================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K
CURRENT REPORT
DATED DECEMBER 15, 2003
of
AGCO CORPORATION
A Delaware Corporation
IRS Employer Identification No. 58-1960019
SEC File Number 1-12930
4205 RIVER GREEN PARKWAY
DULUTH, GEORGIA 30096
(770) 813-9200
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ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE.
Certain information is attached hereto regarding AGCO Corporation's
proposed acquisition of Valtra.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The financial statements included as Exhibit 99.2 hereto are being
filed to reflect the adoption of SFAS No. 145 "Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which requires reclassification to continuing operations from extraordinary
items of gains and losses on debt extinguishments in prior periods. The
adoption does not alter the previously reported net income of AGCO Corporation
for the period affected.
(C) EXHIBITS
99.1 Certain information regarding Valtra.
99.2 Consolidated financial statements of AGCO Corporation and its
subsidiaries for each of the years in the three-year period
ended December 31, 2002 as follows:
Independent Auditors' Report
Copy of Report Previously Issued by the Company's Former
Independent Public Accountants
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
99.3 Consent of KPMG LLP for the 2002 consolidated financial
statements of AGCO Corporation and its subsidiaries.
99.4 Notice Regarding Absence of Consent of Arthur Andersen LLP
relating to the financial statements of AGCO Corporation.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
AGCO Corporation
By: /s/ Andrew H. Beck
-------------------------------------
Andrew H. Beck
Senior Vice President and
Chief Financial Officer
Dated: December 15, 2003
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------------- ----------------------------------------------------------
<S> <C>
99.1 Certain information regarding Valtra
99.2 Consolidated financial statements of AGCO Corporation
and its subsidiaries for each of the years in the
three-year period ended December 31, 2002
99.3 Consent of KPMG LLP for the 2002 consolidated
financial statements of AGCO Corporation and its
subsidiaries
99.4 Notice Regarding Absence of Consent of Arthur
Andersen LLP relating to the financial statements of
AGCO Corporation
</TABLE>
EXHIBIT 99.1
CERTAIN INFORMATION REGARDING VALTRA
VALTRA ACQUISITION
In September 2003, we announced an agreement to acquire the Valtra
tractor and diesel engine operations of Kone Corporation, a Finnish company,
which we refer to as "Kone," for euro 600.0 million cash, subject to customary
closing conditions and post-closing adjustments to the purchase price. Valtra is
a global tractor and off-road engine manufacturer with market leadership
positions in the Nordic region of Europe and Latin America. Valtra is known for
its strong engineering and technical skills in tractor and diesel engine
manufacturing, which allow it to produce high-quality products in an efficient
and expedited basis. In addition, Valtra has a unique and highly effective
direct sales network in certain markets which, together with Valtra's "made to
order" manufacturing process, has allowed it to achieve significant market share
in its core markets. Valtra has focused on becoming a market leader in the
industry in terms of returns and margins rather than market share. For the year
ended December 31, 2002, Valtra's total revenues, income from operations and net
income were euro 761.7 million, euro 44.6 million and euro 6.9 million,
respectively. For the nine months ended September 30, 2003, Valtra's total
revenues, income from operations and net income were euro 626.6 million,
euro 49.8 million and euro 40.6 million, respectively. These amounts are
prepared in accordance with generally accepted accounting principles in Finland,
or Finnish GAAP.
We believe that the Valtra acquisition provides several strategic and
financial opportunities for us. These opportunities include access to Valtra's
Nordic and Latin American customers, a world class research and development
department and a quality source of engines that can be used with several of our
existing product lines. We expect the Valtra business to benefit from access to
our worldwide customer base and strong dealer network and access to our other
products and technology. We also have identified a number of areas where we
believe we can achieve technology, supply and distribution efficiencies in
operating the combined companies.
The cash purchase of Valtra is approximately $733 million at the
current exchange rate.
We intend to permanently finance the purchase price through the private
placement of $150 million of convertible senior subordinated notes, the public
sale of common stock and subordinated notes, and new revolving credit and term
loan facilities provided by Rabobank and Morgan Stanley Senior Funding, Inc.
Although we have not finalized the mix of common stock and debt that we will
sell in addition to the notes, we currently expect to issue approximately $250
million in common stock and $300 million in subordinated notes and to enter into
a new $300 million revolving credit facility (which would replace our existing
$350 million revolving credit facility) and a $450 million term loan facility.
However, the terms for the new facilities have not yet been finalized, nor have
the terms for the bridge financing facility described below. To the extent
additional funds are available, we intend to repay amounts outstanding under our
revolving credit facility.
In order to sell our common stock and subordinated notes in public
offerings, we are required to file with the SEC the audited financial statements
of Valtra (prepared in accordance with United States generally accepted
accounting principles, or U.S. GAAP) and our pro forma financial statements
giving effect to the acquisition. We are preparing the required financial
statements and pro forma financial statements, but they are not yet complete. As
a result, we have arranged for interim bridge financing to be provided by
Rabobank and Morgan Stanley Senior Funding, Inc. The terms of this bridge
financing currently provide for the Company to borrow approximately $100 million
which, together with the proceeds from this offering, and approximately $30
million that we can borrow under the new revolving credit facility and $450
million that we can borrow under the new term loan facility, would enable us to
pay the purchase price for Valtra in cash.
The transaction was approved by European Union regulatory authorities
on December 12, 2003, and we expect to close the acquisition of Valtra in
January 2004. We have applied to the Brazilian competition authority for its
approval of the purchase, although under Brazilian law we are not required to
have that approval in order to complete the purchase, and we have agreed to
complete the purchase even if we do not receive that approval. The Brazilian
competition authority may, either before or after we complete the purchase,
impose conditions on how we
operate both Valtra's Brazilian business and our existing Brazilian business. At
this time, we cannot predict with certainty when or whether the Brazilian
competition authority will grant its approval. The timing and the conditions of
such approval may delay or prevent us from fully executing our business plan for
operating the Valtra business and our existing business or may force us to sell
a portion of the Valtra business or our existing business. In the event that the
purchase of Valtra is not consummated by September 10, 2004, due to our failure
to fulfill our closing obligations or the failure to receive necessary
approvals, we have agreed to pay Kone euro 20 million cash, which is
approximately $24.0 million.
2
VALTRA SUMMARY FINANCIAL DATA
The financial information below regarding Valtra was provided to us by
Kone and was prepared in accordance with Finnish GAAP. Finnish GAAP differs in
certain significant respects from U.S. GAAP, including but not limited to
differences with respect to revenue recognition, commitments and contingencies,
employee benefit obligations, and purchase accounting related to the fair value
of assets acquired and liabilities assumed. In addition, this information has
not been separately audited, and we have not independently verified this
information. This information is not necessarily indicative of Valtra's future
results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -- ---------------------
2000 2001 2002 2002 2003
---- ---- ---- ---- ----
(IN MILLION EUROS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales..................... 671.1 685.5 761.7 554.4 626.6
Gross profit.................. 118.1 122.2 137.4 99.2 119.9
Income from operations........ 33.3 25.9 44.6 31.5 49.8
Net (loss) income............. (0.3) 4.7 6.9 20.5 40.6
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
30, 2003
---------------
(IN MILLION
EUROS)
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... 123.2
Working capital................ 95.5
Total assets................... 476.6
Total long-term debt........... 76.5
Stockholders' equity........... 89.1
</TABLE>
3
VALTRA BUSINESS
Valtra is a global tractor and off-road engine manufacturer
headquartered in Suolahti, Finland and is the fifth largest tractor producer in
the world. Valtra sells its Valtra brand tractors and Sisu brand diesel engines
in over 70 countries and has leading market positions in the Nordic region and
in Latin America. Over the last few years, Valtra has focused on becoming the
market leader in tractors in terms of return on assets and operating margin
rather than market share.
Valtra's operations are structured around three divisions: Tractors
Europe, Tractors Latin America and Sisu Diesel Engines.
TRACTOR DIVISIONS
Valtra's Tractors Europe business is the Nordic market leader with an
approximate 30% market share, while its Western European market share has grown
over the last ten years. Valtra has been the market leader in Scandinavia since
its merger with Volvo's tractor business in 1979. Valtra has operated in Finland
for 52 years.
Tractors Latin America is the third largest tractor manufacturer in the
Latin American market. It established its factory near Sao Paulo in 1960, which
is the largest factory of its kind in Brazil.
DIESEL ENGINE DIVISION
Valtra's Sisu Diesel Engines division produces Sisu diesel engines,
gears and generating sets for sale to third parties, including AGCO, CNH Global
and Partek, as well as Valtra's two tractor divisions. The Sisu diesel
manufacturing facilities are located in Nokia, Finland.
The Engines Division specializes in the manufacture of off-road engines
in the 50-450 horsepower range. Sisu engines are built to deliver lower
horsepower but very high torque, which enables them to perform on par with
larger, more powerful engines produced by Sisu's competitors.
In 2002, Sisu introduced the new Fortius engine series, which complies
with Tier 2 pollution rules set by European Union regulatory authorities. Valtra
expects to introduce engines meeting Tier 3 requirements in 2005.
PRODUCTION INITIATIVES
During the recession of the 1990s, Valtra restructured its sales and
production processes for its Nordic customers by applying the concept of "mass
customization" to its tractor production and sales. Customers are able to order
customized tractors that Valtra assembles as orders are received. Because the
final product is built to order, all parts and required assemblies can be
ordered directly from Valtra's suppliers and used immediately. With its
just-in-time production process, Valtra is able to produce customized products
and reduce inventories of parts, assemblies and final tractors while having a
more focused customer sales effort and more efficient dealers. As a result of
this process, Valtra reduces its requirement to maintain finished goods
inventories.
In late 2002, Valtra introduced several new product lines and commenced
plant expansions in Suolahti, Finland to meet growing demand following record
sales in 2002. Many of Valtra's worldwide sales are direct-to-end-user,
providing Valtra with unique, direct customer access.
Valtra is currently owned by Kone, a Finnish engineering and services
company, which acquired Valtra in 2002 as part of the acquisition of Partek AB.
In order to reduce debt and concentrate on container and load handling, Kone
made the strategic decision to sell, among other assets, the Valtra tractor and
Sisu engine businesses. We agreed to acquire these businesses in September 2003
and expect to close the acquisition in January 2004.
4
EXHIBIT 99.2
Independent Auditors' Report
The Board of Directors
AGCO Corporation:
We have audited the accompanying consolidated balance sheet of AGCO
Corporation and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2002. In connection with our audit of the 2002
consolidated financial statements, we also have audited the 2002 financial
statement schedule as listed in Item 15(a)3. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit. The consolidated balance sheet as of December 31, 2001 and the related
statements of operations, stockholders' equity and cash flows for each of the
years in the two year period ended December 31, 2001, before the revision as
described in Note 1 to these consolidated financial statements, and financial
statement schedule of AGCO Corporation and subsidiaries as listed in Item 15(a)3
were audited by other auditors who have ceased operations. Those auditors'
reports, dated February 6, 2002, on those consolidated financial statements and
financial statement schedule were unqualified and included an explanatory
paragraph that described the change in the Company's method of accounting for
derivative instruments and hedging activities as discussed in Note 11 to those
consolidated financial statements and excluded the revision as described in Note
1 to these accompanying consolidated financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of AGCO
Corporation and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related 2002 financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
As discussed above, the consolidated balance sheet as of December 31,
2001 and the related statements of operations, stockholders' equity and cash
flows for each of the years in the two year period ended December 31, 2001 and
financial statement schedule of AGCO Corporation and subsidiaries as listed in
Item 15(a)3 were audited by other auditors who have ceased operations. As
described in Note 1, these consolidated financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was
adopted by the Company as of January 1, 2002. As described in Note 1, these
consolidated financial statements have been revised to adopt the provisions of
SFAS No. 145 "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which requires reclassification of
gains and losses on debt extinguishments in prior periods from extraordinary
items to continuing operations. In our opinion, these reclassifications and
disclosures for 2001 and 2000 described in Note 1 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001 and 2000
consolidated financial statements and financial statement schedule of AGCO
Corporation and subsidiaries other than with respect to such disclosures and
reclassifications and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 and 2000 consolidated financial statements and
financial statement schedule taken as a whole.
