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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12930
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AGCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-1960019
(State of incorporation) (I.R.S. Employer Identification No.)
4205 River Green Parkway
Duluth, Georgia 30096
(Address of principal executive
offices including zip code)
Registrant's telephone number, including area code: (770) 813-9200
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Common stock par value $.01 per share: 59,534,021 shares outstanding as of
September 30, 1998.
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AGCO CORPORATION AND SUBSIDIARIES
INDEX
Page
Numbers
----------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - September 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements
of Income for the Three Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements
of Income for the Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . 19
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
Part I. Financial Information
Item 1. Financial Statements
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
1998 1997
----------------- -----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35.1 $ 31.2
Accounts and notes receivable, net of allowances . . . . . . . . . . . . . . 1,075.0 978.7
Receivables from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 26.8 18.5
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767.2 622.7
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.6 63.7
------------------ -------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,977.7 1,714.8
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 410.5 403.7
Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.1 87.6
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1 75.8
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356.6 339.0
------------------ -------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,932.0 $ 2,620.9
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 274.1 $ 350.1
Payables to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 17.4
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423.7 430.0
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 34.2 33.0
------------------ -------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 737.0 830.5
------------------ -------------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100.3 727.4
Postretirement health care benefits. . . . . . . . . . . . . . . . . . . . . . . 24.6 24.5
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 58.6 46.9
------------------ -------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,920.5 1,629.3
Stockholders' Equity:
Common stock: $0.01 par value, 150,000,000 shares authorized,
59,534,021 and 62,972,423 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively . . . . . . . . 0.6 0.6
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 427.3 515.0
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658.7 577.6
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . (13.2) (20.0)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . (61.9) (81.6)
------------------ -------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 1,011.5 991.6
------------------ -------------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $ 2,932.0 $ 2,620.9
================== ===================
See accompanying notes to condensed consolidated financial statements.
3
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
Three Months Ended September 30,
------------------------------------
1998 1997
-------------- --------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 665.7 $ 759.5
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534.5 590.0
-------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131.2 169.5
Selling, general and administrative expenses. . . . . . . . . . . . . . . . . . 71.2 70.0
Engineering expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 12.2
Nonrecurring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4.9
-------------- --------------
Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . 46.1 82.4
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.3 13.5
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 4.4
-------------- --------------
Income before income taxes and equity in net earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.4 64.5
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 23.3
-------------- --------------
Income before equity in net earnings of affiliates . . . . . . . . . . . . . . 14.2 41.2
Equity in net earnings of affiliates. . . . . . . . . . . . . . . . . . . . . . 3.7 3.0
-------------- --------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2
============== ==============
Net income per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.72
============== ==============
Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.70
============== ==============
Weighted average number of common and common equivalent shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.3 61.6
============== ==============
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.6 63.3
============== ==============
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ 0.01
============== ==============
See accompanying notes to condensed consolidated financial statements.
4
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
Nine Months Ended September 30,
------------------------------------
1998 1997
-------------- --------------
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,183.3 $ 2,335.8
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,751.1 1,856.2
-------------- --------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432.2 479.6
Selling, general and administrative expenses. . . . . . . . . . . . . . . . . . 202.9 199.2
Engineering expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.1 39.5
Nonrecurring expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12.6
-------------- --------------
Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . 187.2 228.3
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.6 40.7
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 13.4
-------------- --------------
Income before income taxes, equity in net earnings of
affiliates and extraordinary loss . . . . . . . . . . . . . . . . . . . . 115.7 174.2
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 42.8 62.1
-------------- --------------
Income before equity in net earnings of affiliates
and extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . 72.9 112.1
Equity in net earnings of affiliates. . . . . . . . . . . . . . . . . . . . . . 10.0 8.6
-------------- --------------
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . 82.9 120.7
Extraordinary loss, net of taxes . . . . . . . . . . . . . . . . . . . . . . . - (2.1)
-------------- --------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82.9 $ 118.6
============== ==============
Net income per common share:
Basic:
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 2.01
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . - (0.03)
-------------- --------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.38 $ 1.98
============== ==============
Diluted:
Income before extraordinary loss. . . . . . . . . . . . . . . . . . . . . $ 1.35 $ 1.95
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . - (0.03)
-------------- --------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.35 $ 1.92
============== ==============
Weighted average number of common and common equivalent shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.1 60.0
============== ==============
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.6 61.7
============== ==============
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . $ 0.03 $ 0.03
============== ==============
See accompanying notes to condensed consolidated financial statements.
