions. In
addition, these facilities are accounted for as off-balance
sheet transactions in accordance with SFAS No. 140.
Losses on sales of receivables primarily from securitization
facilities were $22.4 million in 2005, $15.6 million
in 2004 and $14.6 million in 2003, and are included in
other expense, net in the Companys
Consolidated Statements of Operations. The losses are determined
by calculating the estimated present value of receivables sold
compared to their carrying amount. The present value is based on
historical collection experience and a discount rate
representing the spread over LIBOR as prescribed under the terms
of the agreements. Other information related to these facilities
and assumptions used in loss calculations are summarized below
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
Canada | |
|
Europe | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Unpaid balance of receivables sold at December 31
|
|
$ |
333.4 |
|
|
$ |
313.4 |
|
|
$ |
94.8 |
|
|
$ |
90.7 |
|
|
$ |
142.3 |
|
|
$ |
174.1 |
|
|
$ |
570.5 |
|
|
$ |
578.2 |
|
Retained interest in receivables sold
|
|
$ |
53.4 |
|
|
$ |
63.4 |
|
|
$ |
34.8 |
|
|
$ |
30.7 |
|
|
$ |
19.7 |
|
|
$ |
25.0 |
|
|
$ |
107.9 |
|
|
$ |
119.1 |
|
Credit losses on receivables sold
|
|
$ |
3.4 |
|
|
$ |
0.3 |
|
|
$ |
0.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4.3 |
|
|
$ |
0.3 |
|
Average liquidation period (months)
|
|
|
3.7 |
|
|
|
5.2 |
|
|
|
3.7 |
|
|
|
5.2 |
|
|
|
2.1 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.0 |
% |
|
|
2.1 |
% |
|
|
3.5 |
% |
|
|
2.9 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
The Company continues to service the sold receivables and
maintains a retained interest in the receivables. No servicing
asset or liability has been recorded since the estimated fair
value of the servicing of
74
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the receivables approximates the servicing income. The retained
interest in the receivables sold is included in the caption
Accounts and notes receivable, net in the
accompanying Consolidated Balance Sheets. The Companys
risk of loss under the securitization facilities is limited to a
portion of the unfunded balance of receivables sold which is
approximately 15% of the funded amount. The Company maintains
reserves for the portion of the residual interest it estimates
is uncollectible. At December 31, 2005 and 2004,
approximately $1.4 million and $11.1 million,
respectively, of the unpaid balance of receivables sold was past
due 60 days or more. The fair value of the retained
interest is approximately $105.9 million and
$116.8 million, respectively, compared to the carrying
amount of $107.9 million and $119.1 million,
respectively, at December 31, 2005 and 2004, and is based
on the present value of the receivables calculated in a method
consistent with the losses on sales of receivables discussed
above. Assuming a 10% and 20% increase in the average
liquidation period, the fair value of the residual interest
would decline by $0.2 million and $0.4 million,
respectively. Assuming a 10% and 20% increase in the discount
rate, the fair value of the residual interest would decline by
$0.2 million and $0.4 million, respectively. For 2005,
the Company received approximately $1,272.4 million from
sales of receivables and $6.4 million for servicing fees.
For 2004, the Company received $1,270.2 million from sales
of receivables and $5.6 million for servicing fees. For
2003, the Company received approximately $1,047.8 million
from sales of receivables and $5.7 million for servicing
fees.
In May 2005, the Company completed an agreement to permit
transferring, on an ongoing basis, the majority of its wholesale
interest-bearing receivables in North America to AGCO Finance
LLC and AGCO Finance Canada, Ltd., its United States and
Canadian retail finance joint ventures. The Company has a 49%
ownership interest in these joint ventures. The transfer of the
receivables is without recourse to the Company, and the Company
will continue to service the receivables. The Company does not
maintain any direct retained interest in the receivables. No
servicing asset or liability has been recorded since the
estimated fair value of the servicing of the receivables
approximates servicing income. The initial transfer of the
wholesale interest-bearing receivables resulted in net proceeds
of approximately $94 million, which were used to redeem the
Companys $250 million
91/2% senior
notes (Note 7). As of December 31, 2005, the balance
of interest-bearing receivables transferred to AGCO Finance LLC
and AGCO Finance Canada, Ltd. under this agreement was
approximately $109.9 million.
|
|
5. |
Investments in Affiliates |
Investments in affiliates as of December 31, 2005 and 2004
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Retail finance joint ventures
|
|
$ |
150.4 |
|
|
$ |
100.1 |
|
Manufacturing joint venture
|
|
|
2.6 |
|
|
|
1.9 |
|
Other joint ventures
|
|
|
11.7 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
$ |
164.7 |
|
|
$ |
114.5 |
|
|
|
|
|
|
|
|
The manufacturing joint venture as of December 31, 2005 and
2004 consisted of a joint venture with an unrelated manufacturer
to produce engines in South America. The other joint ventures
represent minority investments in farm equipment manufacturers,
distributors and licensees.