/s/ KPMG LLP
Atlanta, Georgia
February 28, 2003
NOTE: THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
THE COMPANY'S FORMER INDEPENDENT PUBLIC ACCOUNTANTS. THE ARTHUR
ANDERSEN REPORT REFERS TO CERTAIN FINANCIAL INFORMATION FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1999 AND CERTAIN BALANCE SHEET INFORMATION AT
DECEMBER 31, 2000, WHICH ARE NO LONGER INCLUDED IN THE ACCOMPANYING
FINANCIAL STATEMENTS. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP IN CONNECTION WITH THE FILING OF THIS ANNUAL REPORT ON
FORM 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGCO Corporation:
We have audited the accompanying consolidated balance sheets of AGCO
CORPORATION AND SUBSIDIARIES as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AGCO Corporation and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 11 to the consolidated financial statements, in
accordance with the requirements of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," AGCO
Corporation changed its method of accounting for derivative instruments and
hedging activities effective January 1, 2001.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 6, 2002
2
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 2,922.7 $ 2,541.5 $ 2,336.1
Cost of goods sold 2,390.9 2,106.7 1,959.5
----------- ----------- -----------
Gross profit 531.8 434.8 376.6
Selling, general and administrative expenses 282.4 249.9 224.4
Engineering expenses 57.2 49.6 45.6
Restricted stock compensation expense 44.1 7.1 3.8
Restructuring and other infrequent expenses 42.7 13.0 21.9
Amortization of intangibles 1.4 18.5 15.1
----------- ----------- -----------
Income from operations 104.0 96.7 65.8
Interest expense, net 57.4 59.9 46.6
Other expense, net 20.8 23.4 33.1
----------- ----------- -----------
Income (loss) before income taxes, equity in net earnings of
affiliates and cumulative effect of a change in
accounting principle 25.8 13.4 (13.9)
Income tax provision (benefit) 99.8 1.4 (7.6)
----------- ----------- -----------
(Loss) income before equity in net earnings of affiliates
and cumulative effect of a change in accounting principle (74.0) 12.0 (6.3)
Equity in net earnings of affiliates 13.7 10.6 9.8
----------- ----------- -----------
(Loss) income before cumulative effect of a change in
accounting principle (60.3) 22.6 3.5
Cumulative effect of a change in accounting principle, net
of taxes (24.1) -- --
----------- ----------- -----------
Net (loss) income $ (84.4) $ 22.6 $ 3.5
=========== =========== ===========
Net (loss) income per common share:
Basic:
(Loss) income before cumulative effect of a change
in accounting principle $ (0.81) $ 0.33 $ 0.06
Cumulative effect of a change in accounting
principle, net of taxes (0.33) -- --
----------- ----------- -----------
Net (loss) income $ (1.14) $ 0.33 $ 0.06
=========== =========== ===========
Diluted:
(Loss) income before cumulative effect of a change
in accounting principle $ (0.81) $ 0.33 $ 0.06
Cumulative effect of a change in accounting
principle, net of taxes (0.33) -- --
----------- ----------- -----------
Net (loss) income $ (1.14) $ 0.33 $ 0.06
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding:
Basic 74.2 68.3 59.2
=========== =========== ===========
Diluted 74.2 68.5 59.7
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
AGCO CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 34.3 $ 28.9
Accounts and notes receivable, net 497.4 471.9
Inventories, net 708.6 558.8
Other current assets 171.9 122.9
---------- ----------
Total current assets 1,412.2 1,182.5
Property, plant and equipment, net 343.7 316.9
Investment in affiliates 78.5 69.6
Other assets 120.0 190.9
Intangible assets, net 394.6 413.4
---------- ----------
Total assets $ 2,349.0 $ 2,173.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 312.0 $ 272.2
Accrued expenses 445.2 350.7
Other current liabilities 27.8 19.9
---------- ----------
Total current liabilities 785.0 642.8
Long-term debt 636.9 617.7
Pensions and postretirement health care benefits 131.9 55.0
Other noncurrent liabilities 77.6 58.4
---------- ----------
Total liabilities 1,631.4 1,373.9
---------- ----------
Commitments and Contingencies (Note 12)
Stockholders' Equity:
Common stock; $0.01 par value, 150,000,000 shares authorized,
75,197,285 and 72,311,107 shares issued and outstanding in
2002 and 2001, respectively 0.8 0.7
Additional paid-in capital 587.6 531.5
Retained earnings 560.6 645.0
Unearned compensation (0.7) (0.6)
Accumulated other comprehensive loss (430.7) (377.2)
---------- ----------
Total stockholders' equity 717.6 799.4
---------- ----------
Total liabilities and stockholders' equity $ 2,349.0 $ 2,173.3
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ---------------------- PAID-IN RETAINED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
------ ------ --------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 -- $ -- 59,579,559 $ 0.6 $ 427.7 $ 621.9 $ (5.1)
Net income -- -- -- -- -- 3.5 --
Forfeitures of restricted stock -- -- (29,833) -- (0.9) -- 0.2
Stock options exercised -- -- 39,702 -- 0.3 -- --
Common stock dividends
($0.04 per common share) -- -- -- -- -- (2.5) --
Amortization of unearned
compensation -- -- -- -- -- -- 3.5
Additional minimum pension
liability -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
-------- ---- ----------- ---- ------ ------ ----
Balance, December 31, 2000 -- -- 59,589,428 0.6 427.1 622.9 (1.4)
Net income -- -- -- -- -- 22.6 --
Issuance of preferred shares 555 -- -- -- 5.3 -- --
Conversion of preferred shares
into common stock (555) -- 555,000 -- -- -- --
Issuance of common stock, net
of offering expenses -- -- 11,799,377 0.1 99.2 -- --
Issuance of restricted stock -- -- 226,960 -- 3.5 -- (0.4)
Tax difference on restricted
stock expense -- -- -- -- (4.7) -- --
Stock options exercised -- -- 140,342 -- 1.1 -- --
Common stock dividends
($0.01 per common share) -- -- -- -- -- (0.5) --
Amortization of unearned
compensation -- -- -- -- -- -- 1.2
Additional minimum pension
liability, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives held by
affiliates, net -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
-------- ---- ----------- ---- ------ ------ ----
Balance, December 31, 2001 -- -- 72,311,107 0.7 531.5 645.0 (0.6)
Net loss -- -- -- -- -- (84.4) --
Issuance of common stock, net
of offering expenses -- -- 1,020,356 0.1 21.3 -- --
Issuance of restricted stock -- -- 1,088,072 -- 24.5 -- (3.1)
Stock options exercised -- -- 777,750 -- 9.0 -- --
Income tax benefit of stock
options exercised -- -- -- -- 1.3 -- --
Amortization of unearned
compensation -- -- -- -- -- -- 3.0
Additional minimum pension
liability, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives, net -- -- -- -- -- -- --
Deferred gains and losses on
derivatives held by
affiliates, net -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
-------- ---- ----------- ------ -------- ------ ----
Balance, December 31, 2002 -- $ -- 75,197,285 $ 0.8 $ 587.6 $ 560.6 $ (0.7)
======== ==== =========== ====== ======== ====== ====
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE LOSS
--------------------------------------------------------
ADDITIONAL ACCUMULATED
MINIMUM CUMULATIVE DEFERRED OTHER TOTAL
PENSION TRANSLATION LOSSES ON COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
LIABILITY ADJUSTMENT DERIVATIVES LOSS EQUITY LOSS
------- ----------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $ -- $ (216.0) $ -- $ (216.0) $ 829.1
Net income -- -- -- -- 3.5 $ 3.5
Forfeitures of restricted stock -- -- -- -- (0.7)
Stock options exercised -- -- -- -- 0.3
Common stock dividends
($0.04 per common share) -- -- -- -- (2.5)
Amortization of unearned -- -- -- -- 3.5
compensation
Additional minimum pension
liability (2.8) -- -- (2.8) (2.8) (2.8)
Change in cumulative
translation adjustment -- (40.5) -- (40.5) (40.5) (40.5)
------- ------- ------- -------- -------- ---------
Balance, December 31, 2000 (2.8) (256.5) -- (259.3) 789.9 (39.8)
=========
Net income -- -- -- -- 22.6 22.6
Issuance of preferred shares -- -- -- -- 5.3
Conversion of preferred shares
into common stock -- -- -- -- --
Issuance of common stock, net
of offering expenses -- -- -- -- 99.3
Issuance of restricted stock -- -- -- -- 3.1
Tax difference on restricted
stock expense -- -- -- -- (4.7)
Stock options exercised -- -- -- -- 1.1
Common stock dividends
($0.01 per common share) -- -- -- -- (0.5)
Amortization of unearned
compensation -- -- -- -- 1.2
Additional minimum pension
liability, net (34.3) -- -- (34.3) (34.3) (34.3)
Deferred gains and losses on
derivatives, net -- -- (0.1) (0.1) (0.1) (0.1)
Deferred gains and losses on
derivatives held by
affiliates, net -- -- (5.8) (5.8) (5.8) (5.8)
Change in cumulative
translation adjustment -- (77.7) -- (77.7) (77.7) (77.7)
------- ------- ------- -------- -------- ---------
Balance, December 31, 2001 (37.1) (334.2) (5.9) (377.2) 799.4 (95.3)
=========
Net loss -- -- -- -- (84.4) (84.4)
Issuance of common stock, net
of offering expenses -- -- -- -- 21.4
Issuance of restricted stock -- -- -- -- 21.4
Stock options exercised -- -- -- -- 9.0
Income tax benefit of stock
options exercised -- -- -- -- 1.3
Amortization of unearned
compensation -- -- -- -- 3.0
Additional minimum pension
liability, net (56.8) -- -- (56.8) (56.8) (56.8)
Deferred gains and losses on
derivatives, net -- -- 0.9 0.9 0.9 0.9
Deferred gains and losses on
derivatives held by
affiliates, net -- -- 0.4 0.4 0.4 0.4
Change in cumulative
translation adjustment -- 2.0 -- 2.0 2.0 2.0
------- ------- ------- -------- -------- ---------
Balance, December 31, 2002 $ (93.9) $(332.2) $ (4.6) $ (430.7) $ 717.6 $ (137.9)
======= ======= ======= ======== ======== =========
</TABLE>
5
See accompanying notes to consolidated financial statements.
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (84.4) $ 22.6 $ 3.5
--------- ---------- ---------
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle, net of taxes 24.1 -- --
Depreciation and amortization 50.9 53.2 51.6
Amortization of intangibles 1.4 18.5 15.1
Restricted stock compensation 24.4 4.3 3.0
Equity in net earnings of affiliates, net of cash received (2.7) 4.0 (0.1)
Deferred income tax provision (benefit) 48.4 (32.8) (37.6)
Write-down / (recoveries) of property, plant and equipment 11.6 (0.3) 1.3
Gain on sale of investment in affiliate -- (5.2) --
Changes in operating assets and liabilities, net of effects from
purchase of businesses:
Accounts and notes receivable, net 43.4 111.7 127.8
Inventories, net (119.0) 39.6 23.7
Other current and noncurrent assets 2.2 0.5 (9.9)
Accounts payable 7.4 16.0 (0.6)
Accrued expenses 66.2 (8.2) (7.8)
Other current and noncurrent liabilities (0.7) 1.5 4.4
--------- ---------- ---------
Total adjustments 157.6 202.8 170.9
--------- ---------- ---------
Net cash provided by operating activities 73.2 225.4 174.4
--------- ---------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (54.9) (39.3) (57.7)
Proceeds from sales of property, plant and equipment 13.8 4.7 --
Purchase of businesses, net of cash acquired (60.7) (147.5) (10.0)
Sale of / (investments in) affiliates, net 1.2 1.3 (2.0)
--------- ---------- ---------
Net cash used for investing activities (100.6) (180.8) (69.7)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 659.8 1,256.6 413.3
Repayments of long-term debt (637.6) (1,276.3) (520.8)
Proceeds from issuance of preferred and common stock 10.3 6.4 0.3
Payment of debt and common stock issuance costs -- (13.1) --
Dividends paid on common stock -- (0.5) (2.5)
--------- ---------- ---------
Net cash provided by (used for) financing activities 32.5 (26.9) (109.7)
--------- ---------- ---------
Effects of exchange rate changes on cash and cash equivalents 0.3 (2.1) (1.3)
--------- ---------- ---------
Increase (decrease) in cash and cash equivalents 5.4 15.6 (6.3)
Cash and cash equivalents, beginning of period 28.9 13.3 19.6
--------- ---------- ---------
Cash and cash equivalents, end of period $ 34.3 $ 28.9 $ 13.3
========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
AGCO Corporation ("AGCO" or the "Company") is a leading manufacturer
and distributor of agricultural equipment and related replacement parts
throughout the world. The Company sells a full range of agricultural equipment,
including tractors, combines, hay tools, sprayers, forage equipment and
implements. The Company's products are widely recognized in the agricultural
equipment industry and are marketed under the following brand names: AGCO(R),
AgcoAllis(R), AgcoStar(R), Ag-Chem(R), Challenger(R), Farmhand(R), Fendt(R),
Fieldstar(R), Gleaner(R), Glencoe(R), Hesston(R), Lor*Al(R), Massey Ferguson(R),
New Idea(R), RoGator(R), Soilteq(TM), Spra-Coupe(R), Sunflower(R), Terra-
Gator(R), Tye(R), White(R) and Willmar(R). The Company distributes most of its
products through a combination of approximately 8,450 independent dealers,
distributors, associates and licensees. In addition, the Company provides retail
financing in North America, the United Kingdom, France, Germany, Spain and
Brazil through its retail finance joint ventures with Cooperative Centrale
Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland".
BASIS OF PRESENTATION
The Consolidated Financial Statements represent the consolidation of
all wholly-owned and majority-owned companies where controlling interest exists.
The Company records all affiliate companies representing a 20% to 50% ownership
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 to arrive at the consolidated
financial statements.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
REVENUE RECOGNITION
Sales of equipment and replacement parts are recorded by the Company
when title and risks of ownership have been transferred to the independent
dealer, distributor or other customer. Payment terms vary by market and product
with fixed payment schedules on all sales. The terms of sale generally require
that a purchase order or order confirmation accompany all shipments. Title
generally passes to the dealer or distributor upon shipment and the risk of loss
upon damage, theft or destruction of the equipment is the responsibility of the
dealer or distributor. The dealer or distributor may not return equipment or
replacement parts while its contract with the Company is in force. Replacement
parts may be returned only under promotional and annual return programs.
Provisions for returns under these programs are made at the time of sale based
on the terms of the program and historical returns experience. The Company may
provide certain sales incentives to dealers and distributors. Provisions for
sales incentives are made at the time of sale for existing incentive programs.
These provisions are revised in the event of subsequent modification to the
incentive program.
In the United States and Canada, all equipment sales to dealers are
immediately due upon a retail sale of the equipment by the dealer. If not
already paid by the dealer in the United States and Canada, installment payments
are required generally beginning 7 to 13 months after shipment with the
remaining outstanding equipment balance generally due within 12 to 24 months of
shipment. Interest is generally charged on the outstanding balance 4 to 13
months after shipment. Sales terms of some highly seasonal products provide for
payment and due dates based on a specified date during the year regardless of
the shipment date. Equipment sold to dealers in the United States and Canada is
paid in full on average within 12 months of shipment. Sales of replacement parts
are generally payable within 30 days of shipment with terms for some larger
seasonal stock orders generally payable within 6 months of shipment.
In other international markets, equipment sales are generally payable
in full within 30 to 180 days of shipment. Payment terms for some highly
seasonal products have a specific due date during the year
7
regardless of the shipment date. Sales of replacement parts are generally
payable within 30 days of shipment with terms for some larger seasonal stock
orders generally payable within 6 months of shipment.
In certain markets, particularly in North America, there is a time lag,
which varies based on the timing and level of retail demand, between the date
the Company records a sale and when the dealer sells the equipment to a retail
customer.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are
translated into U.S. currency in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and
liabilities are translated to U.S. dollars at period-end exchange rates. Income
and expense items are translated at average rates of exchange prevailing during
the period. Translation adjustments are included in "Accumulated other
comprehensive loss" in stockholders' equity. Gains and losses, which result from
foreign currency transactions, are included in the accompanying Consolidated
Statements of Operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 receivables, inventory,
deferred income tax allowances, goodwill and certain accrued liabilities,
principally relating to reserves for volume discounts and sales incentives,
warranty and insurance.
CASH AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of
three months or less to be cash equivalents.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable arise from the sale of equipment and
replacement parts to independent dealers, distributors or other customers.
Payments due under the Company's terms of sale are not contingent upon the sale
of the equipment by the dealer or distributor to a retail customer. Under normal
circumstances, payment terms are not extended and equipment may not be returned.
In certain regions, including the United States and Canada, the Company is
obligated to repurchase equipment and replacement parts upon cancellation of a
dealer or distributor contract. These obligations are required by national,
state or provincial laws and require the Company to repurchase dealer or
distributor's unsold inventory, including inventory for which the receivable has
already been paid.
For sales outside of the United States and Canada, the Company does not
normally charge interest on outstanding receivables with its dealers and
distributors. For sales to dealers or distributors in the United States and
Canada, where approximately 28% of the Company's net sales were generated in
2002, 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 range from 1 to 12 months with the exception of certain
seasonal products, which bear interest after various periods depending on the
time of year of the sale and the dealer or distributor's sales volume during the
preceding year. For the year ended December 31, 2002, 19.7%, 5.8%, 1.5% and 1.0%
of the Company's net sales had maximum interest-free periods ranging from 1 to 6
months, 7 to 12 months, 13 to 20 months and 21 months or more, respectively.
Actual interest-free periods are shorter than above because the equipment
receivable to dealers or distributors in the United States and Canada is due
immediately upon sale of the equipment to a retail customer. Under normal
circumstances, interest is not forgiven and interest-free periods are not
extended.