5
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
Nine Months Ended September 30,
----------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82.9 $ 118.6
-------------- -------------
Adjustments to reconcile net income to net cash used for operating
activities:
Extraordinary loss, net of taxes. . . . . . . . . . . . . . . . . . . . - 2.1
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 42.8 36.9
Equity in net earnings of
affiliates, net of cash received . . . . . . . . . . . . . . . . . . (10.0) (8.6)
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . 4.8 11.7
Amortization of intangibles. . . . . . . . . . . . . . . . . . . . . . . 9.6 9.5
Amortization of unearned compensation . . . . . . . . . . . . . . . . . 6.8 8.1
Changes in operating assets and liabilities, net of effects from
purchase of businesses:
Accounts and notes receivable, net. . . . . . . . . . . . . . . . . . ( 65.3) (126.7)
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . (122.3) (123.2)
Other current and noncurrent assets . . . . . . . . . . . . . . . . . (17.6) 3.4
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (96.9) (19.7)
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . (25.1) 15.6
Other current and noncurrent liabilities . . . . . . . . . . . . . . 1.9 (11.4)
-------------- -------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . (271.3) (202.3)
-------------- -------------
Net cash used for operating activities. . . . . . . . . . . . . . . . (188.4) (83.7)
-------------- -------------
Cash flows from investing activities:
(Purchase)/sale of businesses . . . . . . . . . . . . . . . . . . . . . . (40.9) (267.7)
Purchase of property, plant and equipment. . . . . . . . . . . . . . . . . (39.5) (37.3)
-------------- -------------
Net cash used for investing activities. . . . . . . . . . . . . . . . (80.4) (305.0)
-------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt, net . . . . . . . . . . . . . . . . . . . . 361.3 256.8
Payment of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . - (3.5)
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . 0.4 142.0
Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . (88.1) -
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . (1.8) (1.8)
-------------- -------------
Net cash provided by financing activities . . . . . . . . . . . . . . 271.8 393.5
-------------- -------------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . 0.9 (3.2)
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 3.9 1.6
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 31.2 41.7
-------------- -------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . $35.1 $ 43.3
============== =============
See accompanying notes to condensed consolidated financial statements.
6
AGCO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of AGCO Corporation and
subsidiaries (the "Company" or "AGCO") included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, which are of a normal
recurring nature, to present fairly the Company's financial position, results of
operations and cash flows at the dates and for the periods presented. These
condensed consolidated financial statements should be read in conjunction with
the Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Interim results of operations are not necessarily indicative of results to be
expected for the fiscal year.
2. CHARGES FOR NONRECURRING EXPENSES
The results of operations included a charge for nonrecurring expenses
of $4.9 million, or $.05 per common share on a diluted basis, and $12.6 million,
or $.13 per common share on a diluted basis, for the three and nine months ended
September 30, 1997, respectively. The nonrecurring charge for the three and nine
months ended September 30, 1997 included $1.7 million and $9.4 million,
respectively, related to the restructuring of the Company's European operations
and the integration of the operations of Deutz Argentina S.A. ("Deutz
Argentina") and Xaver Fendt GmbH & Co. KG ("Fendt"), which were acquired in
December 1996 and January 1997, respectively. The nonrecurring charge consisted
primarily of employee related costs. In addition, the nonrecurring charge for
the three and nine months ended September 30, 1997 included $3.2 million related
to executive severance costs.
3. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1998 and
December 31, 1997 (in millions):
September 30 December 31,
1998 1997
--------------------- --------------
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 834.9 $ 460.7
Senior subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 248.2 248.1
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2 18.6
--------------------- -------------
$ 1,100.3 $ 727.4
===================== =============
The Company's revolving credit facility allows for borrowings of up to
$1.1 billion. Lending commitments under the revolving credit facility reduce
from the current commitment of $1.1 billion as of September 30, 1998 to $1.0
billion on January 1, 1999. In addition, borrowings under the revolving credit
facility may not exceed the sum of 90% of eligible accounts receivable
7
and 60% of eligible inventory. As of September 30, 1998, approximately $834.9
million was outstanding under the revolving credit facility and available
borrowings were approximately $221.2 million.