The Companys equity in net earnings of affiliates for the
years ended December 31, 2005, 2004 and 2003 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Retail finance joint ventures
|
|
$ |
22.0 |
|
|
$ |
18.3 |
|
|
$ |
14.6 |
|
Manufacturing and other joint ventures
|
|
|
0.6 |
|
|
|
2.3 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22.6 |
|
|
$ |
20.6 |
|
|
$ |
17.4 |
|
|
|
|
|
|
|
|
|
|
|
75
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Summarized combined financial information of the Companys
retail finance joint ventures as of December 31, 2005 and
2004 and for the years ended December 31, 2005, 2004 and
2003 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total assets
|
|
$ |
3,046.6 |
|
|
$ |
2,251.6 |
|
Total liabilities
|
|
|
2,739.4 |
|
|
|
2,035.9 |
|
Partners equity
|
|
|
307.2 |
|
|
|
215.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
$ |
187.3 |
|
|
$ |
175.1 |
|
|
$ |
156.0 |
|
Costs
|
|
|
114.0 |
|
|
|
113.9 |
|
|
|
102.8 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
73.3 |
|
|
$ |
61.2 |
|
|
$ |
53.2 |
|
|
|
|
|
|
|
|
|
|
|
The majority of the assets of the Companys retail finance
joint ventures represent finance receivables. The majority of
the liabilities represent notes payable and accrued interest.
Under the various joint venture agreements, Rabobank or its
affiliates are obligated to provide financing to the joint
venture companies. AGCO does not guarantee the debt obligations
of the retail finance joint ventures (Note 13).
The sources of income before income taxes and equity in net
earnings of affiliates were as follows for the years ended
December 31, 2005, 2004 and 2003 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
(50.4 |
) |
|
$ |
(18.6 |
) |
|
$ |
(28.4 |
) |
Foreign
|
|
|
210.5 |
|
|
|
243.0 |
|
|
|
126.7 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in net earnings of
affiliates
|
|
$ |
160.1 |
|
|
$ |
224.4 |
|
|
$ |
98.3 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes by location of the taxing
jurisdiction for the years ended December 31, 2005, 2004
and 2003 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(5.4 |
) |
|
$ |
(3.8 |
) |
|
$ |
(3.9 |
) |
|
|
|
State
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
48.7 |
|
|
|
75.5 |
|
|
|
57.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.2 |
|
|
|
71.7 |
|
|
|
53.6 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
90.8 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
17.1 |
|
|
|
13.9 |
|
|
|
(12.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
107.9 |
|
|
|
14.5 |
|
|
|
(12.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151.1 |
|
|
$ |
86.2 |
|
|
$ |
41.3 |
|
|
|
|
|
|
|
|
|
|
|
76
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005, the Companys foreign
subsidiaries had approximately $1.2 billion of
undistributed earnings. These earnings are considered to be
indefinitely invested, and, accordingly, no United States
federal or state income taxes have been provided on these
earnings. Determination of the amount of unrecognized deferred
taxes on these earnings is not practical; however, unrecognized
foreign tax credits would be available to reduce a portion of
the tax liability.
On October 22, 2004, the United States enacted the American
Jobs Creation Act (AJCA) of 2004. The AJCA provides
multi-national companies an election to deduct from taxable
income 85% of eligible dividends repatriated from foreign
subsidiaries. The AJCA generally allows companies to take
advantage of this special deduction from November 2004 through
the end of calendar year 2005. The Company did not propose a
qualifying plan of repatriation for 2005 or 2004.