8
Accounts and notes receivable are shown net of allowances for sales
incentive discounts available to dealers and for doubtful accounts. Accounts and
notes receivable allowances at December 31, 2002 and 2001 were as follows (in
millions):
<TABLE>
<CAPTION>
2002 2001
--------- ---------
<S> <C> <C>
Sales incentive discounts $ 69.9 $ 61.1
Doubtful accounts 43.1 49.1
--------- ---------
$ 113.0 $ 110.2
========= =========
</TABLE>
The Company occasionally transfers certain accounts receivable to
various financial institutions. The Company records such transfers as sales of
accounts receivable when it is considered to 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" (Note 4).
INVENTORIES
Inventories are valued at the lower of cost or market using the
first-in, first-out method. Market is net realizable value for finished goods
and repair and replacement parts. For work in process, production parts and raw
materials, market is replacement cost. At December 31, 2002 and 2001, the
Company had recorded $74.5 million and $73.5 million as allowances for surplus
and obsolete inventories. These allowances are reflected within "Inventories,
net."
Inventory balances at December 31, 2002 and 2001 were as follows (in
millions):
<TABLE>
<CAPTION>
2002 2001
-------- --------
<S> <C> <C>
Finished goods $ 288.5 $ 210.7
Repair and replacement parts 235.5 201.5
Work in process, production parts and raw materials 184.6 146.6
-------- --------
Inventories, net $ 708.6 $ 558.8
======== ========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is provided on a straight-line basis
over the estimated useful lives of 10 to 40 years for buildings and
improvements, 3 to 15 years for machinery and equipment and 3 to 10 years for
furniture and fixtures. Expenditures for maintenance and repairs are charged to
expense as incurred.
Property, plant and equipment at December 31, 2002 and 2001 consisted
of the following (in millions):
<TABLE>
<CAPTION>
2002 2001
-------- --------
<S> <C> <C>
Land $ 41.5 $ 36.6
Buildings and improvements 139.1 120.6
Machinery and equipment 327.4 262.8
Furniture and fixtures 77.8 61.7
-------- --------
Gross property, plant and equipment 585.8 481.7
Accumulated depreciation and amortization (242.1) (164.8)
-------- --------
Property, plant and equipment, net $ 343.7 $ 316.9
======== ========
</TABLE>
INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires companies to
cease amortizing goodwill and other indefinite-lived intangible assets on
December 31, 2001 that were in existence at June 30, 2001. Any goodwill and
9
other indefinite-lived intangible assets resulting from acquisitions completed
after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new
method of testing goodwill and other indefinite-lived intangible assets for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. SFAS No. 142 requires that an initial impairment assessment
be performed on all goodwill and indefinite-lived intangible assets. This
assessment involves determining an estimate of the fair value of the Company's
reporting units including trademarks in order to evaluate whether an impairment
of the current carrying amount of goodwill and other intangible assets exists.
Fair values are derived based on an evaluation of past and expected future
performance of the Company's reporting units.
The Company's acquired intangible assets are as follows (in millions):
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001
-------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amounts Amortization Amounts Amortization
--------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Amortized intangible assets:
Patents and Trademarks $ 32.7 $ (1.5) $ 25.3 $ (0.6)
Other 3.4 (0.5) 3.4 --
--------- --------- --------- ---------
Total $ 36.1 $ (2.0) $ 28.7 $ (0.6)
========= ========= ========= =========
Unamortized intangible assets:
Trademarks $ 53.4 $ 53.4
========= =========
</TABLE>
The Company amortizes certain acquired intangible assets over estimated
useful lives of 7 to 30 years. For the years ended December 31, 2002 and 2001,
acquired intangible asset amortization was $1.4 million and $2.2 million,
respectively. In accordance with SFAS No. 142, the Company ceased amortizing
certain trademarks, which it determined to have an indefinite useful life as of
January 1, 2002. The Company estimates amortization of existing intangible
assets will be $1.5 million for 2003 and 2004, $1.4 million for 2005 and $1.3
million for 2006 and 2007.
Changes in the carrying amount of goodwill during the year ended
December 31, 2002 are summarized as follows (in millions):
<TABLE>
<CAPTION>
North South Europe/Africa/ Sprayer
America America Middle East Division Consolidated
-------- -------- -------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 2001 $ 10.2 $ 70.0 $ 92.5 $ 159.2 $ 331.9
Transitional impairment losses (10.2) (17.5) -- -- (27.7)
Acquisitions 4.9 -- -- -- 4.9
Adjustment to purchase price allocations -- -- -- 3.6 3.6
Reversal of unused restructuring
reserves -- -- (2.2) -- (2.2)
Foreign currency translation -- (17.4) 14.0 -- (3.4)
-------- -------- -------- -------- ----------
Balance as of December 31, 2002 $ 4.9 $ 35.1 $ 104.3 $ 162.8 $ 307.1
======== ======== ======== ======== ==========
</TABLE>
The goodwill in each of the Company's segments was tested for
impairment as of January 1, 2002 as required by SFAS No. 142. The Company
utilized a combination of valuation techniques including a discounted cash flow
approach, a market multiple approach and a comparable transaction approach.
Based on this evaluation, the Company determined that goodwill associated with
its Argentina and North America reporting units was impaired. As a result, the
Company recorded a pre-tax write-down of goodwill of $27.7 million. This
write-down was recognized as a cumulative effect of a change in accounting
principle of $24.1 million, net of $3.6 million of taxes, in the first quarter
of 2002. Goodwill is tested for impairment on an annual basis and more often if
indications of impairment exist. The results of the Company's
10
analyses conducted as of October 1, 2002 indicated that no further reduction in
the carrying amount of goodwill was required in 2002.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill
and other indefinite-lived intangible assets over periods ranging from 10 to 40
years. In addition, the Company would periodically review the carrying values
assigned to goodwill and other intangible assets based on expectations of future
cash flows and operating income generated by the underlying tangible assets. The
following is a reconciliation of the Company's (loss) income before cumulative
effect of a change in accounting principle and net (loss) income and net (loss)
income per share as if goodwill and indefinite-lived intangible assets were
accounted for in accordance with SFAS No. 142 in prior periods (in millions,
except per share data):
<TABLE>
<CAPTION>
2002 2001 2000
----------- ----------- -----------
<S> <C> <C> <C>
Reported (loss) income before cumulative
effect of a change in accounting principle $ (60.3) $ 22.6 $ 3.5
Add: Goodwill amortization -- 10.1 7.9
Add: Indefinite-lived trademark
amortization -- 1.0 1.0
----------- ----------- -----------
Adjusted (loss) income before cumulative
effect of a change in accounting principle (60.3) 33.7 12.4
Cumulative effect of a change in
accounting principle, net of taxes (24.1) -- --
----------- ----------- -----------
Adjusted net (loss) income $ (84.4) $ 33.7 $ 12.4
========== =========== ===========
Net (loss) income per common share:
Basic:
Reported (loss) income before cumulative
effect of a change in accounting principle $ (0.81) $ 0.33 $ 0.06
Add: Goodwill amortization -- 0.15 0.13
Add: Indefinite-lived trademark
amortization -- 0.01 0.02
----------- ----------- -----------
Adjusted (loss) income before cumulative
effect of a change in accounting principle (0.81) 0.49 0.21
Cumulative effect of a change in
accounting principle, net of taxes (0.33) -- --
----------- ----------- -----------
Adjusted net (loss) income $ (1.14) $ 0.49 $ 0.21
=========== =========== ===========
Diluted:
Reported (loss) income before cumulative
effect of a change in accounting principle $ (0.81) $ 0.33 $ 0.06
Add: Goodwill amortization -- 0.15 0.13
Add: Indefinite-lived trademark
amortization -- 0.01 0.02
----------- ----------- -----------
Adjusted (loss) income before cumulative
effect of a change in accounting principle (0.81) 0.49 0.21
Cumulative effect of a change in
accounting principle, net of taxes (0.33) -- --
----------- ----------- -----------
Adjusted net (loss) income $ (1.14) $ 0.49 $ 0.21
=========== =========== ===========
</TABLE>
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate 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"). An impairment loss is recognized when the undiscounted future cash flows
estimated to be generated by the asset 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 will be determined based on either the discounted future
cash flows or other appropriate fair value methods with the amount of any such
deficiency charged to income in the current
11
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. During the second
quarter of 2002, the Company recorded a write-down of property, plant and
equipment of $11.2 million in conjunction with the announced closure of its
Coventry, England manufacturing facility (Note 3).
ACCRUED EXPENSES
Accrued expenses at December 31, 2002 and 2001 consisted of the
following (in millions):
<TABLE>
<CAPTION>
2002 2001
-------- --------
<S> <C> <C>
Reserve for volume discounts and sales incentives $ 103.7 $ 91.4
Warranty reserves 83.7 61.1
Accrued employee compensation and benefits 85.8 65.6
Accrued taxes 47.4 46.5
Other 124.6 86.1
-------- --------
$ 445.2 $ 350.7
======== ========
</TABLE>
WARRANTY RESERVES
The warranty reserve activity for the year ended December 31, 2002
consisted of the following (in millions):
<TABLE>
<S> <C>
Balance at beginning of the year $ 61.1
Acquired businesses 1.7
Accruals for warranties issued during the year 82.8
Settlements made (in cash or in kind) during the year (66.0)
Foreign currency translation 4.1
--------
Balance at the end of the year $ 83.7
========
</TABLE>
The Company's agricultural equipment products are generally under
warranty against defects in material and workmanship for a period of one to four
years. The Company accrues for future warranty costs at the time of sale based
on historical warranty experience.
INSURANCE RESERVES
Under the Company's insurance programs, coverage is obtained for
significant liability limits as well as those risks required to be insured by
law or contract. It is the policy of the Company to self-insure a portion of
certain expected losses related primarily to workers' compensation and
comprehensive general, product and vehicle liability. Provisions for losses
expected under these programs are recorded based on the Company's estimates of
the aggregate liabilities for the claims incurred.
STOCK INCENTIVE PLANS
The Company accounts for all stock-based compensation awarded under its
Non-employee Director Incentive Plan, Long-Term Incentive Plan and Stock Option
Plan as prescribed under APB No. 25, "Accounting for Stock Issued to Employees,"
and also provides the disclosures required under SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." APB No. 25 requires no recognition of
compensation expense for options granted under the Stock Option Plan as long as
certain conditions are met. APB No. 25 does require recognition of compensation
expense under the Non-employee Director Incentive Plan and Long-Term Incentive
Plan. Refer to Note 10 for additional information.
12
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred and are
included in engineering expenses in the Consolidated Statements of Operations.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Cooperative
advertising costs are normally expensed at the time the revenue is earned.
Advertising expenses for the years ended December 31, 2002, 2001, and 2000
totaled approximately $8.9 million, $9.9 million and $7.9 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 $12.8 million,
$11.7 million and $11.1 million for 2002, 2001 and 2000, respectively.
INTEREST EXPENSE, NET
Interest expense, net for the years ended December 31, 2002, 2001 and
2000 consisted of the following (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Interest expense $ 66.7 $ 72.1 $ 60.3
Interest income (9.3) (12.2) (13.7)
-------- -------- --------
$ 57.4 $ 59.9 $ 46.6
======== ======== ========
</TABLE>
NET (LOSS) INCOME PER COMMON SHARE
Basic (loss) earnings per common share is computed by dividing net
(loss) income by the weighted average number of common shares outstanding during
each period. Diluted (loss) earnings per share assumes exercise of outstanding
stock options and vesting of restricted stock into common stock during the
periods outstanding when the effects of such assumptions are dilutive.
A reconciliation of net (loss) income and the weighted average number
of common and common equivalent shares outstanding used to calculate basic and
diluted net (loss) income per common share for the years ended December 31,
2002, 2001 and 2000 is as follows (in millions, except per share data):
13
<TABLE>
<CAPTION>
2002 2001 2000
--------- --------- ---------
<S> <C> <C> <C>
Basic (Loss) Earnings Per Share:
Weighted average number of common shares outstanding 74.2 68.3 59.2
========= ========= =========
(Loss) income before cumulative effect of a change in
accounting principle $ (60.3) $ 22.6 $ 3.5
Cumulative effect of a change in accounting principle, net of taxes (24.1) -- --
--------- --------- ---------
Net (loss) income $ (84.4) $ 22.6 $ 3.5
========= ========= =========
Net (loss) income per common share:
(Loss) income before cumulative effect of a change
in accounting principle $ (0.81) $ 0.33 $ 0.06
Cumulative effect of a change in accounting
principle, net of taxes (0.33) -- --
--------- --------- ---------
Net (loss) income $ (1.14) $ 0.33 $ 0.06
========= ========= =========
Diluted (Loss) Earnings Per Share:
Weighted average number of
common shares outstanding 74.2 68.3 59.2
Shares issued upon assumed vesting of restricted stock -- 0.1 0.4
Shares issued upon assumed exercise of outstanding stock options -- 0.1 0.1
--------- --------- ---------
Weighted average number of common and common equivalent shares 74.2 68.5 59.7
========= ========= =========
(Loss) income before cumulative effect of a change in accounting principle $ (60.3) $ 22.6 $ 3.5
Cumulative effect of a change in accounting principle, net of taxes (24.1) -- --
--------- --------- ---------
Net (loss) income $ (84.4) $ 22.6 $ 3.5
========= ========= =========
Net (loss) income per common share:
(Loss) income before cumulative effect of a change in
accounting principle $ (0.81) $ 0.33 $ 0.06
Cumulative effect of a change in accounting
principle, net of taxes (0.33) -- --
--------- --------- ---------
Net (loss) income $ (1.14) $ 0.33 $ 0.06
========= ========= =========
</TABLE>
Stock options to purchase 0.6 million, 2.1 million, and 1.4 million
shares during 2002, 2001 and 2000, respectively, were outstanding but not
included in the calculation of weighted average shares outstanding because the
option exercise prices were higher than the average market price of the
Company's common stock during the related period. In addition, the diluted loss
per share calculation for 2002 excludes the potentially dilutive effect of
options to purchase approximately 0.7 million shares of the Company's common
stock as the Company incurred a loss and their inclusion would have been
anti-dilutive.
COMPREHENSIVE LOSS
The Company reports comprehensive (loss) income, defined as the total
of net (loss) 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 loss and the related tax effects for 2002 and
2001 are as follows (in millions):
14
<TABLE>
<CAPTION>
2002
-----------------------------------------------
Before-tax Income After-tax
Amount Taxes Amount
---------- ------ ---------
<S> <C> <C> <C>
Additional minimum pension liability $ (83.7) $ 26.9 $ (56.8)
Unrealized gain on derivatives 1.5 (0.6) 0.9
Unrealized gain on derivatives held by affiliates 0.7 (0.3) 0.4
Foreign currency translation adjustments 2.0 -- 2.0
--------- --------- ---------
Total other comprehensive loss $ (79.5) $ 26.0 $ (53.5)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
2001
-----------------------------------------------
Before-tax Income After-tax
Amount Taxes Amount
---------- ------ ---------
<S> <C> <C> <C>
Additional minimum pension liability $ (49.0) $ 14.7 $ (34.3)
Unrealized gain on derivatives (0.2) 0.1 (0.1)
Unrealized gain on derivatives held by affiliates (9.8) 4.0 (5.8)
Foreign currency translation adjustments (77.7) -- (77.7)
--------- --------- ---------
Total other comprehensive loss $ (136.7) $ 18.8 $ (117.9)
========= ========= =========
</TABLE>
FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's Consolidated Balance
Sheets for "Cash and cash equivalents," "Accounts and notes receivable" and
"Accounts payable" approximate fair value due to the immediate or short-term
maturity of these financial instruments. The carrying amount of long-term debt
under the Company's Revolving Credit Facility (Note 7) approximates fair value
based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities. At December 31, 2002, the estimated fair
values of the Company's 9 1/2% Senior Notes and 8 1/2% Senior Subordinated Notes
(Note 7), based on their listed market values, were $272.1 million and $250.0
million, respectively, compared to their carrying values of $250.0 million and
$249.1 million, respectively.