4. EXTRAORDINARY LOSS
During the first nine months of 1997, as part of the refinancing of the
Company's revolving credit facility in January 1997, the Company recorded an
extraordinary loss of $2.1 million, net of taxes of $1.4 million, for the
write-off of unamortized debt costs.
5. NET INCOME PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" which specifies
the computation, presentation and disclosure requirements for earnings per
share. All prior period earnings per share data has been restated to conform
with the provisions of SFAS 128. The per share amounts reported under SFAS 128
are not materially different than those calculated and presented under the
previous method of calculation as specified under Accounting Principles Board
Opinion No. 15.
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during each period.
Diluted earnings per common share assumes exercise of outstanding stock options
and vesting of restricted stock.
A reconciliation of net income and the weighted average number of
common shares outstanding used to calculate basic and diluted earnings per
common share for the three and nine months ended September 30, 1998 and 1997 is
as follows (in millions, except per share data):
Basic Earnings Per Share Three Months Ended Nine Months Ended
September 30, September 30
1998 1997 1998 1997
-------- --------- -------- -------
Weighted average number of common shares outstanding. . . . . . . . . . . . . . 58.3 61.6 60.1 60.0
======== ========= ========= ========
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2 $ 82.9 $ 120.7
Extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (2.1)
-------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2 $ 82.9 $ 118.6
======== ========= ========= ========
Net income per common share:
Income before extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.72 $ 1.38 $ 2.01
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (0.03)
-------- --------- --------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.31 $ 0.72 $ 1.38 $ 1.98
======== ========= ========= ========
Diluted Earnings Per Share
Weighted average number of common shares outstanding. . . . . . . . . . . . . . 58.3 61.6 60.1 60.0
Assumed vesting of restricted stock. . . . . . . . . . . . . . . . . . . . . . 1.2 1.3 1.3 1.3
Assumed exercise of outstanding stock options . . . . . . . . . . . . . . . . . 0.1 0.4 0.2 0.4
-------- --------- --------- --------
Weighted average number of common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59.6 63.3 61.6 61.7
======== ========= ========= ========
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2 $ 82.9 $ 120.7
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (2.1)
-------- --------- --------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2 $ 82.9 $ 118.6
======== ========= ========= ========
Net income per common share:
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.70 $ 1.35 $ 1.95
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - (0.03)
-------- --------- --------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.30 $ 0.70 $ 1.35 $ 1.92
======== ========= ========= ========
6. INVENTORIES
Inventories are valued at the lower of cost or market using the
first-in, first-out method. Market is net realizable value for finished goods
and repair and replacement parts. For work in process, production parts and raw
materials, market is replacement cost.
Inventory balances at September 30, 1998 and December 31, 1997 were
as follows (in millions):
September 30 December 31,
1998 1997
------------- ------------------
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 334.7 $ 267.7
Repair and replacement parts . . . . . . . . . . . . . . . . . . . . . . . . . . 278.5 250.2
Work in process, production parts and raw materials. . . . . . . . . . . . . . . 232.4 184.5
------------ ------------------
Gross inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845.6 702.4
Allowance for surplus and obsolete inventories . . . . . . . . . . . . . . . . (78.4) (79.7)
------------ ------------------
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 767.2 $ 622.7
============ ==================
7. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
companies to disclose components of comprehensive income, defined as the total
of net income and all other nonowner changes in equity. This statement requires
disclosure only; therefore, its adoption had no effect on the Company's
financial position or results of operations.
Total comprehensive income for the three and nine months ended
September 30, 1998 and 1997 was as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------
1998 1997 1998 1997
----------- ------------ -------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17.9 $ 44.2 $ 82.9 $ 118.6
Other comprehensive income:
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . 48.0 1.2 19.6 (53.9)
=========== ============= ======== ============
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65.9 $ 45.4 $102.5 $ 64.7
=========== ============= ======== ============
8. COMMON STOCK
In December 1997, the Company's Board of Directors authorized the
repurchase of up to $150.0 million of its outstanding common stock. As of
September 30, 1998, the Company has repurchased approximately 3.5 million shares
of its common stock at a cost of approximately $88.1 million. The purchases are
made through open market transactions, and the timing and number of shares
purchased depend on various factors, such as price and other market conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's operations are subject to the cyclical nature of the
agricultural industry. Sales of the Company's equipment have been affected by
changes in net cash farm income, farm land values, weather conditions, the
demand for agricultural commodities, commodity prices and general economic
conditions. The Company's operations are expected to be subject to such
conditions in the future. Sales are recorded by the Company when equipment and
replacement parts are shipped by the Company to its independent dealers,
distributors or other customers. To the extent possible, the Company attempts to
ship products to its dealers and distributors on a level basis throughout the
year to reduce the effect of seasonal demands on its manufacturing operations
and to minimize its investment in inventory. Retail sales by dealers to farmers
are highly seasonal and are a function of the timing of the planting and
harvesting seasons. As a result, the Company's net sales and operating results
have historically been the lowest in the first quarter and have increased in
subsequent quarters.
