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UNITED STATES
SECURTIES 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 SECURTIES
- ------ EXCHANGE Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
- ------ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURTIES
EXCHANGE ACT OF 1934
- ------
FOR THE TRANSITION PERIOD FROM _______________________ TO _____________________
COMMISSION FILE NUMBER 1-12930
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
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: 59,545,781 shares outstanding as of
September 30, 1999.
AGCO CORPORATION AND SUBSIDIARIES
INDEX
Page
Numbers
--------------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets - September 30, 1999 and
December 31, 1998.................................................3
Condensed Consolidated Statements
of Income for the Three Months
Ended September 30, 1999 and 1998.................................4
Condensed Consolidated Statements
of Income for the Nine Months
Ended September 30, 1999 and 1998.................................5
Condensed Consolidated Statements
of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998.................................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................................................17
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES....................................................................19
2
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
1999 1998
----------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 18.0 $ 15.9
Accounts and notes receivable, net........................................ 855.6 1,016.3
Inventories, net.......................................................... 645.8 671.6
Other current assets...................................................... 99.2 86.7
----------------- -----------------
Total current assets................................................... 1,618.6 1,790.5
Property, plant and equipment, net.............................................. 329.9 417.6
Investment in affiliates........................................................ 102.8 95.2
Other assets.................................................................... 103.4 76.6
Intangible assets, net.......................................................... 316.0 370.5
----------------- -----------------
Total assets........................................................... $ 2,470.7 $ 2,750.4
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable.......................................................... $ 235.1 $ 287.0
Accrued expenses.......................................................... 413.1 428.0
Other current liabilities................................................. 31.8 45.6
----------------- -----------------
Total current liabilities.............................................. 680.0 760.6
Long-term debt.................................................................. 850.7 924.2
Postretirement health care benefits............................................. 24.8 24.5
Other noncurrent liabilities.................................................... 46.7 59.0
----------------- -----------------
Total liabilities...................................................... 1,602.2 1,768.3
----------------- -----------------
Stockholders' Equity
Common stock: $0.01 par value, 150,000,000 shares authorized,
59,545,781 and 59,535,921 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively.............. 0.6 0.6
Additional paid-in capital................................................ 427.4 427.3
Retained earnings......................................................... 649.8 635.8
Unearned compensation..................................................... (6.2) (11.1)
Accumulated other comprehensive income.................................... (203.1) (70.5)
----------------- -----------------
Total stockholders' equity............................................. 868.5 982.1
================= =================
Total liabilities and stockholders' equity............................. $ 2,470.7 $ 2,750.4
================= =================
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,
----------------------------------------
1999 1998
------------------ -----------------
Net sales....................................................................... $ 570.5 $ 665.7
Cost of goods sold.............................................................. 473.4 534.5
------------------ -----------------
Gross profit............................................................... 97.1 131.2
Selling, general and administrative expenses.................................... 55.7 71.2
Engineering expenses............................................................ 11.2 13.9
------------------ -----------------
Income from operations..................................................... 30.2 46.1
Interest expense, net........................................................... 13.3 17.3
Other expense, net.............................................................. 8.7 6.4
------------------ -----------------
Income before income taxes and equity in net earnings
of affiliates............................................................... 8.2 22.4
Provision for income taxes...................................................... 3.8 8.2
------------------ -----------------
Income before equity in net earnings of affiliates.............................. 4.4 14.2
Equity in net earnings of affiliates............................................ 3.1 3.7
------------------ -----------------
Net income...................................................................... $ 7.5 $ 17.9
================== =================
Net income per common share:
Basic...................................................................... $ 0.13 $ 0.31
================== =================
Diluted.................................................................... $ 0.13 $ 0.30
================== =================
Weighted average number of common and common equivalent shares outstanding:
Basic...................................................................... 58.8 58.3
================== =================
Diluted.................................................................... 59.7 59.6
================== =================
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,
--------------------------------------
1999 1998
------------------ ---------------
Net sales....................................................................... $ 1,815.6 $ 2,183.3
Cost of goods sold.............................................................. 1,528.4 1,751.1
--------------- ---------------
Gross profit............................................................... 287.2 432.2