The Company enters into foreign exchange forward contracts to hedge the
foreign currency exposure of certain receivables, payables and committed
purchases and sales. These contracts are for periods consistent with the
exposure being hedged and generally have maturities of one year or less. At
December 31, 2002 and 2001, the Company had foreign exchange forward contracts
outstanding with gross notional amounts of $225.4 million and $216.1 million,
respectively. The fair value is a gain on the foreign exchange forward contracts
at December 31, 2002 of $7.1 million. These foreign exchange forward contracts
do not subject the Company's results of operations to risk due to exchange rate
fluctuations because gains and losses on these contracts generally offset gains
and losses on the exposure being hedged. The Company does not enter into any
foreign exchange forward contracts for speculative trading purposes.
The notional amounts of foreign exchange forward contracts do not
represent amounts exchanged by the parties and therefore are not a measure of
the Company's risk. The amounts exchanged are calculated on the basis of the
notional amounts and other terms of the contracts. The credit and market risks
under these contracts are not considered to be significant.
ACCOUNTING CHANGES
On January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
requires companies to cease amortizing goodwill and other indefinite-lived
intangible assets on December 31, 2001 that were in existence at June 30, 2001.
Any goodwill and other indefinite-lived intangible assets resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill and other indefinite-lived
intangible assets for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. SFAS No. 142 requires that an initial
impairment assessment be performed on all goodwill and indefinite-lived
intangible assets. This assessment involves determining an
15
estimate of the fair value of the Company's reporting units and trademarks in
order to evaluate whether an impairment of the current carrying amount of
goodwill and other intangible assets exists. Fair values are derived based on an
evaluation of past and expected future performance of the Company's reporting
units. The adoption of SFAS No. 142 resulted in a reduction of amortization
expense of approximately $17.1 million during 2002 compared to 2001.
The goodwill in each of the Company's segments was tested for
impairment as of January 1, 2002 as required by SFAS No. 142. The Company
utilized a combination of valuation techniques including a discounted cash flow
approach, a market multiple approach and a comparable transaction approach.
Based on this evaluation, the Company determined that goodwill associated with
its Argentine and North American reporting units was impaired. As a result, the
Company recorded a pre-tax write-down of goodwill of $27.7 million. This
write-down was recognized as a cumulative effect of a change in accounting
principle of $24.1 million, net of $3.6 million of taxes, in the first quarter
of 2002.
In July 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
entity capitalizes the cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the entity either settles the
obligation for the amount recorded or incurs a gain or loss. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002. The Company is
evaluating the effect of this statement on its results of operations and
financial position, but does not believe the impact will be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supersedes FASB Statement No. 121. "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB Opinion No. 30") for the disposal of a segment of business
(as previously defined in APB Opinion No. 30). The FASB issued SFAS No. 144 to
establish a single accounting model, based on the framework established in SFAS
No. 121, for long-lived assets to be disposed of by sale. SFAS No. 144 broadens
the presentation of discontinued operations in the statement of operations to
include a component of an entity (rather than a segment of a business). A
component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. SFAS No. 144 also requires that discontinued operations be
measured at the lower of the carrying amount or fair value less cost to sell.
The Company adopted SFAS No. 144 effective January 1, 2002. The adoption of this
standard had no impact on its current results of operations or financial
position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 eliminates the requirement under
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", to report
gains and losses from extinguishments of debt as extraordinary items in the
income statement. Accordingly, gains or losses from extinguishments of debt for
fiscal years beginning after May 15, 2002 shall not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30. Upon adoption of SFAS No. 145, any gain or
loss on extinguishment of debt previously classified as an extraordinary item in
prior periods presented that does not meet the criteria of APB Opinion No. 30
for such classification should be reclassified to conform with the provisions of
SFAS No. 145. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. In
addition, SFAS No. 145 amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The new standard required the Company to
reclassify the extraordinary loss recorded in 2001 to interest
16
expense, net which resulted in a reduction in income before cumulative effect of
a change in accounting principle of $0.01 per share but had no impact on net
income or stockholders' equity. The consolidated statements of operations
reflects the adoption of this standard.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF Issue No. 94-3, a liability for an exit cost as defined in the Issue
was recognized at the date of an entity's commitment to an exit plan. Therefore,
SFAS No. 146 eliminates the definition and requirements for recognition of exit
costs in EITF Issue No. 94-3, and also establishes that fair value is the
objective for initial measurement of the liability. SFAS No. 146 is effective
for all exit or disposal activities that are initiated after December 31, 2002.
SFAS No. 146 does not impact the Company's current restructuring plans related
to the closure of the Coventry, England manufacturing facility. The Company will
comply with this Statement for any future exit or disposal activities. The
DeKalb, Illinois closure will be accounted for under the requirements of EITF
Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires that the
guarantor recognize, at the inception of certain guarantees, a liability for the
fair value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure about the guarantor's obligations under certain
guarantees that it has issued. The initial recognition and measurement
provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002 and the disclosure
requirements are effective after December 15, 2002 and are included in Note 12.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure an Amendment of FASB
Statement No. 123," ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The
Company has adopted the disclosure provisions of SFAS No. 148 effective for the
year ending December 31, 2002 (Note 10).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities and Interpretation of ARB No. 51," ("FIN 46"). FIN
46 established the criteria for consolidating variable interest entities. The
Company is currently evaluating FIN 46, which is effective for fiscal years or
interim periods beginning after June 15, 2003, to variable entities that were
acquired before February 1, 2003. The Company currently does not believe its
current securitization facilities and special purpose entity will be affected by
this interpretation.
2. ACQUISITIONS
On November 7, 2002, The Company completed the acquisition of Sunflower
Manufacturing Co., Inc. ("Sunflower"), a former product line of SPX Corporation.
Sunflower is a leading producer of tillage, seeding and specialty harvesting
equipment, serving the North American market and is located in Beloit, Kansas.
The purchase price was approximately $48.0 million and was funded through
borrowings under the Company's revolving credit facility. The acquired assets
and liabilities consist primarily of inventories, accounts receivables,
property, plant and equipment, technology, tradenames and patents. The results
of operations for the Sunflower acquisition are included in the Company's
Consolidated Financial Statements as of and from the date of acquisition. The
Company recorded approximately $4.9 million of goodwill and
17
$7.1 million of tradenames and patents associated with the acquisition of
Sunflower. The tradenames and patents will be amortized over a period from 15 to
30 years. The Sunflower acquisition was accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"), and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on a
preliminary estimate of fair values as of the acquisition date. The purchase
price allocation for the Sunflower acquisition is preliminary and is subject to
adjustment and will be completed in 2003.
On March 5, 2002, the Company completed its agreement with Caterpillar
Inc. ("Caterpillar") to acquire the design, assembly and marketing of the new MT
Series of Caterpillar's Challenger tractor line. The Company issued
approximately 1.0 million shares of common stock in the transaction valued at
approximately $21.3 million based on the closing price of the Company's common
stock on the acquisition date. During July 2002, the Company received
approximately $0.9 million from Caterpillar pursuant to the terms of the
purchase agreement, whereby any proceeds Caterpillar received upon the sale of
the Company's stock above $21.0 million would be refunded to the Company. In
addition, the Company purchased approximately $13.6 million of initial
production inventory from Caterpillar in connection with a supply agreement with
Caterpillar. The addition of the Challenger tractor line provides the Company
with a technological leader in high horsepower track-type tractors that will be
marketed on a worldwide basis primarily through the Caterpillar distribution
organization. Furthermore, the Company will provide Caterpillar dealers with
additional products that will broaden their equipment offerings and enhance
their competitive position. The results of operations for this product line have
been included in the Company's results as of and from the date of the
acquisition. The acquired assets consisted primarily of inventory and property,
plant and equipment. There were no accounts receivable acquired or liabilities
assumed in the transaction since all rights and obligations relating to past
sales of the prior series of the Challenger product line remain with
Caterpillar. The Challenger acquisition was accounted for in accordance with
SFAS No. 141, and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based on a preliminary estimate of
fair values as of the acquisition date. Since the preliminary fair value of the
assets acquired was in excess of the purchase price, no goodwill was recorded in
connection with the acquisition. The purchase price allocation for the
Challenger acquisition is preliminary and is subject to adjustment and will be
completed in 2003.
On April 16, 2001, the Company completed the acquisition of Ag-Chem
Equipment Co., Inc. ("Ag-Chem"), a manufacturer and distributor of
self-propelled sprayers. The Company paid Ag-Chem shareholders approximately
$247.2 million consisting of approximately 11.8 million AGCO common shares and
$147.5 million of cash. The funding of the cash component of the purchase price
was made through borrowings under the Company's revolving credit facility. The
acquired assets and liabilities primarily consisted of technology, trademarks,
tradenames, accounts receivables, inventories, property, plant and equipment,
accounts payable and accrued liabilities. The results of operations for the
Ag-Chem acquisition are included in the Company's Consolidated Financial
Statements as of and from the date of acquisition. The Company recorded
approximately $145.2 million of goodwill and $27.2 million of trademarks and
other identifiable intangible assets associated with the acquisition of Ag-Chem.
The trademarks and other identifiable intangible assets are being amortized over
periods ranging from 8 to 30 years.
The Ag-Chem acquisition was accounted for as a purchase in accordance
with Accounting Principles Board ("APB") No. 16, "Business Combinations," and
accordingly, the purchase price was allocated to the assets acquired and the
liabilities assumed based on their fair values as of the acquisition date. In
connection with the acquisition of Ag-Chem, the Company established $3.1 million
in liabilities primarily related to severance, employee relocation and other
costs associated with the planned closure of Ag-Chem's Benson, Minnesota
manufacturing facility, Minnetonka, Minnesota administrative office and 15 parts
and service facilities.
During the first quarter of 2002, all costs in connection with the
liabilities established had been incurred. Accordingly, the Company adjusted its
purchase price allocation to reflect a reduction in these established
liabilities by $0.4 million. In addition, the Company finalized its purchase
price allocation resulting in a net total goodwill adjustment of approximately
$3.6 million. The adjustment primarily
18
related to the reflection of final appraised values of property, plant and
equipment acquired and the establishment of certain liabilities related to
outstanding litigation and warranty obligations.
In May 2000, the Company acquired from CNH Global N.V. ("CNH") its 50%
share in Hay and Forage Industries ("HFI") for $10.0 million. This agreement
terminated a joint venture agreement in which CNH and AGCO each owned 50%
interests in HFI, thereby providing AGCO with sole ownership of the facility.
HFI, located in Hesston, Kansas develops and manufactures hay and forage
equipment and implements that AGCO sells under various brand names. The acquired
assets and liabilities primarily consisted of technology, production
inventories, property, plant and equipment related to its manufacturing
operations, accounts payable and accrued liabilities. The financial statements
of HFI, which were previously accounted for under the equity method of
accounting, were consolidated with the Company's financial statements as of the
date of the acquisition.
In connection with the acquisition of Xaver Fendt GmbH in 1997, the
Company established liabilities of $7.1 million primarily related to severance
and other costs associated with the planned closure of certain sales and
marketing offices and parts distribution operations. Approximately $3.1 million
of the reserves originally established remained at December 31, 2001. During the
second quarter of 2002, the Company reversed to goodwill approximately $2.2
million of restructuring reserves determined not to be required. During 2002,
$0.8 million of costs were incurred leaving a remaining $0.1 million of reserves
at December 31, 2002. These costs are expected to be incurred in 2003.
The following unaudited pro forma data summarizes the results of
operations for the years ended December 31, 2002, 2001 and 2000 as if the
Ag-Chem acquisition had occurred at the beginning of 2000 and the Challenger and
Sunflower acquisitions had occurred at the beginning of 2001. The unaudited pro
forma information has been prepared for comparative purposes only and does not
purport to represent what the results of operations of the Company would
actually have been had the transactions occurred on the dates indicated or what
the results of operations may be in any future period.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- -------------- ---------------
(in millions, except per share data)
<S> <C> <C> <C>
Net sales $ 2,962.5 $ 2,761.2 $ 2,633.3
Loss before cumulative effect of a change in accounting
principle (57.2) (33.9) (8.8)
Net loss (81.3) (33.9) (8.8)
Net loss per common share - basic $ (1.08) $ (0.47) $ (0.12)
Net loss per common share - fully diluted $ (1.08) $ (0.47) $ (0.12)
</TABLE>
3. RESTRUCTURING AND OTHER INFREQUENT EXPENSES
The Company recorded restructuring and other infrequent expenses of
$42.7 million, $13.0 million and $21.9 million in 2002, 2001 and 2000,
respectively. The 2002 expense consisted of $40.2 million associated with the
closure of the Company's tractor manufacturing facility in Coventry, England and
$3.5 million primarily associated with various functional rationalizations,
offset by a $1.0 million net gain related to the sale of two closed
manufacturing facilities. The 2001 expense consisted of $8.5 million associated
with the integration of the Ag-Chem acquisition and $4.5 million associated with
manufacturing facility rationalizations commenced in prior years. The 2000
expense consisted of $24.9 million associated with the closure of certain
manufacturing facilities in the United States and Argentina and a credit of $3.0
million related to the reversal of reserves established in 1997.
COVENTRY 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 Company's Beauvais, France and Canoas, Brazil manufacturing
19
facilities. In connection with the restructuring plan, the Company has recorded
approximately $40.2 million of restructuring and other infrequent expenses
during 2002. The components of the restructuring expenses are summarized in the
following table (in millions):
<TABLE>
<CAPTION>
Write-down
of Property, Employee Facility
Plant and Employee Retention Closure
Equipment Severance Payments Costs Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
2002 Provision $ 11.2 $ 8.3 $ 18.3 $ 2.4 $ 40.2
Less: Non-cash expense 11.2 -- -- -- 11.2
-------- -------- -------- -------- --------
Cash expense -- 8.3 18.3 2.4 29.0
2002 cash activity -- (0.1) (0.3) (0.3) (0.7)
-------- -------- -------- -------- --------
Balances as of
December 31, 2002 $ -- $ 8.2 $ 18.0 $ 2.1 $ 28.3
======== ======== ======== ======== ========
</TABLE>
The severance costs relate to the termination of approximately 1,100
employees, following the completion of production in the Coventry facility.