A reconciliation of income taxes computed at the United States
federal statutory income tax rate (35%) to the provision for
income taxes reflected in the Consolidated Statements of
Operations for the years ended December 31, 2005, 2004 and
2003 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Provision for income taxes at United States federal statutory
rate of 35%
|
|
$ |
56.0 |
|
|
$ |
78.5 |
|
|
$ |
34.4 |
|
State and local income taxes, net of federal income tax benefit
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(1.1 |
) |
Taxes on foreign income which differ from the United States
statutory rate
|
|
|
(4.8 |
) |
|
|
2.8 |
|
|
|
0.7 |
|
Tax effect of permanent differences
|
|
|
(10.2 |
) |
|
|
7.5 |
|
|
|
0.9 |
|
Adjustment to valuation allowance
|
|
|
110.8 |
|
|
|
(3.1 |
) |
|
|
6.7 |
|
Other
|
|
|
(0.1 |
) |
|
|
1.1 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151.1 |
|
|
$ |
86.2 |
|
|
$ |
41.3 |
|
|
|
|
|
|
|
|
|
|
|
77
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant components of the deferred tax assets and
liabilities at December 31, 2005 and 2004 were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
192.9 |
|
|
$ |
188.2 |
|
|
Sales incentive discounts
|
|
|
42.5 |
|
|
|
36.1 |
|
|
Inventory valuation reserves
|
|
|
23.2 |
|
|
|
23.5 |
|
|
Pensions and postretirement health care benefits
|
|
|
77.1 |
|
|
|
67.9 |
|
|
Warranty and provisions
|
|
|
61.6 |
|
|
|
69.0 |
|
|
Other
|
|
|
32.5 |
|
|
|
46.1 |
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
429.8 |
|
|
|
430.8 |
|
|
|
Valuation allowance
|
|
|
(252.8 |
) |
|
|
(142.9 |
) |
|
|
|
|
|
|
|
|
|
Total net deferred tax assets
|
|
|
177.0 |
|
|
|
287.9 |
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Tax over book depreciation and amortization
|
|
|
140.8 |
|
|
|
123.6 |
|
|
Other
|
|
|
9.3 |
|
|
|
17.1 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
150.1 |
|
|
|
140.7 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
26.9 |
|
|
$ |
147.2 |
|
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Deferred tax assets current
|
|
$ |
39.7 |
|
|
$ |
127.5 |
|
|
Deferred tax assets noncurrent
|
|
|
84.1 |
|
|
|
146.1 |
|
|
Other current liabilities
|
|
|
(8.8 |
) |
|
|
(28.5 |
) |
|
Other noncurrent liabilities
|
|
|
(88.1 |
) |
|
|
(97.9 |
) |
|
|
|
|
|
|
|
|
|
$ |
26.9 |
|
|
$ |
147.2 |
|
|
|
|
|
|
|
|
The Company has recorded a net deferred tax asset of
$26.9 million and $147.2 million as of
December 31, 2005 and 2004, respectively. As reflected in
the preceding table, the Company established a valuation
allowance of $252.8 million and $142.9 million as of
December 31, 2005 and 2004, respectively.
The change in the valuation allowance for the years ended
December 31, 2005, 2004 and 2003 was an increase of
$109.9 million, $1.2 million, and $15.5 million,
respectively. During the fourth quarter of 2005, the Company
recognized a non-cash deferred income tax charge of
$90.8 million related to increasing the valuation allowance
against its United States deferred tax assets.
SFAS No. 109 requires the establishment of a valuation
allowance when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. In
accordance with SFAS No. 109, the Company assessed the
likelihood that its deferred tax assets would be recovered from
estimated future taxable income and available tax planning
strategies and determined that an adjustment to the valuation
allowance was appropriate. In making this assessment, all
available evidence was considered including the current economic
climate, as well as reasonable tax planning strategies. The
Company believes it is more likely than not that the Company
will realize the remaining deferred tax assets, net of the
valuation allowance, in future years. As of December 31,
2005, approximately $3.3 million of the valuation allowance
relates to acquired assets of Valtra and will be recorded as a
reduction of goodwill if and when realized.
The Company had net operating loss carryforwards of
$536.2 million as of December 31, 2005, with
expiration dates as follows: 2006 $4.4 million,
2007 $28.2 million, 2010
$2.6 million and thereafter or
78
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unlimited $501.0 million. These net operating
loss carryforwards include United States net loss carryforwards
of $302.2 million and foreign net operating loss
carryforwards of $234.0 million. The Company paid income
taxes of $55.9 million, $83.4 million, and
$78.5 million for the years ended December 31, 2005,
2004 and 2003, respectively.