RESULTS OF OPERATIONS
NET INCOME
The Company recorded net income for the three months ended September
30, 1998 of $17.9 million compared to $44.2 million for the same period in 1997.
Net income per common share on a diluted basis was $0.30 and $0.70 for the third
quarter of 1998 and 1997, respectively. Net income for the first nine months of
1998 was $82.9 million compared to $118.6 million for the same period in 1997.
Net income per common share on a diluted basis was $1.35 and $1.92 for the first
nine months of 1998 and 1997, respectively. Net income for the three and nine
months ended September 30, 1997 included nonrecurring expenses of $4.9 million,
or $0.05 per share on a diluted basis, and $12.6 million, or $0.13 per share on
a diluted basis, respectively, related to the restructuring of the Company's
European operations, the integration of the Deutz Argentina and Fendt
operations, acquired in December 1996 and January 1997, respectively, and
executive severance costs (see "Charges for Nonrecurring Expenses"). In
addition, net income for the nine months ended September 30, 1997 included an
extraordinary after-tax charge of $2.1 million, or $0.03 per share on a diluted
basis, for the write-off of unamortized debt costs related to the refinancing in
January 1997 of the Company's revolving credit facility (see "Liquidity and
Capital Resources"). The results for the three and nine months ended September
30, 1998 were negatively impacted by unfavorable industry conditions which
resulted in reduced net sales in the majority of markets throughout the world as
well as lower operating margins in all regions.
RETAIL SALES
In the United States and Canada, for the nine months ended September
30, 1998, industry unit retail sales of tractors and combines increased
approximately 7% and 5%, respectively, over the same period in 1997, while
industry unit retail sales of hay and forage equipment decreased approximately
5% compared to the same period in 1997. The industry increases reflect strong
demand during the first half of 1998; however, industry demand during the third
quarter of 1998 declined in all major equipment categories primarily due to low
commodity prices and high commodity stock levels which have negatively impacted
farm income. Company unit retail sales of tractors in the United States and
Canada increased 4% for the nine months ended September 30, 1998 compared to
1997 primarily due to favorable industry conditions in the first half of 1998
and strong acceptance of new tractor models. Company unit retail sales of
combines decreased 18% for the first nine months of 1998 compared to 1997
primarily due to lower 1998 pre-season sales, adverse weather conditions
particularly in Western Canada and new product introductions by competitors.
Company unit retail sales of hay and forage equipment decreased less than the
industry for the first nine months of 1998 compared to the prior year.
In Western Europe, industry unit retail sales of tractors experienced
mixed results with an overall decrease of approximately 3% for the nine months
ended September 30, 1998 compared to the same period in the prior year. Industry
retail sales in the U.K and Scandinavia were negatively impacted by unfavorable
market conditions offset to some extent by increases in Germany and Spain. For
the third quarter of 1998, all significant European markets experienced declines
in retail sales with industry retail sales decreasing 11% compared to the same
period in 1997 primarily due to depressed commodity prices and export demand.
For the nine months ended September 30, 1998, the Company's unit retail sales of
tractors in Western Europe decreased in line with the industry with improved
market position in the Massey Ferguson utility tractor range and the Fendt brand
offset by declines in the Massey Ferguson high horsepower range due to the
product lacking certain competitive features.