Approximately 250 employees had been terminated as of December 31, 2002. The
employee retention payments relate to incentives paid to Coventry employees who
remain employed until certain future termination dates and are accrued over the
term of the retention period. The facility closure costs include certain
noncancelable operating lease termination and other facility exit costs. The
write-down of property, plant and equipment represents the impairment of
machinery and equipment resulting from the facility closure and was based on the
estimated fair value of the assets compared to their carrying value. The
estimated fair value of the equipment was determined based on current conditions
in the market. The machinery, equipment and tooling will be disposed of after
production ceases and the buildings, land and improvements will be marketed for
sale. The $28.3 million of restructuring costs accrued at December 31, 2002 are
expected to be incurred during 2003. The Company also recorded approximately
$1.4 million of inventory reserves during 2002 reflected in costs of goods sold
related to inventory that was identified as obsolete as a result of the closure.
In October 2002, the Company applied to the High Court in London,
England, for clarification of a rule 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 terminated due to the closure of the Company's
Coventry facility, should be reduced to compensate for the fact that the pension
payments begin prior to normal retirement age of 65. On December 20, 2002, the
High Court ruled against the Company's position that reduced pension payments
are payable in the context of early retirements or terminations. The High
Court's ruling also granted the Company approval to appeal the judgment in the
Court of Appeal. The Company and its advisors maintain the view that reduced
pension payments should be payable and, as a result, have appealed the judgment
to the Court of Appeal. Under the appeal process in England, a panel of judges
who had no involvement with the High Court proceedings will hear the appeal and
determine the outcome on its merits. A majority ruling of the Court of Appeal
judges is required to overturn the original High Court decision.
The Company, based upon advice of its legal advisors, has reassessed
the merits of its case in consideration of the High Court ruling and maintains
the opinion that the likelihood of an unfavorable resolution to this matter is
reasonably possible, but does not consider it to be probable. Consequently, the
Company has not recorded a loss as of December 31, 2002 related to this matter.
In the event that the Company's position is not ultimately upheld, the closure
of the Company's Coventry facility and past early retirement programs would
entitle certain terminated employees to receive unreduced pension payments. The
estimated impact to the Company's pension plan would be an increase in the
Company's pension plan liabilities of approximately $55 million to $60 million
and a related charge to the Company's Consolidated Statements of Operations. The
Company presently estimates that additional funding to the pension plan related
to this increased liability would be approximately $6.5 million per annum for
the next 10 years. The timing of the Company's obligation to fund cash into the
pension plan with respect to this increased liability would depend on many
factors including the overall funded status of the plan and the investment
returns of the plan's assets.
20
In addition, the Company recorded restructuring and other infrequent
expenses of $3.4 million during 2002. The expense primarily relates to
severance costs and certain lease termination and other exit costs associated
with the rationalization of the Company's European engineering and marketing
personnel and certain components of the Company's German manufacturing
facilities located in Kempten and Marktoberdorf, Germany, as well as the
restructuring of the Company's North American information systems function. The
$2.6 million of severance costs recorded associated with these activities
relate to the termination of 137 employees in total. At December 31, 2002,
approximately $2.6 million of the amount accrued had been incurred. The
remaining balance of $0.8 million is expected to be incurred during 2003.
AG-CHEM ACQUISITION INTEGRATION
In 2001, the Company announced its plans to rationalize certain
facilities as part of the Ag-Chem acquisition integration. The Company
consolidated AGCO's Willmar, Minnesota manufacturing facility and Ag-Chem's
Benson, Minnesota manufacturing facility into Ag-Chem's Jackson, Minnesota
manufacturing plant. In addition, the Company closed Ag-Chem's Minnetonka,
Minnesota administrative offices and relocated all functions to the Jackson
facility. The Company also closed fifteen parts and service facilities and
integrated parts warehousing and logistics into AGCO's North American parts
distribution system.
All employees identified in the restructuring plan had been terminated
as of the end of the first quarter of 2002. Employee retention payments related
to incentives paid to Ag-Chem and AGCO employees who remained employed until
certain future termination dates were accrued over the term of the retention
period. The Company incurred facility closure costs, which included employee
relocation costs and other future exit costs at the Company's Willmar location
after operations ceased. The facility relocation and transition costs were
expensed as incurred and represented costs to relocate inventory and machinery
and costs to integrate operations into the remaining facilities. There are no
remaining costs accrued related to these rationalizations as of December 31,
2002. The components of the restructuring expenses are summarized in the
following table (in millions):
<TABLE>
<CAPTION>
Write-down Facility
of Relocation
Property, Employee Facility and
Plant and Employee Retention Closure Transition
Equipment Severance Payments Costs Costs Total
---------- --------- --------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
2001 Provision $0.4 $1.3 $1.4 $0.8 $4.6 $8.5
Less: Non-cash expense 0.4 -- -- -- -- 0.4
---- ---- ---- ---- ---- ----
Cash expense -- 1.3 1.4 0.8 4.6 8.1
2001 cash activity -- (0.7) (1.2) (0.7) (4.6) (7.2)
---- ---- ---- ---- ---- ----
Balances as of
December 31, 2001 -- 0.6 0.2 0.1 -- 0.9
2002 Provision -- 0.2 -- -- 0.1 0.3
Reversal of 2001 Provision -- -- (0.2) -- -- (0.2)
2002 cash activity -- (0.8) -- (0.1) (0.1) (1.0)
---- ---- ---- ---- ---- ----
Balances as of
December 31, 2002 $ -- $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ==== ====
</TABLE>
1999 THROUGH 2001 MANUFACTURING FACILITY RATIONALIZATIONS
In 2000, the Company permanently closed its combine manufacturing
facility in Independence, Missouri and its Lockney, Texas and Noetinger,
Argentina implement manufacturing facilities. In 1999, the Company permanently
closed its Coldwater, Ohio manufacturing facility. The majority of production
in these facilities has been relocated to existing Company facilities or
outsourced to third parties. The Company expensed approximately $4.5 million
and $24.9 million associated with these rationalizations during 2001 and 2000,
respectively, and had $1.0 million of costs accrued related to these
rationalizations as of December 31, 2001. The Company did not record any
additional restructuring and other infrequent expenses in 2002 related to these
closures. The Company incurred approximately $0.5 million of expenses
21
during 2002. The remaining accrued restructuring costs of $0.5 million
primarily relate to noncancelable lease termination costs and will be incurred
through 2005.
In addition, during 2002, the Company sold its closed manufacturing
facilities in Independence, Missouri and Coldwater, Ohio. A net gain on the
sale of these two facilities of $1.0 million was reflected in "Restructuring
and other infrequent expenses" in the Company's Consolidated Statements of
Operations.
4. ACCOUNTS RECEIVABLE SECURITIZATION
At December 31, 2002, the Company has accounts receivable
securitization facilities in the United States, Canada, and Europe totaling
approximately $424.9 million. Under these facilities, wholesale accounts
receivable are sold on a revolving basis to commercial paper conduits either on
a direct basis or through a wholly-owned special purpose U.S. subsidiary. The
Company completed the U.S. securitization facility in 2000 and completed the
Canadian and European securitization facilities in 2001. Outstanding funding
under these facilities totaled approximately $423.9 million at December 31,
2002 and $402.0 million at December 31, 2001. The funded balance has the effect
of reducing accounts receivable and short-term liabilities by the same amount.
Losses on sales of receivables primarily from securitization
facilities were $14.8 million in 2002 and $23.5 million in 2001. The amount for
2001 includes $4.0 million of losses and transaction fees associated with the
initial closing and funding of the Canadian and European facilities. The losses
are determined by calculating the estimated present value of receivables sold
compared to their carrying amount. The present value is based on historical
collection experience and a discount rate representing the spread over LIBOR as
prescribed 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):
<TABLE>
<CAPTION>
U.S. Canada Europe Total
------------------- ----------------- ------------------- ------------------
2002 2001 2002 2001 2002 2001 2002 2001
------ ------ ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unpaid balance of receivables
sold at December 31 $311.9 $323.8 $78.2 $78.1 $133.1 $107.0 $523.2 $508.9
Retained interest in
receivables sold $ 61.9 $ 73.8 $18.2 $18.1 $ 19.2 $ 15.0 $ 99.3 $106.9
Credit losses on receivables
sold $ 1.2 $ 1.4 $ -- $ -- $ -- $ -- $ 1.2 $ 1.4
Average liquidation period
(months) 5.9 5.5 5.9 5.5 2.4 2.3
Discount rate 2.4% 4.5% 3.1% 4.3% 4.2% 5.0%
</TABLE>
The Company continues to service the sold receivables and maintains a
retained interest in the receivables. The Company received approximately $5.7
million and $4.3 million in servicing fees in 2002 and 2001, respectively. No
servicing asset or liability has been recorded since the estimated fair value
of the servicing of the receivables approximates the servicing income. The
retained interest in the receivables sold is included in the caption "Accounts
and notes receivable, net" in the accompanying Consolidated Balance Sheets. The
Company's risk of loss under the securitization facilities is limited to a
portion of the unfunded balance of receivables sold which is approximately 15%
of the funded amount. The Company maintains reserves for the portion of the
residual interest it estimates is uncollectible. At December 31, 2002,
approximately $3.3 million of the unpaid balance of receivables sold was past
due 60 days or more. The fair value of the retained interest is approximately
$97.3 million compared to the carrying amount of $99.3 million and is based on
the present value of the receivables calculated in a method consistent with the
losses on sales of receivables discussed above. Assuming a 10% and 20% increase
in the average liquidation period, the fair value of the residual interest
would decline by $0.2 million and $0.4 million, respectively. Assuming a 10%
and 20% increase in the discount rate assumed the fair value of the residual
interest would decline by $0.2 million and $0.4 million, respectively. For
2002, the Company received approximately $919.5 million from sales of
receivables and $5.7 million for servicing fees. For 2001, the Company received
$879.2 million from sales of receivables and $4.3 million for servicing fees.
5. INVESTMENTS IN AFFILIATES
Investments in affiliates as of December 31, 2002 and 2001 were as
follows (in millions):
22
<TABLE>
<CAPTION>
2002 2001
----- -----
<S> <C> <C>
Retail finance joint ventures $64.7 $57.5
Manufacturing joint ventures 4.9 4.6
Other 8.9 7.5
----- -----
$78.5 $69.6
===== =====
</TABLE>
The manufacturing joint ventures as of December 31, 2002 consisted of
joint ventures with unrelated manufacturers to produce transmissions in Europe
and engines in South America. The other joint ventures represent minority
investments in farm equipment manufacturers and licensees. In 2001, the Company
sold its minority interest in a European farm equipment manufacturer in
exchange for $8.6 million. In connection with the sale, the Company recorded a
pre-tax gain of $5.2 million, which is included in other expense, net in the
Consolidated Statements of Operations. The Company's equity in earnings of this
investment was not significant for 2001 or 2000.
The Company's equity in net earnings of affiliates for 2002, 2001 and
2000 were as follows (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
----- ----- -----
<S> <C> <C> <C>
Retail finance joint ventures $12.7 $10.1 $10.3
Other 1.0 0.5 (0.5)
----- ----- -----
$13.7 $10.6 $ 9.8
===== ===== =====
</TABLE>
The manufacturing joint ventures of the Company primarily sell their
products to the joint venture partners at prices which result in operating at
or near breakeven on an annual basis.
Summarized combined financial information of the Company's retail
finance joint ventures as of December 31, 2002 and 2001 and for the years ended
December 31, 2002, 2001 and 2000 were as follows (in millions):
<TABLE>
<CAPTION>
As of December 31,
---------------------------
2002 2001
---------- ----------
<S> <C> <C>
Total assets $ 1,538.4 $ 1,314.6
Total liabilities 1,399.7 1,195.4
Partners' equity 138.7 119.2
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Revenues $143.2 $138.1 $145.2
Costs 100.9 104.5 112.8
------ ------ ------
Income before income taxes $ 42.3 $ 33.6 $ 32.4
====== ====== ======
</TABLE>
The majority of the assets of the Company's retail finance joint
ventures represent finance receivables. The majority of the liabilities
represent notes payable and accrued interest. Under the various joint venture
agreements, Rabobank or its affiliates are obligated to provide financing to
the joint venture companies. AGCO does not guarantee the obligations of the
retail finance joint ventures.
6. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
23
The sources of income (loss) before income taxes, equity in net
earnings of affiliates and cumulative effect of a change in accounting
principle were as follows for the years ended December 31, 2002, 2001 and 2000
(in millions):
<TABLE>
<CAPTION>
2002 2001 2000
------ ------ -------
<S> <C> <C> <C>
United States $(98.7) $(105.9) $(109.3)
Foreign 124.5 119.3 95.4
------ ------ -------
Income (loss) before income taxes, equity in net earnings
of affiliates, extraordinary loss and the cumulative
effect of a change in accounting principle $ 25.8 $ 13.4 $ (13.9)
====== ======= =======
</TABLE>
The provision (benefit) for income taxes by location of the taxing
jurisdiction for the years ended December 31, 2002, 2001 and 2000 consisted of
the following (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
----- ----- ------
<S> <C> <C> <C>
Current:
United States:
Federal $ -- $ -- $ (7.4)
State -- -- (0.2)
Foreign 51.4 34.7 37.6
----- ------- ------
51.4 34.7 30.0
Deferred:
United States:
Federal 43.3 (34.3) (33.4)
State 9.5 (4.1) (5.2)
Foreign (4.4) 5.1 1.0
----- ------- ------
48.4 (33.3) (37.6)
----- ------- ------
$99.8 $ 1.4 $ (7.6)
===== ======= ======
</TABLE>
At December 31, 2002, the Company had approximately $718.2 million of
undistributed earnings of the Company's foreign subsidiaries. These earnings
are considered to be indefinitely invested, and accordingly, no United States
federal or state income taxes have been provided on these earnings.
Determination of the amount of unrecognized deferred taxes on these earnings is
not practical, however, unrecognized foreign tax credits would be available to
reduce a portion of the tax liability.
A reconciliation of income taxes computed at the United States federal
statutory income tax rate (35%) to the provision (benefit) for income taxes
reflected in the Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 is as follows (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
----- ------ ------
<S> <C> <C> <C>
Provision (benefit) for income taxes at United States
federal statutory rate of 35% $ 9.0 $ 4.7 $ (4.9)
State and local income taxes, net of federal income tax
benefit (3.8) (4.1) (4.3)
Taxes on foreign income which differ from the United
States statutory rate 4.3 (2.5) 0.6
Income or losses with no tax benefit (expense) (1.0) 2.8 4.2
Adjustment to valuation allowance 91.0 -- --
Other 0.3 0.5 (3.2)
----- ------ ------
$99.8 $ 1.4 $ (7.6)
===== ====== ======
</TABLE>
For 2000, the Company has included in "Other" the recognition of a
United States tax credit carryback of approximately $2.0 million.