Long-term debt consisted of the following at December 31,
2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Credit facility
|
|
$ |
401.5 |
|
|
$ |
424.7 |
|
13/4% Convertible
senior subordinated notes due 2033
|
|
|
201.3 |
|
|
|
201.3 |
|
91/2% Senior
notes due 2008
|
|
|
|
|
|
|
250.0 |
|
67/8% Senior
subordinated notes due 2014
|
|
|
237.0 |
|
|
|
271.1 |
|
Other long-term debt
|
|
|
8.3 |
|
|
|
11.5 |
|
|
|
|
|
|
|
|
|
|
|
848.1 |
|
|
|
1,158.6 |
|
Less: Current portion of long-term debt
|
|
|
(6.3 |
) |
|
|
(6.9 |
) |
|
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$ |
841.8 |
|
|
$ |
1,151.7 |
|
|
|
|
|
|
|
|
The Companys credit facility provides for a
$300.0 million multi-currency revolving credit facility, a
$300.0 million United States dollar denominated term loan
and a
120.0 million
Euro denominated term loan. The maturity date of the revolving
credit facility was automatically extended from March 2008 to
December 2008 due to the redemption of the Companys
91/2% senior
notes on June 23, 2005. The Company was required to prepay
approximately $22.3 million of the United States dollar
denominated term loan and
9.0 million
of the Euro denominated term loan as a result of excess proceeds
received from its common stock public offering in April 2004.
The Company is required to make quarterly payments towards the
United States dollar denominated term loan and Euro denominated
term loan of $0.75 million and
0.3 million,
respectively (or an amortization of one percent per annum until
the maturity date of each term loan). The maturity date for the
term loans was automatically extended from March 2008 to June
2009 due to the redemption of the Companys
91/2% senior
notes on June 23, 2005. The revolving credit and term loan
facilities are secured by a majority of the Companys
United States, Canadian, Finnish and U.K. based
assets and a pledge of a portion of the stock of its domestic
and material foreign subsidiaries. Interest accrues on amounts
outstanding under the revolving credit facility, at the
Companys option, at either (1) LIBOR plus a margin
ranging between 1.50% and 2.25% based upon the Companys
senior debt ratio or (2) the higher of the administrative
agents base lending rate or one-half of one percent over
the federal funds rate plus a margin ranging between 0.25% and
1.0% based on the Companys senior debt ratio. Interest
accrues on amounts outstanding under the term loans at LIBOR
plus 1.75%. The credit facility contains covenants restricting,
among other things, the incurrence of indebtedness and the
making of certain payments, including dividends. The Company
also must fulfill financial covenants including, among others, a
total debt to EBITDA ratio, a senior debt to EBITDA ratio and a
fixed charge coverage ratio, as defined in the facility. As of
December 31, 2005, the Company had total borrowings of
$401.5 million under the credit facility, which included
$272.5 million under the United States dollar denominated
term loan facility and
108.9 million
(approximately $129.0 million) under the Euro denominated
term loan facility. As of December 31, 2005, the Company
had availability to borrow $292.9 million under the
revolving credit facility. As of December 31, 2004, the
Company had total borrowings of $424.7 million under the
credit facility, which included $275.5 million under the
United States dollar denominated term loan facility and
110.1 million
(approximately $149.2 million) under the Euro denominated
term loan facility. As of December 31, 2004, the Company
had availability to borrow $291.2 million under the
revolving credit facility. On March 22, 2005, the
79
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company amended the term loan agreements to, among other
reasons, lower the borrowing rate by 25 basis points from
LIBOR plus 2.00% to LIBOR plus 1.75%.
On December 23, 2003, the Company issued
$201.3 million of
13/4% convertible
senior subordinated notes due 2033 under a private placement
offering. The notes were unsecured obligations and were
convertible into shares of the Companys common stock upon
satisfaction of certain conditions, as discussed below. Interest
is payable on the notes at
13/4% per
annum, payable semi-annually in arrears in cash on June 30
and December 31 of each year. The notes were convertible
into shares of the Companys common stock at an effective
price of $22.36 per share, subject to adjustment. On
June 29, 2005, the Company exchanged the notes for new
notes which provide for (i) the settlement upon conversion
in cash up to the principal amount of the converted new notes
with any excess conversion value settled in shares of the
Companys common stock, and (ii) the conversion rate
to be increased under certain circumstances if the new notes are
converted in connection with certain change of control
transactions occurring prior to December 10, 2010, but
otherwise are substantially the same as the old notes. Holders
may convert the notes only under the following circumstances:
(1) during any fiscal quarter, if the closing sales price
of the Companys common stock exceeds 120% of the
conversion price for at least 20 trading days in the
30 consecutive trading days ending on the last trading day
of the preceding fiscal quarter; (2) during the five
business day period after a five consecutive trading day period
in which the trading price per note for each day of that period
was less than 98% of the product of the closing sale price of
the Companys common stock and the conversion rate;
(3) if the notes have been called for redemption; or
(4) upon the occurrence of certain corporate transactions.