Selling, general and administrative expenses.................................... 170.0 202.9
Engineering expenses............................................................ 34.1 42.1
--------------- ---------------
Income from operations..................................................... 83.1 187.2
Interest expense, net........................................................... 45.0 50.6
Other expense, net.............................................................. 24.5 20.9
--------------- ---------------
Income before income taxes and equity in net earnings
of affiliates.............................................................. 13.6 115.7
Provision for income taxes...................................................... 5.8 42.8
---------------- ---------------
Income before equity in net earnings of affiliates.............................. 7.8 72.9
Equity in net earnings of affiliates............................................ 8.0 10.0
--------------- ---------------
Net income...................................................................... $ 15.8 $ 82.9
=============== ===============
Net income per common share:
Basic...................................................................... $ 0.27 $ 1.38
=============== ===============
Diluted.................................................................... $ 0.27 $ 1.35
=============== ===============
Weighted average number of common and common equivalent shares outstanding:
Basic...................................................................... 58.6 60.1
=============== ===============
Diluted.................................................................... 59.6 61.6
=============== ===============
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,
---------------------------------------
1999 1998
--------------- ----------------
Cash flows from operating activities:
Net income................................................................ $ 15.8 $ 82.9
---------------- ----------------
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization.......................................... 42.7 42.8
Equity in net earnings of affiliates,
net of cash received............................................... (7.5) (10.0)
Deferred income tax (benefit) provision................................ (23.2) 4.8
Amortization of intangibles............................................ 11.1 9.6
Amortization of unearned compensation.................................. 4.9 6.8
Changesin operating assets and liabilities, net of effects from
purchase/sale of businesses:
Accounts and notes receivable, net................................. 118.8 (65.3)
Inventories, net................................................... (4.2) (122.3)
Other current and noncurrent assets................................ (31.9) (17.6)
Accounts payable................................................... (37.8) (96.9)
Accrued expenses................................................... (10.4) (25.1)
Other current and noncurrent liabilities........................... (3.2) 1.9
---------------- ----------------
Total adjustments................................................. 59.3 (271.3)
---------------- ----------------
Net cash provided by (used for) operating activities.............. 75.1 (188.4)
---------------- ----------------
Cash flows from investing activities:
Purchase of property, plant and equipment................................. (29.4) (39.5)
Proceeds from sale/leaseback of property.................................. 18.7 --
(Purchase) sale of business, net.......................................... (.6) (40.9)
---------------- ----------------
Net cash used for investing activities................................. (11.3) (80.4)
---------------- ----------------
Cash flows from financing activities:
(Repayments of) proceeds from long-term debt, net......................... (58.5) 361.3
Proceeds from issuance of common stock.................................... -- 0.4
Repurchases of common stock............................................... -- (88.1)
Dividends paid on common stock............................................ (1.8) (1.8)
---------------- ----------------
Net cash (used for) provided by financing activities................... (60.3) 271.8
---------------- ----------------
Effect of exchange rate changes on cash and cash equivalents.............. (1.4) 0.9
---------------- ----------------
Increase in cash and cash equivalents..................................... 2.1 3.9
Cash and cash equivalents, beginning of period............................ 15.9 31.2
---------------- ----------------
Cash and cash equivalents, end of period.................................. $ 18.0 $ 35.1
================ ================
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, necessary 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, 1998.
Interim results of operations are not necessarily indicative of results to be
expected for the fiscal year.
2. NONRECURRING EXPENSES
In the fourth quarter of 1998, the Company recorded nonrecurring
expenses of $40.0 million primarily related to costs associated with reductions
in the Company's worldwide permanent workforce. As of September 30, 1999, the
Company had terminated approximately 1,380 of the 1,400 employees identified for
termination. Of the $40.0 million total expense, $30.4 million had been incurred
as of September 30, 1999.
3. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1999 and
December 31, 1998 (in millions):
September 30, December 31,
1999 1998
--------------------- ---------------------
Revolving credit facility....................................................... $ 585.8 $ 661.2
Senior subordinated notes....................................................... 248.4 248.3
Other long-term debt............................................................ 16.5 14.7
--------------------- ---------------------
$ 850.7 $ 924.2
===================== =====================
The Company's revolving credit facility allows for borrowings of up to
$1.0 billion. As of September 30, 1999, $585.8 million was outstanding under the
revolving credit facility and available borrowings were $414.0 million.
7
4. NET INCOME PER COMMON SHARE
The computation, presentation and disclosure requirements for earnings
per share are presented in accordance with Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." Basic earnings per common
share is computed by dividing net income by the weighted average number of
common shares outstanding during each period. Diluted earnings per common share
assumes exercise of outstanding stock options and vesting of restricted stock
when the effects of such assumptions are dilutive.