Industry unit retail sales of tractors in South America increased
approximately 4% for the nine months ended September 30, 1998 over the prior
year primarily due to a 25% increase in retail sales in the major market of
Brazil offset by industry declines in Argentina and in the remaining South
American markets. Industry demand in the third quarter declined 6% compared to
the prior year with lesser gains in Brazil offset by declines in the remaining
markets. Industry conditions have recently been negatively impacted by economic
uncertainty and low commodity prices. For the nine months ended September 30,
1998, Company unit retail sales of tractors in Brazil increased approximately
16% compared to the same period in 1997, trailing the industry due to heavy
competitor discounting activity. For the third quarter of 1998, the Company's
retail sales of tractors in Brazil increased in line with the industry. Outside
of Brazil, Company unit retail sales of tractors in South America performed
better than the industry for the three and nine months ended September 30, 1998
primarily due to the favorable acceptance of new product introductions.
In other international markets, industry unit retail sales of tractors
decreased significantly compared to the prior year in the East Asia/Pacific
region, due to the economic crisis affecting the market, and in Africa,
primarily due to political and economic instability as well as adverse weather
conditions,. The Company also experienced significant declines in retail sales
in these markets and in Central and Eastern Europe due to difficulties in
securing financing in the region.
STATEMENT OF INCOME
Net sales for the third quarter of 1998 were $665.7 million compared to
$759.5 million for the same period in 1997. Net sales for the nine months ended
September 30, 1998 were $2,183.3 million compared to $2,335.8 million for the
prior year. The decrease in net sales for the three and nine months ended
September 30, 1998 primarily reflects the lower retail demand in the majority of
markets throughout the world as well as the negative translation effect of
currency exchange for the nine months ended September 30, 1998. Net sales for
the three and nine months ended September 30, 1998, were also negatively
impacted by the sale of the Fendt caravan business in December 1997 (the "Fendt
Caravan Sale") and the disposition of 50% of the Deutz Argentina engine business
in December 1997 (the "Engine Joint Venture"). This impact was partially offset
by the acquisitions of Dronningborg Industries a/s ("Dronningborg") in Denmark
in December 1997, the distribution rights of Massey Ferguson in Argentina in May
1998, and the Spra-Coupe line of self-propelled agricultural sprayers in North
America in July 1998. Excluding the impact of currency translation, acquisitions
and divestitures, net sales for the three and nine months ended September 30,
1998 decreased approximately 11.9% and 2.4%, respectively, compared to the same
periods in 1997.
On a regional basis, net sales in North America decreased $16.3
million, or 6.5%, for the three months ended September 30, 1998 compared to the
same period in 1997 primarily due to unfavorable market conditions which
resulted in lower sales, particularly related to combines and replacement parts.
For the nine months ended September 30, 1998, net sales increased $63.0 million,
or 9.5%, compared to the same period in 1997 primarily relating to higher sales
of midrange and high horsepower tractors resulting from favorable industry
conditions during the first half of 1998. In Western Europe, net sales declined
$40.0 million, or 12.4%, and $130.4 million, or 11.6%, for the three and nine
months ended September 30, 1998, respectively, compared to the same periods in
1997 primarily due to the unfavorable industry conditions in the region, the
Fendt Caravan Sale, and for the nine months ended September 30, 1998, the
negative impact of foreign currency translation. Net sales in South America
decreased $9.8 million, or 11.0% for the three months ended September 30, 1998
compared to the same period in 1997 primarily due to the impact of the Engine
Joint Venture and the negative impact of foreign currency translation. For the
nine months ended September 30, 1998, net sales increased $1.8 million, or 0.7%,
compared to the same period in 1997 primarily due to improved sales of Brazilian
tractors and combines offset by the impact of the Engine Joint Venture and
foreign currency translation. In the remaining international markets, net sales
decreased $27.7 million, or 28.1%, and $86.9 million, or 28.5%, for the three
and nine months ended September 30, 1998, respectively, compared to the same
periods in 1997 primarily due to decreased sales in the Asia/Pacific region and
Central and Eastern Europe resulting from unfavorable market conditions and the
negative impact of foreign currency translation.
Gross profit was $131.2 million (19.7% of net sales) for the third
quarter of 1998 compared to $169.5 million (22.3% of net sales) for the same
period in the prior year. Gross profit for the nine months ended September 30,
1998 was $432.2 million (19.8% of net sales) compared to $479.6 million (20.5%
of net sales). Gross margins for the three months ended September 30, 1998 were
negatively impacted by (1) increased discounts related to the sale of the
Company's products in North America, Western Europe and South America resulting
from the competitive market environment, (2) lower production volumes which
resulted in lower overhead absorption, and (3) unfavorable currency exchange
primarily relating to the weak Canadian dollar. For the nine months ended
September 30, 1998, gross margins were negatively impacted by (1) increased
discounting, (2) lower production overhead absorption, and (3) unfavorable
currency exchange relating to the weak Canadian dollar and the strong British
pound. These factors were offset to some extent by improved gross margins on
combines sold in Western Europe resulting from the acquisition of Dronningborg.