Beginning January 1, 2011, the Company may redeem any of
the notes at a redemption price of 100% of their principal
amount, plus accrued interest. Holders of the notes may require
the Company to repurchase the notes at a repurchase price of
100% of their principal amount, plus accrued interest, on
December 31, 2010, 2013, 2018, 2023 and 2028. The impact of
the exchange completed in June 2005, as discussed above, will
reduce the diluted weighted average shares outstanding in future
periods. The reduction in the diluted shares was approximately
9.0 million shares on a prospective basis and will vary in
the future based on the Companys stock price, once the
market price trigger or other specified conversion circumstances
have been met.
On June 23, 2005, the Company completed the redemption of
its $250 million
91/2% senior
notes due 2008. The Company redeemed the notes at a price of
approximately $261.9 million, which included a premium of
4.75% over the face amount of the senior notes. The premium of
approximately $11.9 million and the write-off of the
remaining balance of deferred debt issuance costs of
approximately $2.2 million were recognized in interest
expense, net during the second quarter of 2005. The funding
source for the redemption was a combination of cash generated
from the transfer of North American wholesale interest-bearing
receivables to the Companys United States and Canadian
retail finance joint ventures, AGCO Finance LLC and AGCO Finance
Canada, Ltd., as well as from revolving credit facility
borrowings and available cash on hand (Note 4).
On April 23, 2004, the Company completed its offering of
200.0 million
of
67/8% senior
subordinated notes due 2014 and received proceeds of
approximately $234.0 million, after offering related fees
and expenses. The
67/8% senior
subordinated notes are unsecured obligations and are
subordinated in right of payment to the Companys existing
or future senior indebtedness. Interest is payable on the notes
at
67/8% per
annum, payable semi-annually on April 15 and
October 15 of each year, beginning October 15, 2004.
Beginning April 15, 2009, the Company may redeem the notes,
in whole or in part, initially at 103.438% of their principal
amount, plus accrued interest, declining to 100% of their
principal amount, plus accrued interest, at any time on or after
April 15, 2012. In addition, before April 15, 2009,
the Company may redeem the notes, in whole or in part, at a
redemption price equal to 100% of the principal amount, plus
accrued interest plus a make-whole premium. Before
April 15, 2007, the Company also may redeem up to 35% of
the notes at 106.875% of their principal amount using the
proceeds from sales of certain kinds of capital stock.
80
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The notes include certain covenants restricting the incurrence
of indebtedness and the making of certain restrictive payments,
including dividends.
At December 31, 2005, the aggregate scheduled maturities of
long-term debt, excluding the current portion of long-term debt
are as follows (in millions):
|
|
|
|
|
2007
|
|
$ |
6.0 |
|
2008
|
|
|
5.2 |
|
2009
|
|
|
389.0 |
|
2010
|
|
|
0.8 |
|
2011
|
|
|
0.8 |
|
Thereafter
|
|
|
440.0 |
|
|
|
|
|
|
|
$ |
841.8 |
|
|
|
|
|
Cash payments for interest were $97.8 million,
$95.6 million and $75.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Company has arrangements with various banks to issue standby
letters of credit or similar instruments, which guarantee the
Companys obligations for the purchase or sale of certain
inventories and for potential claims exposure for insurance
coverage. At December 31, 2005, outstanding letters of
credit issued under the revolving credit facility totaled
$7.1 million.
|
|
8. |
Employee Benefit Plans |
The Company has defined benefit pension plans covering certain
employees principally in the United States, the United Kingdom,
Germany, Finland, Norway, France, Australia, Argentina and
Brazil. The Company also provides certain postretirement health
care and life insurance benefits for certain employees
principally in the United States.