24
The significant components of the net deferred tax assets at December
31, 2002 and 2001 were as follows (in millions):
<TABLE>
<CAPTION>
2002 2001
------ ------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $164.2 $141.6
Sales incentive discounts 35.6 30.6
Inventory valuation reserves 17.4 15.0
Pensions and postretirement health care benefits 27.1 7.8
Other 82.5 64.2
Valuation allowance (126.2) (52.7)
------ ------
Total deferred tax assets 200.6 206.5
------ ------
Deferred Tax Liabilities:
Tax over book depreciation 42.7 23.5
Tax over book amortization of goodwill 16.1 18.2
Other 1.0 19.1
------ ------
Total deferred tax liabilities 59.8 60.8
------ ------
Net deferred tax assets $140.8 $145.7
====== ======
Amounts recognized in Consolidated Balance Sheets:
Other current assets $133.2 $ 95.6
Other assets 74.4 97.6
Other current liabilities (2.1) --
Other noncurrent liabilities (64.7) (47.5)
------ ------
$140.8 $145.7
====== ======
</TABLE>
The Company has recorded a net deferred tax asset of $140.8 million
and $145.7 million as of December 31, 2002 and 2001, respectively. As reflected
in the preceding table, the Company established a valuation allowance of $126.2
million and $52.7 million as of December 31, 2002 and 2001, respectively.
The change in the valuation allowance for 2002, 2001 and 2000 was an increase
of $73.5 million, a decrease of $19.1 million and a decrease of $7.0 million,
respectively. Realization of the asset is dependent on generating sufficient
taxable income in future periods. During the year ended December 31, 2002, the
Company recognized a non-cash income tax charge of $91.0 million related to
increasing the valuation allowance for its United States deferred tax assets.
In accordance with SFAS No. 109, the Company assessed the likelihood that its
deferred tax assets would be recovered from future taxable income and
determined that an adjustment to its 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 its
remaining deferred tax assets, net of the valuation allowance, in future years.
The Company has net operating loss carryforwards of $416.7 million as
of December 31, 2002, with expiration dates as follows: 2004 - $16.8 million,
2005 - $8.1 million, 2006 - $8.4 million, 2007 - $0.6 million, 2008 - $2.7
million and thereafter or unlimited - $380.1 million. These net operating loss
carryforwards include U.S. net loss carryforwards of $285.1 million and foreign
net operating loss carryforwards of $131.6 million. The Company paid income
taxes of $41.5 million, $26.9 million and $49.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
7. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002 and
2001 (in millions):
25
<TABLE>
<CAPTION>
2002 2001
------ ------
<S> <C> <C>
Revolving credit facility $126.9 $ 89.0
9 1/2% Senior notes due 2008 250.0 250.0
8 1/2% Senior subordinated notes due 2006 249.1 248.9
Other long-term debt 10.9 29.8
------ ------
$636.9 $617.7
====== ======
</TABLE>
On April 17, 2001, the Company issued $250.0 million of 9 1/2% Senior
Notes due 2008 (the "Senior Notes"). The Senior Notes are unsecured obligations
of the Company and are redeemable at the option of the Company, in whole or in
part, commencing May 1, 2005 initially at 104.75% of their principal amount,
plus accrued interest, declining to 100% of their principal amount plus accrued
interest on or after May 1, 2007. The indenture governing the Senior Notes
requires the Company to offer to repurchase the Senior Notes at 101% of their
principal amount, plus accrued interest to the date of the repurchase in the
event of a change in control. The indenture also contains certain covenants
that, among other things, limit the Company's ability (and that of its
restricted subsidiaries) to incur additional indebtedness; make restricted
payments (including dividends and share repurchases); make investments;
guarantee indebtedness; create liens; and sell assets. The proceeds were used
to repay borrowings outstanding under the Company's existing revolving credit
facility and support the financing of the Ag-Chem acquisition.
On April 17, 2001, the Company entered into a $350.0 million
multi-currency revolving credit facility with Rabobank that will mature October
2005. The facility, which replaced the Company's existing revolving credit
facility, is secured by a majority of the Company's U.S., Canadian and U.K.
based assets and a pledge of a portion of the stock of the Company's domestic
and material foreign subsidiaries. Interest will accrue on borrowings
outstanding under the facility, at the Company's option, at either (1) LIBOR
plus a margin based on a ratio of the Company's senior debt to EBITDA, as
adjusted, or (2) the administrative agent's base lending rate or the federal
funds rate plus a margin ranging between 0.625% and 1.5%, whichever is higher.
The facility contains covenants, including, among others, covenants restricting
the incurrence of indebtedness and the making of restrictive payments,
including dividends. At December 31, 2002, interest rates on the outstanding
borrowings, ranged from 3.9% to 5.5%, and the weighted average interest rate
during 2002 was 4.7%. In addition, the Company must fulfill financial covenants
including, among others, a total debt to EBITDA ratio, a senior debt to EBITDA
ratio and a fixed charge coverage ratio, as defined in the facility. No portion
of the revolving credit facility was payable in Euros at December 31, 2002 and
$35.5 million was payable in Euros at December 31, 2001. Approximately $19.1
million and $18.8 million of the revolving credit facility was payable in
Canadian dollars at December 31, 2002 and 2001, respectively. As of December
31, 2002, the Company had borrowings of $126.9 million and availability to
borrow $217.6 million under the revolving credit facility. The facility was
amended on March 14, 2002 to allow the Long-Term Incentive Plan ("LTIP") cash
expense to be recorded evenly over four quarters for purposes of calculating
EBITDA under certain financial covenants. The facility was also amended on
December 31, 2002 to change the required ratios for the total debt to EBITDA
and Senior Debt to EBITDA covenants.
In 1996, the Company issued $250.0 million of 8 1/2% Senior
Subordinated Notes due 2006 (the "Notes") at 99.139% of their principal amount.
The Notes are unsecured obligations of the Company and are redeemable at the
option of the Company, in whole or in part, at any time on or after March 15,
2001 initially at 104.25% of their principal amount, plus accrued interest,
declining ratably to 100% of their principal amount plus accrued interest, on
or after March 15, 2003. The Notes include certain covenants restricting the
incurrence of indebtedness and the making of certain restrictive payments,
including dividends.
In March 2001, the Company was issued a notice of default by the
trustee of its $250 million 8 1/2% Senior Subordinated Notes due 2006 (the
"Notes") regarding the violation of a covenant restricting the payment of
dividends during periods in 1999, 2000 and 2001 when an interest coverage ratio
was not met. During those periods, the Company paid approximately $4.8 million
in dividends based upon its interpretation that it did not need to meet the
interest coverage ratio but, instead, an alternative total debt
26
test. The Company subsequently received sufficient waivers from the holders of
the Notes for any violations of the covenant that might have resulted from the
dividend payments. In connection with the solicitation of waivers, the Company
incurred costs of approximately $2.6 million, which were expensed in the first
quarter of 2001. Currently, the Company is prohibited from paying dividends
until such time as the interest coverage ratio in the indenture is met.
At December 31, 2002, the aggregate scheduled maturities of long-term
debt are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
2004 $ 2.1
2005 128.6
2006 250.7
2007 1.4
2008 and thereafter 254.1
------
$636.9
======
</TABLE>
Cash payments for interest were $64.1 million, $65.7 million and $60.7
million for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company has arrangements with various banks to issue standby
letters of credit or similar instruments, which guarantee the Company's
obligations for the purchase or sale of certain inventories and for potential
claims exposure for insurance coverage. At December 31, 2002, outstanding
letters of credit totaled $9.9 million, of which $5.5 million were issued under
the revolving credit facility.
8. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans covering certain
employees principally in the United States, the United Kingdom and Germany. The
Company also provides certain postretirement health care and life insurance
benefits for certain employees principally in the United States.
Net annual pension and postretirement cost and the measurement
assumptions for the plans for the years ended December 31, 2002, 2001 and 2000
are set forth below (in millions):
<TABLE>
<CAPTION>
Pension benefits 2002 2001 2000
---------------- ------- ------- -------
<S> <C> <C> <C>
Service cost $ 6.8 $ 7.8 $ 8.1
Interest cost 27.5 26.7 27.4
Expected return on plan assets (30.5) (29.0) (30.6)
Amortization of prior service cost -- -- 0.2
Amortization of net actuarial loss 3.5 0.1 0.6
Special termination benefits -- -- 0.5
Curtailment loss -- -- 1.4
------- ------- -------
Net annual pension costs $ 7.3 $ 5.6 $ 7.6
======= ======= =======
Weighted average discount rate 5.8% 6.4% 6.4%
Weighted average expected long-term rate of return
on plan assets 7.1% 7.6% 7.3%
Rate of increase in future compensation 3.0-5.0% 4.0-5.0% 4.0-5.0%
<CAPTION>
Postretirement benefits 2002 2001 2000
------- ------- -------
<S> <C> <C> <C>
Service cost $ 0.4 $ 0.3 $ 0.4
Interest cost 1.7 1.5 1.4
Amortization of transition and prior service cost -- 0.1 --
Amortization of unrecognized net gain (0.2) (0.5) (0.4)
Curtailment gain -- -- (1.4)
------- ------- -------
Net annual postretirement costs $ 1.9 $ 1.4 $ --
======= ======= =======
Weighted average discount rate 6.75% 7.5% 7.7%
======= ======= =======
</TABLE>
27
The following tables set forth reconciliations of the changes in
benefit obligation, plan assets and funded status as of December 31, 2002 and
2001 (in millions):
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------- -----------------------
Change in benefit obligation 2002 2001 2002 2001
---------------------------- ------ ------ ----- -----
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 431.3 $444.3 $ 21.7 $ 21.0
Service cost 6.8 7.8 0.4 0.3
Interest cost 27.5 26.7 1.7 1.5
Plan participants' contributions 2.1 2.1 -- --
Actuarial (gain) loss 23.2 (14.0) 2.4 2.0
Acquisitions -- -- 1.0 --
Benefits paid (24.5) (24.8) (3.0) (3.1)
Foreign currency exchange rate changes 42.7 (10.8) -- --
------- ------ ------ ------
Benefit obligation at end of year $ 509.1 $431.3 $ 24.2 $ 21.7
======= ====== ====== ======
<CAPTION>
Pension Benefits Postretirement Benefits
-------------------------- -----------------------
Change in plan assets 2002 2001 2002 2001
--------------------- ------- ------ ----- -----
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning
of year $ 372.9 $443.0 $ -- $ --
Actual return on plan assets (21.9) (52.1) -- --
Employer contributions 11.5 15.5 3.0 3.1
Plan participants' contributions 2.1 2.1 -- --
Benefits paid (24.5) (24.8) (3.0) (3.1)
Foreign currency exchange rate changes 31.9 (10.8) -- --
------- ------ ------ ------
Fair value of plan assets at end of year $ 372.0 $372.9 $ -- $ --
======= ====== ====== ======
Funded status $(137.1) $(58.4) $(24.2) $(21.7)
Unrecognized net obligation -- -- 0.3 0.3
Unrecognized net actuarial loss (gain) 165.2 80.7 (1.6) (4.3)
Unrecognized prior service cost -- -- 1.0 0.1
------- ------ ------ ------
Net amount recognized $ 28.1 $ 22.3 $(24.5) $(25.6)
======= ====== ====== ======
Amounts recognized in Consolidated
Balance Sheets:
Prepaid benefit cost $ -- $ -- $ -- $ --
Accrued benefit liability (107.4) (29.5) (24.5) (25.6)
Additional minimum pension liability 135.5 51.8 -- --
------- ------ ------ ------
Net amount recognized $ 28.1 $ 22.3 $(24.5) $(25.6)
======= ====== ====== ======
</TABLE>
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 $509.1 million, $479.3
million and $372.0 million, respectively, as of December 31, 2002 and $431.3
million, $401.5 million and $372.9 million, respectively, as of December 31,
2001. At December 31, 2002, the Company had recorded a reduction to equity of
$135.5 million, net of taxes of $41.6 million related to the recording of a
minimum pension liability primarily related to the Company's UK plans where the
accumulated benefit obligation exceeded plan assets.
For measuring the expected postretirement benefit obligation, an 8.25%
health care cost trend rate was assumed for 2003, decreasing 0.75% per year to
6.0% and remaining at that level thereafter. For 2002, a 6.75% health care cost
trend rate was assumed. Changing the assumed health care cost trend rates by
one percentage point each year and holding all other assumptions constant would
have the following effect to service and interest cost for 2002 and the
accumulated postretirement benefit obligation at December 31, 2002 (in
millions):
28
<TABLE>
<CAPTION>
One One
Percentage Percentage
Point Point
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on service and interest cost $ 0.1 $ (0.1)
Effect on accumulated benefit obligation $ 1.8 $ (1.6)
</TABLE>
The Supplemental Executive Retirement Plan ("SERP") is an unfunded
plan that provides Company executives with retirement income for a period of
ten years based on a percentage of their final base salary, reduced by the
executive's social security benefits and 401(k) employer matching contributions
account. The benefit paid to the executive is equal to 3% of the final base
salary times credited years of service, with a maximum benefit of 60% of the
final base salary. Benefits under the SERP vest at age 65 or, at the discretion
of the Board of Directors, at age 62 reduced by a factor to recognize early
commencement of the benefit payments.
Net annual SERP cost and the measurement assumptions for the plan for
the years ended December 31, 2002, 2001 and 2000 are set forth below (in
millions):
<TABLE>
<CAPTION>
2002 2001 2000
----- ---- ----
<S> <C> <C> <C>
Service cost $ 0.5 $0.4 $0.4
Interest cost 0.3 0.3 0.2
Amortization of prior service cost 0.3 0.3 0.2
Recognized actuarial gain (0.1) -- --
----- ---- ----
Net annual SERP costs $ 1.0 $1.0 $0.8
===== ==== ====
Discount rate 6.75% 7.5% 7.5%
Rate of increase in future compensation 5.0% 4.0% 4.0%
</TABLE>
The following tables set forth reconciliations of the changes in
benefit obligation and funded status as of December 31, 2002 and 2001 (in
millions):
<TABLE>
<CAPTION>
Change in benefit obligation 2002 2001
---------------------------- ---- ----
<S> <C> <C>
Benefit obligation at beginning of year $4.4 $4.6
Service cost 0.5 0.4
Interest cost 0.3 0.3
Actuarial (gain) loss 0.1 (0.9)
---- ----
Benefit obligation at end of year $5.3 $4.4
==== ====
Funded status $5.3 $4.4
Unrecognized net actuarial gain 0.7 0.8
Unrecognized prior service cost (3.2) (3.5)
---- ----
Net amount recognized $2.8 $1.7
==== ====
Amounts recognized in Consolidated
Balance Sheets:
Accrued benefit liability $3.8 $2.8
Intangible asset (1.0) (1.1)
---- ----
Net amount recognized $2.8 $1.7
==== ====
</TABLE>
The Company maintains separate defined contribution plans covering
certain employees primarily in the United States and United Kingdom. Under the
plans, the Company contributes a specified percentage of each eligible
employee's compensation. The Company contributed $3.4 million, $2.8 million and
$1.6 million for the years ended December 31, 2002, 2001 and 2000,
respectively.
29
9. COMMON STOCK
At December 31, 2002, the Company had 150.0 million authorized shares
of common stock with a par value of $0.01, with 75.2 million shares of common
stock outstanding, 1.8 million shares reserved for issuance under the Company's
2001 Stock Option Plan (Note 10), 0.1 million shares reserved for issuance
under the Company's Non-employee Director Stock Incentive Plan (Note 10) and
1.9 million shares reserved for issuance under the Company's Long-Term
Incentive Plan (Note 10).