Selling, general and administrative expenses for the third quarter of
1998 were $71.2 million (10.7% of net sales) compared to $70.0 million (9.2% of
net sales) for the same period in 1997. For the nine months ended September 30,
1998, selling, general and administrative expenses were $202.9 million (9.3% of
net sales) compared to $199.2 million (8.5% of net sales). The increase in
selling, general and administrative expenses as a percentage of net sales for
both periods was primarily due to lower sales volumes compared to the same
periods in the prior year and Year 2000 project costs recorded in 1998.
Engineering expenses were $13.9 million (2.1% of net sales) for the third
quarter of 1998 compared to $12.2 million (1.6% of net sales) for the same
period in 1997. Engineering expenses for the nine months ended September 30,
1998 were $42.1 million (1.9% of net sales) compared to $39.5 million (1.7% of
net sales) for the same period in 1997. Engineering expenses as a percentage of
net sales were higher for both periods primarily due to lower sales volume in
addition to higher engineering expenses relating to the introduction of new
products and the acquisition of Dronningborg.
The nonrecurring charge recorded in the three and nine months ended
September 30, 1997 related to the restructuring of the Company's European
operations, the integration of the Deutz Argentina and Fendt operations,
acquired in December 1996 and January 1997, respectively, and executive
severance costs. See "Charges for Nonrecurring Expenses" for further discussion.
Operating income, excluding nonrecurring charges, was $46.1 million
(6.9% of net sales) for the third quarter of 1998 compared to $87.3 million
(11.5% of net sales) for the same period in 1997. For the first nine months of
1998, operating income was $187.2 million (8.6% of net sales) compared to $240.9
million (10.3% of net sales). Operating income as a percentage of net sales for
both periods was unfavorable compared to the prior year periods primarily due to
the negative effect of lower sales volumes on selling, general and
administrative expenses as discussed above, the decline in gross margins and
Year 2000 project costs recorded during 1998.
Interest expense, net was $17.3 million for the third quarter of 1998
compared to $13.5 million for the same period in the prior year. For the nine
months ended September 30, 1998, interest expense, net was $50.6 million
compared to $40.7 million for the same period in the prior year. The higher
interest expense, net for both periods primarily resulted from the higher level
of borrowings at September 30, 1998 compared to the prior year to fund the
Company's recent acquisitions, common stock repurchases made during the second
quarter of 1998 and higher levels of working capital.
Other expense, net was $6.4 million for the third quarter of 1998
compared to $4.4 million for the same period in 1997. For the nine months ended
September 30, 1998, other expense, net, was $20.9 million compared to $13.4
million for the same period in the prior year. The Company experienced an
increase in other expense, net relating to increased hedging costs on sales of
U.K. sourced products and foreign exchange losses compared to gains reported in
the same periods in 1997.
The Company recorded an income tax provision of $8.2 million and $23.3
million for the third quarter of 1998 and 1997, respectively. For the nine
months ended September 30, 1998 and 1997, the Company recorded an income tax
provision of $42.8 million and $62.1 million, respectively. The Company's
effective tax rate increased during the nine months ended September 30, 1998
compared to the same period in 1997 due to a change in the mix of income to
jurisdictions with higher tax rates.
Equity in net earnings of affiliates was $3.7 million and $3.0 million
for the third quarter of 1998 and 1997, respectively. For the nine months ended
September 30, 1998 and 1997, equity in net earnings of affiliates was $10.0
million and $8.6 million, respectively. The increase in equity in net earnings
of affiliates for both periods primarily related to increased earnings for the
Company's retail finance affiliates. In addition, the Company recognized 50% of
the net income of the Engine Joint Venture during the third quarter and first
nine months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing requirements are subject to variations due to
seasonal changes in inventory and dealer receivable levels. Internally generated
funds are supplemented when necessary from external sources, primarily the
Company's revolving credit facility. Lending commitments under the Company's
revolving credit facility reduce from the current commitment of $1.1 billion as
of September 30, 1998 to $1.0 billion on January 1, 1999. In addition,
borrowings under the Company's revolving credit facility may not exceed the sum
of 90% of eligible accounts receivable and 60% of eligible inventory. As
receivables and inventories fluctuate, borrowings under the revolving credit
facility fluctuate as well. As of September 30, 1998, approximately $834.9
million was outstanding under the Company's revolving credit facility and
available borrowings were approximately $221.2 million.