Net annual pension costs for the years ended December 31,
2005, 2004 and 2003 are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
$ |
4.9 |
|
|
$ |
4.8 |
|
|
$ |
6.6 |
|
Interest cost
|
|
|
38.7 |
|
|
|
37.1 |
|
|
|
31.3 |
|
Expected return on plan assets
|
|
|
(33.0 |
) |
|
|
(31.3 |
) |
|
|
(29.3 |
) |
Amortization of net actuarial loss
|
|
|
16.7 |
|
|
|
16.9 |
|
|
|
9.7 |
|
Amortization of transition obligation/(asset) and prior service
cost
|
|
|
(0.1 |
) |
|
|
0.5 |
|
|
|
|
|
Curtailment and other gain
|
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
(4.1 |
) |
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
Net annual pension cost
|
|
$ |
24.9 |
|
|
$ |
23.9 |
|
|
$ |
30.7 |
|
|
|
|
|
|
|
|
|
|
|
81
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average assumptions used to determine the net
annual pension costs for the Companys pension plans for
the years ended December 31, 2005, 2004 and 2003 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Plans: |
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
| |
Weighted average discount rate |
|
|
5.6 |
% |
|
|
5.7 |
% |
|
|
5.8 |
% |
Weighted
average expected long-term rate of return on plan assets |
|
|
7.1 |
% |
|
|
7.1 |
% |
|
|
7.1 |
% |
Rate of increase in
future compensation |
|
|
3.0- 4.0 |
% |
|
|
3.0- 4.0 |
% |
|
|
3.0- 5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.-based
plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate |
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
Weighted
average expected long-term rate of return on plan assets |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
8.0 |
% |
Rate of
increase in future compensation |
|
|
N/ |
A |
|
|
N/ |
A |
|
|
N/ |
A |
Net annual postretirement costs for the years ended
December 31, 2005, 2004 and 2003 are set forth below (in
millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefits |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
| |
|
| |
|
| |
Service cost |
|
$ |
0.7 |
|
|
$ |
0.7 |
|
|
$ |
0.4 |
|
Interest cost |
|
|
2.2 |
|
|
|
2.6 |
|
|
|
1.7 |
|
Amortization of transition and prior service cost
|
|
|
0.2 |
|
|
|
(0.6 |
) |
|
|
(0.9 |
) |
Amortization of unrecognized net loss
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
0.5 |
|
Other
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
Curtailment (gain)/loss
|
|
|
(1.9 |
) |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net annual postretirement cost
|
|
$ |
2.3 |
|
|
$ |
5.8 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth reconciliations of the changes in
benefit obligation, plan assets and funded status as of
December 31, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement | |
|
|
|
Pension Benefits | |
|
Benefits | |
|
|
|
| |
|
| |
Change in benefit obligation |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
|
| |
|
| |
|
| |
|
| |
Benefit obligation at beginning of year
|
|
$ |
751.2 |
|
|
$ |
628.5 |
|
|
$ |
45.1 |
|
|
$ |
30.8 |
|
Service cost
|
|
|
4.9 |
|
|
|
4.8 |
|
|
|
0.7 |
|
|
|
0.7 |
|
Interest cost
|
|
|
38.7 |
|
|
|
37.1 |
|
|
|
2.2 |
|
|
|
2.6 |
|
Plan participants contributions
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
101.4 |
|
|
|
37.8 |
|
|
|
(4.4 |
) |
|
|
13.1 |
|
Acquisitions and other
|
|
|
|
|
|
|
35.2 |
|
|
|
|
|
|
|
1.9 |
|
Amendments
|
|
|
(0.5 |
) |
|
|
(1.5 |
) |
|
|
(2.3 |
) |
|
|
|
|
Curtailment gain
|
|
|
(0.7 |
) |
|
|
|
|
|
|
(4.7 |
) |
|
|
|
|
Benefits paid
|
|
|
(42.1 |
) |
|
|
(39.0 |
) |
|
|
(3.4 |
) |
|
|
(4.0 |
) |
Foreign currency exchange rate changes
|
|
|
(77.4 |
) |
|
|
47.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
776.3 |
|
|
$ |
751.2 |
|
|
$ |
33.2 |
|
|
$ |
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Postretirement Benefits | |
|
|
| |
|
| |
Change in plan assets |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Fair value of plan assets at beginning of year
|
|
$ |
499.7 |
|
|
$ |
427.3 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets
|
|
|
85.6 |
|
|
|
39.3 |
|
|
|
|
|
|
|
|
|
Acquisitions and other
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
27.3 |
|
|
|
28.2 |
|
|
|
3.4 |
|
|
|
4.0 |
|
Plan participants contributions
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(37.0 |
) |
|
|
(35.5 |
) |