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, 1999 and 1998 is
as follows (in millions, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
Basic Earnings Per Share
Weighted average number of common shares outstanding ........................... 58.8 58.3 58.6 60.1
========== ========== ========== ==========
Net income ..................................................................... $ 7.5 $ 17.9 $ 15.8 $ 82.9
========== ========== ========== ==========
Net income per common share..................................................... $ 0.13 $ 0.31 $ 0.27 $ 1.38
========== ========== ========== ==========
Diluted Earnings Per Share
Weighted average number of common shares outstanding............................ 58.8 58.3 58.6 60.1
Assumed vesting of restricted stock............................................. 0.8 1.2 0.9 1.3
Assumed exercise of outstanding stock options .................................. 0.1 0.1 0.1 0.2
---------- ---------- ---------- ----------
Weighted average number of common and common equivalent
shares outstanding.......................................................... 59.7 59.6 59.6 61.6
========== ========== ========== ==========
Net income...................................................................... $ 7.5 $ 17.9 $ 15.8 $ 82.9
========== ========== ========== ==========
Net income per common share..................................................... $ 0.13 $ 0.30 $ 0.27 $ 1.35
========== ========== ========== ==========
8
5. 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, 1999 and December 31, 1998 were as
follows (in millions):
September 30, December 31,
1999 1998
---------------------- ----------------------
Finished goods.................................................................. $ 293.4 $ 271.2
Repair and replacement parts.................................................... 241.3 256.7
Work in process, production parts and raw materials............................. 176.8 222.6
--------------------- ----------------------
Gross inventories........................................................ 711.5 750.5
Allowance for surplus and obsolete inventories.................................. (65.7) (78.9)
--------------------- ----------------------
Inventories, net......................................................... $ 645.8 $ 671.6
===================== ======================
6. COMPREHENSIVE INCOME
The Company follows the provisions of 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. Total comprehensive income (loss) for
the three and nine months ended September 30, 1999 and 1998 was as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
Net income......................................... $ 7.5 $ 17.9 $ 15.8 $ 82.9
Other comprehensive income (loss):
Foreign currency translation
adjustments............................ (6.6) 48.0 (132.6) 19.6
----------- ----------- ----------- -----------
Total comprehensive income (loss).................. $ 0.9 $ 65.9 $ (116.8) $ 102.5
=========== =========== =========== ===========
9
7. SEGMENT REPORTING
The Company has four geographic reportable segments: North America;
South America; Europe/Africa/Middle East; and Asia/Pacific. Each segment
distributes a full range of agricultural equipment and related replacement
parts. The Company evaluates segment performance primarily based on income from
operations. Sales for each segment are based on the location of the third-party
customer. All 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 where the
expenses are incurred. As a result, the components of operating income for one
segment may not be comparable to another segment. Segment results for the three
and nine months ended September 30, 1999 and 1998 are as follows (in millions):
North South Europe/Africa
America America Middle East Asia/Pacific Consolidated
------------ -------------- ------------- ---------------- ---------------
Three Months ended September 30:
1999
Net Sales $ 148.1 $ 52.1 $ 344.2 $ 26.1 $ 570.5
Income from operations (3.4) (2.4) 33.7 4.2 32.1
1998
Net Sales $ 232.2 $ 80.0 $ 332.3 $ 21.3 $ 665.8
Income from operations 18.0 3.2 23.5 4.3 49.0
Nine Months ended September 30:
1999
Net Sales $ 467.2 $ 155.8 $ 1,124.8 $ 67.8 $ 1,815.6
Income from operations (6.2) (7.0) 94.1 9.0 89.9
1998
Net Sales $ 725.5 $ 249.8 $ 1,142.2 $ 65.9 $ 2,183.4
Income from operations 67.8 14.2 103.1 11.5 196.6
A reconciliation from the segment information to the consolidated
balances for income from operations is set forth below (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ --------------
Segment income from operations....................$ 32.1 $ 49.0 $ 89.9 $ 196.6
Restricted stock compensation expense............. (1.9) (2.9) (6.8) (9.4)
============ ============= ============ ============
Consolidated income from operations...............$ 30.2 $ 46.1 $ 83.1 $ 187.2
============ ============= ============ ============
10
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 and are
expected to continue to be affected by changes in net cash farm income, farm
land values, weather conditions, the demand for agricultural commodities,
commodity prices and general economic conditions. The Company records sales when
the Company ships equipment and replacement parts 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 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, 1999 of $7.5 million compared to net income of $17.9 million for the same
period in 1998. Net earnings per common share on a diluted basis were $0.13 and
$0.30 for the third quarters of 1999 and 1998, respectively. Net income for the
first nine months of 1999 was $15.8 million compared to $82.9 million for the
same period in 1998. Net income per common share on a diluted basis was $0.27
and $1.35 for the first nine months of 1999 and 1998, respectively. The results
for the three months and nine months ended September 30, 1999 were negatively
impacted by lower net sales and operating margins caused by unfavorable industry
conditions in many markets throughout the world, the negative impact of currency
translation, unfavorable absorption of fixed manufacturing overhead costs, an
unfavorable mix of products sold and lower price realization due to a more
competitive pricing environment.