The Company's working capital requirements are seasonal, with
investments in working capital typically building in the first half of the year
and then reducing in the second half of the year. The Company had $1,240.7
million of working capital, as of September 30, 1998, an increase of $356.4
million over working capital of $884.3 million as of December 31, 1997. The
increase in working capital was primarily due to working capital acquired in the
Company's recent acquisitions and higher accounts receivable and inventories,
particularly in North America, reflecting the impact of normal seasonal
requirements in addition to sales declines in the third quarter.
Cash flow used for operating activities was $188.4 million and $83.7
million for the nine months ended September 30, 1998 and 1997, respectively. The
increase in cash flow used for operating activities compared to the prior year
was primarily due to lower net income and decreases in accounts payable and
accrued expenses compared to the prior year. The decrease in payables and
accruals were primarily related to lower sales volume in 1998 and lower
production in the Company's production facilities in order to compensate for the
anticipated declines in future market demand. The decrease in payables and
accruals was offset to some extent by a decrease in accounts receivable
resulting from reduced sales during the nine months ended September 30, 1998.
As a result of the negative market conditions which have adversely
affected demand in the majority of markets throughout the world, the Company has
reduced production levels for the remainder of 1998 at the Company's
manufacturing facilities in North America, Western Europe and South America. In
order to reduce dealer and company inventory levels, the Company has reduced
1998 tractor and combine unit production to be 13% below 1997 levels. In
addition, in response to the anticipated declines in demand, the Company has
identified headcount reductions in production and white collar personnel to be
made by the beginning of 1999. The Company expects to record a charge in the
fourth quarter of 1998 of $35.0 million to $40.0 million related to these
headcount reductions.
Capital expenditures for the nine months ended September 30, 1998 were
$39.5 million compared to $37.3 million for the same period in 1997. The Company
anticipates that additional capital expenditures for the remainder of 1998 will
range from approximately $20.0 million to $25.0 million and will primarily be
used to support the development and enhancement of new and existing products as
well as facility and equipment maintenance.
In December 1997, the Company's Board of Directors authorized the
repurchase of up to $150.0 million of its outstanding common stock. As of
September 30, 1998, the Company has repurchased approximately 3.5 million shares
of its common stock at a cost of approximately $88.1 million. The purchases are
made through open market transactions, and the timing and number of shares
purchased depend on various factors, such as price and other market conditions.
In October 1998, the Company's Board of Directors declared a dividend
of $0.01 per share of common stock for the fourth quarter of 1998. The
declaration and payment of future dividends will be at the sole discretion of
the Board of Directors and will depend upon the Company's results of operations,
financial condition, cash requirements, future prospects, limitations imposed by
the Company's credit facilities and other factors deemed relevant by the
Company's Board of Directors.
The Company believes that available borrowings under the Company's
revolving credit facility, available cash and internally generated funds will be
sufficient to support its working capital, capital expenditures and debt service
requirements for the foreseeable future.
The Company from time to time reviews and will continue to review
acquisition and joint venture opportunities as well as changes in the capital
markets. If the Company were to consummate a significant acquisition or elect to
take advantage of favorable opportunities in the capital markets, the Company
may supplement availability or revise the terms under its credit facilities or
complete public or private offerings of equity or debt securities.
YEAR 2000
The Company has assessed the impact of the Year 2000 issue on its
reporting systems and operations. Based on its assessment, the Company has
developed a Year 2000 compliance plan, in which all key information systems are
being tested and all non-compliant software or technology is being modified or
replaced. This review included all information technology systems and embedded
systems located in the Company's manufacturing equipment, facility equipment and
in the Company's products. The Company is also reviewing the Year 2000
compliance status and compatibility of customers' and suppliers' systems which
interface with the Company's systems or could impact the Company's operations.