|
|
(3.4 |
) |
|
|
(4.0 |
) |
Other
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange rate changes
|
|
|
(50.2 |
) |
|
|
30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$ |
527.9 |
|
|
$ |
499.7 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$ |
(248.4 |
) |
|
$ |
(251.5 |
) |
|
$ |
(33.2 |
) |
|
$ |
(45.1 |
) |
Unrecognized net obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Unrecognized net actuarial loss
|
|
|
251.3 |
|
|
|
244.3 |
|
|
|
10.1 |
|
|
|
19.1 |
|
Unrecognized prior service cost
|
|
|
(2.9 |
) |
|
|
(2.8 |
) |
|
|
(0.5 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
|
|
|
$ |
(10.0 |
) |
|
$ |
(23.6 |
) |
|
$ |
(24.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
0.5 |
|
|
$ |
0.4 |
|
|
$ |
|
|
|
$ |
0.3 |
|
Accrued benefit liability
|
|
|
(216.9 |
) |
|
|
(223.6 |
) |
|
|
(23.6 |
) |
|
|
(25.0 |
) |
Additional minimum pension liability
|
|
|
216.4 |
|
|
|
213.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
|
|
|
$ |
(10.0 |
) |
|
$ |
(23.6 |
) |
|
$ |
(24.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension costs of approximately $4.4 million have
been classified as current liabilities as of December 31,
2005.
The weighted average assumptions used to determine the benefit
obligation for the Companys pension plans as of
December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Plans: |
|
|
|
|
|
2005 | |
|
2004 | |
|
|
|
|
|
|
| |
|
| |
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
|
5.0% |
|
|
|
5.6% |
|
Weighted average expected long-term rate of return on plan assets
|
|
|
|
|
|
|
|
|
|
|
7.1% |
|
|
|
7.1% |
|
Rate of increase in future compensation
|
|
|
|
|
|
|
|
|
|
|
3.0-4.0% |
|
|
|
3.0-4.0% |
|
|
U.S. based plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
|
|
5.5% |
|
|
|
5.75% |
|
Weighted average expected long-term rate of return on plan assets
|
|
|
|
|
|
|
|
|
|
|
8.0% |
|
|
|
8.0% |
|
Rate of increase in future compensation
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
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
$770.0 million, $732.3 million and
$515.8 million, respectively, as of December 31, 2005
and $747.5 million, $710.0 million and
$490.4 million, respectively, as of December 31, 2004.
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the Companys
U.S.-based pension
plans were $52.1 million, $52.1 million and
$41.7 million, respectively, as of December 31, 2005,
and $51.7 million, $51.7 million and
$39.7 million, respectively, as of December 31, 2004.
At December 31, 2005 and 2004, the Company had recorded a
reduction to equity of $216.4 million, net of taxes of
$66.3 million, and $213.2 million, net of taxes
83
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of $65.9 million, respectively, related to the recording of
a minimum pension liability primarily related to the
Companys U.K. pension plan where the accumulated benefit
obligation exceeded plan assets.
The Company utilizes a September 30 measurement date to
determine the pension benefit measurements for the
Companys U.K. pension plan. The Company utilizes a
December 31 measurement date to determine the pension and
postretirement benefit measurements for the Companys plans
in the United States and the rest of the world.
The Company bases the discount rate used to determine the
projected benefit obligation for its U.S. pension plans on
the Moodys Investor Service Aa bond yield as of
December 31 of each year. For its
non-U.S. plans,
the Company bases the discount rate on comparable indices within
each of those countries, such as the
15-year iBoxx AA
corporate bond yield in the United Kingdom. The indices used in
the United States, the United Kingdom and other countries were
chosen to match the expected plan obligations and related
expected cash flows.
The weighted average asset allocation of the Companys
U.S. pension benefit plans at December 31, 2005 and
2004 are as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category |
|
|
2005 | |
|
2004 | |
|
|
|
| |
|
| |
Large cap domestic equity securities
|
|
|
47 |
% |
|
|
46 |
% |
International equity securities
|
|
|
12 |
% |
|
|
11 |
% |
Domestic fixed income securities
|
|
|
28 |
% |
|
|
32 |
% |
Other investments
|
|
|
13 |
% |
|
|
11 |
% |
|