In April 1994, the Company designated 300,000 shares of Junior
Cumulative Preferred Stock ("Junior Preferred Stock") in connection with the
adoption of a Stockholders' Rights Plan (the "Rights Plan"). Under the terms of
the Rights Plan, one-third of a preferred stock purchase right (a "Right") is
attached to each outstanding share of the Company's common stock. The Rights
Plan contains provisions that are designed to protect stockholders in the event
of certain unsolicited attempts to acquire the Company. Under the terms of the
Rights Plan, each Right entitles the holder to purchase one one-hundredth of a
share of Junior Preferred Stock, par value of $0.01 per share, at an exercise
price of $200 per share. The Rights are exercisable a specified number of days
following (i) the acquisition by a person or group of persons of 20% or more of
the Company's common stock or (ii) the commencement of a tender or exchange
offer for 20% or more of the Company's common stock. In the event the Company
is the surviving company in a merger with a person or group of persons that
owns 20% or more of the Company's outstanding stock, each Right will entitle
the holder (other than such 20% stockholder) to receive, upon exercise, common
stock of the Company having a value equal to two times the Right's exercise
price. In addition, in the event the Company sells or transfers 50% or more of
its assets or earning power, each Right will entitle the holder to receive,
upon exercise, common stock of the acquiring company having a value equal to
two times the Right's exercise price. The Rights may be redeemed by the Company
at $0.01 per Right prior to their expiration on April 27, 2004.
In March 2001, the Company sold 555 non-voting preferred shares, which
were convertible into shares of the Company's common stock in a private
placement with net proceeds of approximately $5.3 million. In June 2001, the
preferred shares were converted into 555,000 shares of the Company's common
stock.
10. STOCK INCENTIVE PLANS
NON-EMPLOYEE DIRECTOR STOCK INCENTIVE PLAN
The Company's Non-employee Director Stock Incentive Plan (the
"Director Plan") provides for restricted stock awards to non-employee directors
based on increases in the price of the Company's common stock. The awarded
shares are earned in specified increments for each 15% increase in the average
market value of the Company's common stock over the initial base price
established under the plan. When an increment of the awarded shares is earned,
the shares are issued to the participant in the form of restricted stock which
vests at the earlier of 12 months after the specified performance period or
upon departure from the Board of Directors. When the restricted shares are
earned, a cash bonus equal to 40% of the value of the shares on the date the
restricted stock award is earned is paid by the Company to satisfy a portion of
the estimated income tax liability to be incurred by the participant. At
December 31, 2002, there were 13,500 shares awarded but not earned under the
Director Plan and 50,976 shares that have been earned but not vested under the
Director Plan.
Outstanding shares awarded but not earned as of December 31, 2002
consist of the following and can be earned when the Company's average common
stock price reaches the following increments (over a consecutive 20-day
period):
<TABLE>
<CAPTION>
Stock Price
-----------------------------------------
$26.12 $29.13 $32.14 Total
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares 4,500 4,500 4,500 13,500
</TABLE>
30
LONG-TERM INCENTIVE PLAN ("LTIP")
The Company's LTIP provides for restricted stock awards to executives
based on increases in the price of the Company's common stock. The awarded
shares may be earned over a five-year performance period in specified
increments for each 20% increase in the average market value of the Company's
common stock over the established initial base price. For all restricted stock
awards prior to 2000, earned shares are issued to the participant in the form
of restricted stock which generally carries a five-year vesting period with
one-third of each earned award vesting at the end of the third, fourth and
fifth year after each award is earned. In 2000, the LTIP was amended to replace
the vesting schedule with a non-transferability period for all future grants.
Accordingly, for restricted stock awards in 2000 and all future awards, earned
shares are subject to a non-transferability period, which expires over a
five-year period with the transfer restrictions lapsing in one-third increments
at the end of the third, fourth and fifth year after each award is earned.
During the non-transferability period, participants will be restricted from
selling, assigning, transferring, pledging or otherwise disposing of any earned
shares, but earned shares are not subject to forfeiture. In the event a
participant terminates employment with the Company, the non-transferability
period is extended by two years. When the earned shares have vested and are no
longer subject to forfeiture, the Company is obligated to pay a cash bonus
equal to 40% of the value of the shares on the date the shares are earned in
order to satisfy a portion of the estimated income tax liability to be incurred
by the participant.
For awards granted in 2000 and in the future, the Company will record
the entire compensation expense relating to the market value of the earned
shares and related cash bonus in the period in which the award is earned. For
awards granted prior to 2000, the market value of awards earned are added to
common stock and additional paid-in capital and an equal amount is deducted
from stockholders' equity as unearned compensation. The LTIP unearned
compensation and the amount of cash bonus to be paid when the awarded shares
become vested are amortized to expense ratably over the vesting period. The
Company recognized compensation expense associated with the LTIP and Director
Plan of $44.1 million, $7.1 million and $3.8 million for the years ended
December 31, 2002, 2001 and 2000, respectively, consisting of compensation
expense relating to earned shares, amortization of stock awards for earned
shares issued prior to 2000 and the related cash bonuses.
Additional information regarding the LTIP for the years ended December
31, 2002, 2001 and 2000 is as follows:
<TABLE>
<CAPTION>
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Shares awarded but not earned at January 1 1,717,000 1,930,000 1,046,000
Shares awarded 755,000 260,000 2,075,000
Shares forfeited or expired unearned (375,000) (196,000) (1,191,000)
Shares earned (1,349,500) (277,000) --
---------- ---------- ----------
Shares awarded but not earned at December 31 747,500 1,717,000 1,930,000
Shares available for grant 1,156,000 1,536,000 1,600,000
---------- ---------- ----------
Total shares reserved for issuance 1,903,500 3,253,000 3,530,000
========== ========== ==========
</TABLE>
Outstanding shares awarded but not earned as of December 31, 2002
consist of the following and can be earned when the Company's average common
stock price reaches the following increments (over a consecutive 20-day
period):
<TABLE>
<CAPTION>
Ranges of Stock Price
------------------------------------------------------------------------
$25.00 - $28.50 $29.00 - $33.25 $38.00 $42.75 $47.50 Total
--------------- --------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares 83,500 120,250 145,000 181,250 217,500 747,500
</TABLE>
In 2001, the LTIP was amended to permit a participant to elect to
forfeit a portion of an earned award in order to fully satisfy federal, state
and employment taxes which are payable at the time the shares and the related
cash bonus are earned. The number of shares of common stock equal to the value
of the participant's tax liability, net of the cash bonus, are thereby
forfeited in lieu of an additional cash payment
31
contributed to the participant's tax withholding. In 2002 and 2001, 299,409 and
52,540 earned shares, respectively, were forfeited in this manner.
In 2000, the LTIP was amended to increase the number of shares
authorized for issuance by 1,250,000 shares.
For awards granted prior to 2000, the number of shares vested during
the years 2002, 2001 and 2000 were 201,334, 166,500 and 411,667, respectively.
All awards granted after 2000 vest immediately upon being earned.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan") provides for the
granting of nonqualified and incentive stock options to officers, employees,
directors and others. The stock option exercise price is determined by the
Board of Directors except in the case of an incentive stock option for which
the purchase price shall not be less than 100% of the fair market value at the
date of grant. Each recipient of stock options is entitled to immediately
exercise up to 20% of the options issued to such person, and the remaining 80%
of such options vest ratably over a four-year period and expire not later than
ten years from the date of grant.
Stock option transactions during the three years ended December 31,
2002, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at January 1 2,850,345 2,433,497 1,855,919
Options granted 87,500 727,500 802,000
Options exercised (777,750) (140,342) (39,702)
Options canceled (27,730) (170,310) (184,720)
---------- ---------- ----------
Options outstanding at December 31 2,132,365 2,850,345 2,433,497
---------- ---------- ----------
Options available for grant at December 31 1,839,438 1,908,938 123,438
---------- ---------- ----------
Option price ranges per share:
Granted $18.30-23.00 $8.19-15.12 $11.63-13.13
Exercised 2.50-22.31 1.52-14.63 1.52-11.00
Canceled 11.00-31.25 6.25-31.25 14.63-31.25
Weighted average option prices per share:
Granted $ 20.68 $ 14.32 $ 11.69
Exercised 11.61 8.07 8.12
Canceled 16.97 15.87 18.66
Outstanding at December 31 16.69 15.28 15.19
</TABLE>
At December 31, 2002, the outstanding options had a weighted average
remaining contractual life of approximately 6.9 years and there were 1,242,826
options currently exercisable with option prices ranging from $6.25 to $31.25
and with a weighted average exercise price of $18.87.
In 2001, the Company's shareholders approved a new Stock Option Plan
to replace the existing plan that was scheduled to expire in September 2001.
The new plan substantially contains the same terms as the prior plan and
expires in 2011. The new plan allows the Company to issue stock option grants
for the remaining unissued shares under the prior plan of 123,438, plus an
additional 2,500,000 shares.
The following table sets forth the exercise price range, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date:
32
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted Average Weighted Exercisable Weighted
Remaining Average as of Average
Number of Contractual Life Exercise December 31, Exercise
Range of Exercise Prices Shares (Years) Price 2002 Price
------------------------ --------- ---------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$6.25 - $9.10 62,600 7.9 $ 8.36 23,600 $ 8.02
$10.50 - $15.12 1,359,599 7.7 $13.18 583,060 $13.14
$16.96 - $23.00 460,200 6.2 $21.96 386,200 $22.20
$25.50 - $31.25 249,966 3.8 $28.11 249,966 $28.11
--------- ---------
2,132,365 1,242,826
========= =========
</TABLE>
The Company accounts for all stock-based compensation awarded under
the Director Plan, the LTIP and the Option Plan as prescribed under APB No. 25,
and also provides the disclosures required under SFAS No. 123 and SFAS No. 148.
APB No. 25 requires no recognition of compensation expense for options granted
under the Option Plan as long as certain conditions are met. There was no
compensation expense recorded under APB No. 25 for the Option Plan. However,
APB No. 25 does require recognition of compensation expense under the Director
Plan and the LTIP.
For disclosure purposes only, under SFAS No. 123, the Company
estimated the fair value of grants under the Company's stock option plan using
the Black-Scholes option pricing model and utilized the Barrier option model
for awards granted under the Director Plan and LTIP. Based on these models, the
weighted average fair value of options granted under the Option Plan and the
weighted average fair value of awards granted under the Director Plan and the
LTIP, were as follows (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Director Plan $11.86 $ -- $ --
LTIP 19.81 9.88 8.50
Option Plan 11.60 8.63 6.23
Weighted average assumptions under Black-Scholes
and Barrier option models:
Expected life of awards (years) 5.0 7.0 5.6
Risk-free interest rate 3.4% 4.8% 5.8%
Expected volatility 53.3% 52.0% 44.0%
Expected dividend yield -- -- 0.3%
</TABLE>
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 (loss) income and
(loss) 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):
33
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
2002 2001 2000
-------- -------- -----
<S> <C> <C> <C>
Net (loss) income, as reported $ (84.4) $ 22.6 $ 3.5
Add: Stock-based employee compensation expense
included in reported net (loss) income, net
of related tax effects 16.1 4.4 2.4
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (9.4) (8.6) (8.4)
-------- -------- ------
Pro forma net (loss) income $ (77.7) $ 18.4 $ (2.5)
======== ======== ======
(Loss) earnings per share:
Basic - as reported $ (1.14) $ 0.33 $ 0.06
======== ======== ======
Basic - pro forma $ (1.05) $ 0.27 $(0.04)
======== ======== ======
Diluted - as reported $ (1.14) $ 0.33 $ 0.06
======== ======== ======
Diluted - pro forma $ (1.05) $ 0.27 $(0.04)
======== ======== ======
</TABLE>
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138. The cumulative effect for adopting this standard as of January 1,
2001 resulted in a fair value asset, net of taxes of approximately $0.5
million, which was reclassified to earnings over the next twelve months. All
derivatives are recognized on the consolidated balance sheets at fair value. On
the date the derivative contract is entered, the Company designates the
derivative as either (1) a fair value hedge of a recognized liability, (2) a
cash flow hedge of a forecasted transaction, (3) a hedge of a net investment in
a foreign operation, or (4) a non-designated derivative instrument. The Company
currently engages in derivatives that are classified as cash flow hedges and
non-designated derivative instruments. Changes in the fair value of a
derivative that is designated as a cash flow hedge are recorded in other
comprehensive income until reclassified into earnings at the time of settlement
of the forecasted transaction. Changes in the fair value of non-designated
derivative contracts and the ineffective portion of designated derivative
instruments are reported in current earnings.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as the risk management objectives and
strategy for undertaking various hedge transactions. The Company formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flow of hedged items. When it is
determined that a derivative is no longer highly effective as a hedge, hedge
accounting is discontinued on a prospective basis.
Foreign Currency Risk
The Company has significant manufacturing operations in the United
States, the United Kingdom, France, Germany, Denmark and Brazil, and it
purchases a portion of its tractors, combines and components from third party
foreign suppliers, primarily in various European countries and in Japan. The
Company also sells products in over 140 countries throughout the world. The
Company's most significant transactional foreign currency exposures include:
(i) the British pound in relation to the Euro and the U.S. dollar and (ii) the
Euro and the Canadian dollar in relation to the U.S. dollar.
The Company attempts to manage its transactional foreign exchange
exposure by hedging identifiable foreign currency cash flow commitments and
forecasts arising from receivables, payables, and
34
expected purchases and sales. Where naturally offsetting currency positions do
not occur, the Company hedges certain of its exposures through the use of
foreign currency forward contracts.
The Company uses foreign currency forward contracts to hedge
receivables and payables on the Company and its subsidiaries' balance sheets
that are denominated in foreign currencies other than the functional currency.
These forward contracts are classified as non-designated derivatives
instruments. For the years ended December 31, 2002 and 2001, the Company
recorded net gains of approximately $17.3 million and net losses of
approximately $7.8 million under the caption of other expense, net,
respectively. These gains and losses were substantially offset by losses and
gains on the remeasurement of the underlying asset or liability being hedged.
The Company uses foreign currency forward contracts to hedge
forecasted foreign currency inflows and outflows resulting from purchases and
sales. The Company currently has hedged anticipated foreign currency cash flows
up to twelve months in the future. As of December 31, 2002, the Company had
deferred gains, net of taxes, of approximately $0.8 million included in
stockholders' equity as a component of accumulated other comprehensive loss.
The deferred gain is expected to be reclassified to earnings during the next
twelve months. The Company recorded no gain or loss resulting from a forward
contract's ineffectiveness or discontinuance as a cash flow hedge.
Interest Rate Risk
The Company may use interest rate swap agreements to manage its
exposure to interest rate changes. Currently, the Company has no interest rate
swap agreements outstanding.