The Company expects to have the majority of the necessary modifications
to its information technology systems completed by the end of 1998 and to
complete testing of its systems for Year 2000 compliance during 1999. During
1998, the Company reviewed a majority of its embedded systems and identified a
small percentage of systems with Year 2000 problems. The Company expects to have
these affected systems replaced or corrected by mid-1999 and to complete testing
of all systems during 1999. Based on its reviews, the Company estimates that the
required costs to modify existing computer systems and applications will be
approximately $10 million to $12 million of which $4.0 million has been incurred
to date. The remaining costs will be incurred in the fourth quarter of 1998 and
in 1999.
While the Company believes that its plans are adequate to ensure that
the Year 2000 issue will not materially impact future operations, the risks of
these plans not being adequate or the risk that the Company's major customers
and suppliers do not modify or replace their affected systems could have a
material adverse impact on the Company's results of operations or financial
condition in the future. Failure by the Company or its customers or suppliers to
resolve the Year 2000 problem could result in a temporary slowdown or cessation
of manufacturing operations at one or more of the Company's facilities and a
temporary inability of the Company to process some orders and to deliver some
finished products to customers. The Company is currently identifying and
considering various contingency options, to minimize the risks of any Year 2000
problems.
CHARGES FOR NONRECURRING EXPENSES
The Company recorded $4.9 million and $12.6 million of nonrecurring
expenses during the three and nine months ended September 30, 1997,
respectively. The nonrecurring charge for the three and nine months ended
September 30, 1997 included $1.7 million and $9.4 million, respectively, related
to the restructuring of the Company's European operations and the integration of
the operations of Deutz Argentina and Fendt, acquired in December 1996 and
January 1997, respectively. In addition, the nonrecurring charge for the three
and nine months ended September 30, 1997 included $3.2 million related to
executive severance costs (see Note 2 of the Notes to the Condensed Consolidated
Financial Statements). The costs related to the restructuring of the Company's
European operations primarily related to the centralization of certain
administrative functions. The costs related to the integration of the Deutz
Argentina and Fendt operations primarily related to the rationalization of
manufacturing and administrative functions.
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15,
1999, however, early adoption is permitted. We have not yet quantified the
impact of adopting Statement 133 on our financial statements and have not
determined the timing of or method of our adoption of Statement 133. However,
the Statement could increase volatility in earnings and other comprehensive
income.
FORWARD LOOKING STATEMENTS
Certain information included in Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. Although the Company believes that the expectations reflected in such
forward looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Additionally, the Company's
financial results are sensitive to movement in interest rates and foreign
currencies, as well as general economic conditions, pricing and product actions
taken by competitors, production disruptions and changes in environmental,
international trade and other laws which impact the way in which it conducts its
business.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK MANAGEMENT
The Company has significant manufacturing operations in the United
States, the United Kingdom, France, Germany, Denmark, Brazil and Argentina, 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.
Fluctuations in the value of foreign currencies create exposures which can
adversely affect the Company's results of operations.
The Company attempts to manage its foreign exchange exposure by
hedging identifiable foreign currency commitments arising from receivables,
payables, and expected purchases and sales. Where naturally offsetting currency
positions do not occur, the Company hedges certain of its exposures through the
use of foreign currency forward contracts. The Company's hedging policy
prohibits foreign currency forward contracts for speculative trading purposes.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule - September 30, 1998
(electronic filing purposes only).
27.2 - Restated Financial Data Schedule - September
30, 1997 (electronic filing purposes only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned thereunto duly authorized.
AGCO CORPORATION
Registrant
Date: November 13, 1998 /s/ Patrick S. Shannon
---------------- ------------------------
Patrick S. Shannon
Vice President and Chief
Financial Officer
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
- -------- ---------------------------------------- ------------
27.1 Financial Data Schedule - September 30, 1998
(electronic filing purposes only).
27.2 Restated Financial Data Schedule - September 30, 1997
(electronic filing purposes only).
5
1,000,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
35
0
1,075
0
767
1,978
411
0
2,932
737
1,100
0
0
1
1,011
2,932
2,183
2,183
1,751
1,751
42
3
51
116
43
83
0
0
0
83
1.38
1.35
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
43,262
0
1,025,440
0
643,019
1,796,925
321,299
0
2,685,708
761,182
864,442
0
0
629
987,016
2,685,708
2,335,766
2,335,766
1,856,143
1,856,143
39,502
3,931
40,736
174,185
62,133
120,736
0
(2,080)
0
118,656
1.98
1.92