The following table summarizes activity in accumulated other
comprehensive loss related to derivatives held by the Company during the
periods from January 1, 2002 through December 31, 2002 and January 1, 2001
through December 31, 2001 (in millions):
<TABLE>
<CAPTION>
2002
-------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
---------- ------ ---------
<S> <C> <C> <C>
Accumulated derivative net losses as of December 31, 2001 $(0.2) $ 0.1 $ (0.1)
Net changes in fair value of derivatives 3.9 (1.6) 2.3
Net losses reclassified from accumulated other
comprehensive loss into earnings (2.4) 1.0 (1.4)
----- ----- ------
Accumulated derivative net gains as of December 31, 2002 $ 1.3 $(0.5) $ 0.8
===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
2001
-------------------------------------------
Before-Tax Income After-Tax
Amount Tax Amount
---------- ------ ---------
<S> <C> <C> <C>
Cumulative effect of adopting SFAS No. 133, net $ 0.8 $(0.3) $ 0.5
Net changes in fair value of derivatives (3.4) 1.4 (2.0)
Net gains reclassified from accumulated other
comprehensive loss into earnings 2.4 (1.0) 1.4
----- ----- -----
Accumulated derivative net losses as of December 31, 2001 $(0.2) $ 0.1 $(0.1)
===== ===== =====
</TABLE>
In addition to the above, the Company recorded a deferred gain of $0.4
million, net of taxes, and a deferred loss of $5.8 million, net of taxes, to
other comprehensive loss related to derivatives held by affiliates for the
years ended December 31, 2002 and 2001, respectively. The gain and loss are
related to interest rate swap contracts in the Company's retail finance joint
ventures. These swap contracts have the effect of converting floating rate debt
to fixed rates in order to secure its yield against its fixed rate loan
portfolio.
The Company's senior management establishes the Company's foreign
currency and interest rate risk management policies. These policies are
reviewed periodically by the Audit Committee of the Board
35
of Directors. The policy allows for the use of derivative instruments to hedge
exposures to movements in foreign currency and interest rates. The Company's
policy prohibits the use of derivative instruments for speculative purposes.
12. COMMITMENTS AND CONTINGENCIES
The future payments required under the Company's significant
commitments as of December 31, 2002 are as follows (in millions):
<TABLE>
<CAPTION>
Payments Due By Period
----------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
----- ----- ----- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital lease $ 0.7 $ 0.6 $ 0.6 $0.4 $ -- $ -- $ 2.3
obligations
Operating lease 19.1 13.8 9.4 6.9 5.0 25.9 80.1
obligations
Unconditional purchase
obligations(1) 15.9 0.2 0.2 -- -- -- 16.3
Other long-term
obligations 1.6 -- -- -- -- -- 1.6
----- ----- ----- ---- ---- ----- ------
Total contractual
cash obligations $37.3 $14.6 $10.2 $7.3 $5.0 $25.9 $100.3
===== ===== ===== ==== ==== ===== ======
</TABLE>
(1) Unconditional purchase obligations exclude routine purchase orders in
the normal course of business.
<TABLE>
<CAPTION>
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
----- ----- ----- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Guarantees $ 8.6 $ 5.9 $ 9.8 $ -- $ -- $ -- $24.3
===== ===== ===== ===== ==== ==== =====
</TABLE>
Guarantees
At December 31, 2002, the Company was obligated under certain
circumstances to purchase through the year 2005 up to $12.5 million of
equipment upon expiration of certain operating leases between AGCO Finance LLC
and AGCO Finance Canada Ltd., the Company's retail finance joint ventures in
North America, and end users. The Company also maintains a remarketing
agreement with these joint ventures, whereby the Company is obligated to
repurchase repossessed inventory at market values. The Company believes that
any losses, which might be incurred on the resale of this equipment, will not
materially impact the Company's financial position or results of operations.
At December 31, 2002, the Company guaranteed indebtedness owed to
third parties of approximately $11.8 million, primarily related to dealer and
end user financing of equipment. The Company believes the credit risk
associated with these guarantees is not material to its financial position.
Other
In addition, at December 31, 2002, the Company had outstanding foreign
currency forward contracts of approximately $151.3 million. All contracts have
a maturity of less than one year (Note 11).
Total lease expense under noncancelable operating leases was $18.9
million, $17.2 million and $17.4 million for the years ended December 31, 2002,
2001 and 2000, respectively.
As discussed in Note 3, the Company is involved in litigation with
respect to its pension scheme in Coventry, England. The Company is also party
to various claims and lawsuits arising in the normal course of business. It is
the opinion of management, after consultation with legal counsel, that those
claims and lawsuits, excluding a potential adverse outcome with respect to the
pension case, when resolved, will not have a material adverse effect on the
financial position or results of operations of the Company (Note 3).
36
13. RELATED PARTY TRANSACTIONS
Rabobank Nederland, a AAA rated financial institution based in the
Netherlands, is a 51% owner in the Company's retail finance joint ventures
which are located in the United States, Canada, the United Kingdom, France,
Germany, Spain, Ireland and Brazil. Rabobank is also the principal agent and
participant in the Company's revolving credit facility and securitization
facilities. The majority of the assets of the Company's retail finance joint
ventures represent finance receivables. The majority of the liabilities
represent notes payable and accrued interest. Under the various joint venture
agreements, Rabobank or its affiliates are obligated to provide financing to
the joint venture companies, primarily through lines of credit. The Company
does not guarantee the obligations of the retail finance joint ventures other
than 49% of the solvency requirements of the Brazil joint venture. In Brazil,
the Company's joint venture company has an agency relationship with Rabobank
whereby Rabobank provides funding. The funding is provided entirely through
government-sponsored FINAME facilities which are subject to variation at any
time by the Brazilian government.
The Company's retail finance joint ventures provide retail financing
and wholesale financing to its dealers. The terms of the financing arrangements
offered to the Company's dealers are similar to arrangements the retail finance
joint ventures provide to unaffiliated third parties. At December 31, 2002, the
Company was obligated under certain circumstances to purchase through the year
2005 up to $12.5 million of equipment upon expiration of certain operating
leases between AGCO Finance LLC and AGCO Finance Canada Ltd, its retail joint
ventures in North America, and end users. The Company also maintains a
remarketing agreement with these joint ventures (Note 12). In addition, as part
of sales incentives provided to end users, the Company may from time to time
subsidize interest rates of retail financing provided by its retail joint
ventures. The cost of those programs is recognized at the time of sale to the
Company's dealers.
During 2002, the Company had net sales of $130.2 million to BayWa
Corporation, a German distributor, in the ordinary course of business. The
President and CEO of BayWa Corporation is also a member of the Board of
Directors of the Company.
During 2002, the Company purchased approximately $127.5 million of
equipment components from its manufacturing joint venture, GIMA, at cost.
During 2002, the Company also purchased approximately $5.3 million of equipment
components from its manufacturing joint venture, Deutz AGCO Motores SA, at
prices approximating cost.
14. SEGMENT REPORTING
The Company has five reportable segments: North America; South
America; Europe/Africa/Middle East; Asia/Pacific; and Sprayers. Each regional
segment distributes a full range of agricultural equipment and related
replacement parts. Sprayers manufacture and distribute self-propelled
agricultural sprayers and replacement parts. The Company evaluates segment
performance primarily based on income from operations. Sales for each regional
segment are based on the location of the third-party customer. All significant
intercompany transactions between the segments have been eliminated. The
Company's selling, general and administrative expenses and engineering expenses
are charged to each segment based on the region and division where the expenses
are incurred. As a result, the components of operating income for one segment
may not be comparable to another segment. As a result of the Ag-Chem
acquisition, Sprayers includes Ag-Chem and the Company's prior sprayer
operations. Segment results for the years ended December 31, 2002, 2001 and
2000 are as follows (in millions):
37
<TABLE>
<CAPTION>
North South Europe/Africa/ Asia/
Years ended December 31, America America Middle East Pacific Sprayers Consolidated
------------------------ ------- ------- -------------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
2002
Net sales $791.0 $270.8 $1,486.4 $107.1 $ 267.4 $2,922.7
(Loss) income from operations (6.9) 30.5 133.0 19.4 16.2 192.2
Depreciation and amortization 8.6 4.4 30.7 3.9 3.3 50.9
Assets 597.8 128.0 627.4 37.4 150.2 1,540.8
Capital expenditures 14.3 8.8 30.5 -- 1.3 54.9
2001
Net sales $713.4 $257.8 $1,283.6 $ 97.9 $ 188.8 $2,541.5
Income (loss) from operations 2.9 22.5 94.5 16.0 (0.6) 135.3
Depreciation and amortization 9.4 5.1 31.3 3.3 2.8 51.9
Assets 427.5 176.3 553.5 30.3 151.6 1,339.2
Capital expenditures 13.0 5.1 18.6 -- 2.6 39.3
2000
Net sales $636.0 $242.8 $1,317.2 $ 98.4 $ 41.7 $2,336.1
(Loss) income from operations (18.6) 6.3 101.4 16.2 1.3 106.6
Depreciation and amortization 12.8 5.6 29.5 2.5 1.2 51.6
Assets 500.0 209.3 685.6 27.3 17.6 1,439.8
Capital expenditures 23.4 4.3 29.0 -- 1.0 57.7
</TABLE>
A reconciliation from the segment information to the consolidated
balances for income from operations and assets is set forth below (in
millions):
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Segment income from operations $ 192.2 $ 135.3 $ 106.6
Restricted stock compensation expense (44.1) (7.1) (3.8)
Restructuring and other infrequent expenses (42.7) (13.0) (21.9)
Amortization of intangibles (1.4) (18.5) (15.1)
-------- -------- --------
Consolidated income from operations $ 104.0 $ 96.7 $ 65.8
======== ======== ========
Segment assets $1,540.8 $1,339.2 $1,439.8
Cash and cash equivalents 34.3 28.9 13.3
Receivables from affiliates 8.9 8.4 10.4
Investments in affiliates 78.5 69.6 85.3
Other current and noncurrent assets 291.9 313.8 269.0
Intangible assets 394.6 413.4 286.4
-------- -------- --------
Consolidated total assets $2,349.0 $2,173.3 $2,104.2
======== ======== ========
</TABLE>
Net sales by customer location for the years ended December 31, 2002,
2001 and 2000 were as follows (in millions):
38
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales:
United States $ 881.4 $ 754.8 $ 540.2
Canada 129.5 115.2 114.8
Germany 411.4 362.8 371.5
France 273.4 240.6 266.9
United Kingdom and Ireland 170.7 137.6 109.0
Other Europe 488.5 422.3 418.2
South America 263.3 249.4 235.6
Middle East 124.3 99.8 114.3
Asia 46.9 49.6 57.6
Australia 60.2 48.3 40.8
Africa 37.3 29.2 37.3
Mexico, Central America and Caribbean 35.8 31.9 29.9
-------- -------- --------
$2,922.7 $2,541.5 $2,336.1
======== ======== ========
</TABLE>
Net sales by product for the years ended December 31, 2002, 2001 and
2000 were as follows (in millions):
<TABLE>
<CAPTION>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Tractors $1,712.1 $1,470.3 $1,474.5
Combines 202.1 195.3 145.4
Sprayers 226.9 153.4 30.8
Other machinery 286.7 250.3 238.6
Replacement parts 494.9 472.2 446.8
-------- -------- --------
$2,922.7 $2,541.5 $2,336.1
======== ======== ========
</TABLE>
Property, plant and equipment by country as of December 31, 2002 was
as follows (in millions):
<TABLE>
<CAPTION>
2002
--------
<S> <C>
United States $ 111.6
United Kingdom 48.0
Germany 96.1
France 33.9
Brazil 34.9
Other 19.2
--------
$ 343.7
========
</TABLE>
15. SUBSEQUENT EVENT (UNAUDITED)
On March 3, 2003, the Company announced the closure of its track
tractor facility in DeKalb, Illinois. Currently, the DeKalb plant assembles
Challenger track tractors in the range of 235 to 500 horsepower. After a review
of cost reduction alternatives, it was determined the current and forecasted
production levels were not sufficient to support a stand alone track tractor
site. The Company is evaluating the relocation of production to its current
facilities in Hesston, Kansas or Jackson, Minnesota. Production at the DeKalb
facility is planned to cease by late May 2003 with production to be relocated
and resumed in July 2003. At March 3, 2003, there were 186 employees at the
DeKalb plant.
39
EXHIBIT 99.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
AGCO Corporation:
We consent to the incorporation by reference in the registration statements
(No. 333-75591, No. 333-75589 and No. 333-04707) on Form S-8, of AGCO
Corporation of our report dated February 28, 2003 with respect to the
consolidated balance sheet of AGCO Corporation and subsidiaries as of December
31, 2002 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 2002, and the financial
statement schedule, which report appears in the Form 8-K dated December 15,
2003 of AGCO Corporation. Our report refers to a change in accounting for
goodwill and other intangible assets in 2002.
Our report refers to our audit of adjustments that were applied to the
transitional disclosures required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, to revise the 2001 and
2000 consolidated financial statements, and our audit of the reclassifications
required by Statement of Financial Accounting Standards No. 145, Recission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, to revise the 2001 consolidated financial statements, as
more fully described in Note 1 to the consolidated financial statements.
However, we were not engaged to audit, review or apply any procedures to the
2001 and 2000 consolidated financial statements other than with respect to such
disclosures.
/s/ KPMG LLP
Atlanta, Georgia
December 15, 2003
EXHIBIT 99.4
NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended (the
"Securities Act"), provides that if any part of a registration statement at the
time such part becomes effective contains an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, any person acquiring a
security pursuant to such registration statement (unless it is proved that at
the time of such acquisition such person knew of such untruth or omission) may
sue, among others, every accountant who has consented to be named as having
prepared or certified any part of the registration statement, or as having
prepared or certified any report or valuation which is used in connection with
the registration statement, with respect to the statement in such registration
statement, report or valuation which purports to have been prepared or
certified by the accountant.
This Form 10-K is incorporated by reference into the following
previously filed registration statements of AGCO Corporation ("AGCO"):
Registration Statements on Form S-8 file numbers 333-75591, 333-75589 and
333-04707 (collectively, the "Registration Statements") and, for purposes of
determining liability under the Securities Act, is deemed to be a new
registration statement for each Registration Statement into which it is
incorporated by reference.
On April 25, 2002, AGCO dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent public accountant and appointed KPMG LLP to
replace Arthur Andersen. Both the engagement partner and the manager for AGCO's
prior fiscal year audit are no longer with Arthur Andersen. As a result, AGCO
has been unable to obtain Arthur Andersen's written consent to incorporate by
reference into the Registration Statements Arthur Andersen's audit report
regarding AGCO's financial statements as of December 31, 2001 and December 31,
2000 and for the years then ended. Under these circumstances, Rule 437a under
the Securities Act and Rule 2-02 of Regulation S-X promulgated by the
Securities and Exchange Commission permit AGCO to file this Form 10-K without a
written consent from Arthur Andersen. As a result, however, Arthur Andersen
will have no liability under Section 11(a) of the Securities Act for any untrue
statements of a material fact contained in the financial statements audited by
Arthur Andersen or any omissions of a material fact required to be stated
therein. Accordingly, you would be unable to assert a claim against Arthur
Andersen under Section 11(a) of the Securities Act for any purchases of
securities under the Registration Statements made on or after the date of the
Form 10-K. However, to the extent provided in Section 11(b)(3)(C) of the
Securities Act, other persons who are liable under Section 11(a) of the
Securities Act, including AGCO's officers and directors, may still rely on
Arthur Andersen's original audit reports as being made by an expert for
purposes of establishing a due diligence defense under Section 11(b) of the
Securities Act.