RETAIL SALES
High global commodity stock levels and reduced export demand continue
to result in lower commodity prices compared to prior periods, adversely
affecting agricultural equipment demand in most major markets. These unfavorable
industry conditions have negatively impacted equipment demand since the third
quarter of 1998.
11
In the United States and Canada, industry unit retail sales of tractors
and combines for the first nine months of 1999 increased approximately 2.4% and
decreased approximately 52.0%, respectively, compared to the same period in
1998. Industry retail sales declines were significant in the high horsepower
tractor segment but were offset by strong increases in the under 40 horsepower
segment. Company unit retail sales of tractors in the United States and Canada
decreased compared to the same period in 1998, and Company unit retail sales of
combines decreased less than the industry decrease.
In Western Europe, industry unit retail sales of tractors experienced
mixed results with an overall increase of approximately 2.8% for the first nine
months of 1999 as compared to the prior year. Decreases in industry unit retail
sales in Scandinavia and Spain were offset to some extent by increases in the
UK, France and Italy. Retail sales in Germany for the first nine months were
slightly above the same period in 1998. Company unit retail sales results for
the nine months ended September 30, 1999 were also mixed with an overall
decrease compared to the same period in 1998. However, the Company's retail
sales for the third quarter of 1999 improved relative to the industry due to
favorable acceptance of the Company's new Massey Ferguson high horsepower
tractor line which was introduced during 1999.
Industry unit sales of tractors in South America for the first nine months
of 1999 decreased approximately 17.6% compared to the same period in 1998 with a
small increase in the major market of Brazil offset by significant declines in
Argentina and other South American markets due to low commodity prices, economic
uncertainty and tightening credit. Retail sales in the Brazilian market declined
11% in the third quarter, offsetting first half increases, due to inflationary
pressures and higher farmer input costs. Company unit retail sales of tractors
in South America decreased less than the industry.
In other international markets, industry and Company retail sales
decreased compared to the prior year in most markets including Africa, the
Middle East and Australia.
STATEMENTS OF INCOME
Net sales for the third quarter of 1999 were $570.5 million compared to
$665.7 million for the same period in 1998. Net sales for the first nine months
of 1999 were $1,815.6 million compared to $2,183.3 for the prior year. The
decrease in net sales for the third quarter and the first nine months primarily
reflects lower retail demand in certain markets throughout the world. Net sales
were also impacted by the negative currency translation effect of the
strengthening dollar against the Euro and the Brazilian Real. This impact was
partially offset for the first nine months of 1999 by the acquisitions completed
in 1998 of Massey Ferguson Argentina, Spra-Coupe and Willmar, which were only
partially included in the 1998 results. Excluding the impact of currency
translation and acquisitions, net sales for the third quarter and first nine
months of 1999 decreased approximately 9.3% and 14.8%, respectively, compared to
the prior year periods.
Regionally, net sales in North America decreased $84.1 million, or
36.2%, and $258.3 million, or 35.6% for the third quarter and first nine months
of 1999, respectively, compared to the same periods in the prior year. The
decrease is primarily due to unfavorable market conditions and the Company's
planned efforts to lower dealer inventories by selling to dealers at a rate less
12
than expected retail demand. The year to date decline was partially offset by
the impact of the Spra-Coupe and Willmar acquisitions. In the
Europe/Africa/Middle East region, net sales increased $11.9 million, or 3.6%,
and decreased $17.4 million, or 1.5% for the third quarter and first nine months
of 1999, respectively, compared to the same periods in the prior year. Net sales
for the first nine months of 1999 were lower than the prior year primarily due
to unfavorable market conditions in the markets outside Western Europe and
unfavorable foreign currency translation. These negative impacts were offset in
the third quarter of 1999 by higher sales of combines and high horsepower
tractors in Western Europe. Net sales in South America decreased approximately
$27.9 million, or 34.9%, and $94.0 million, or 37.6% for the third quarter and
first nine months of 1999, respectively, compared to the same periods in the
prior year primarily due to unfavorable industry conditions and to the negative
impact of foreign currency translation due to the weakening of the Brazilian
Real compared to the U.S. dollar. In the East Asia/Pacific region, net sales
increased approximately $4.8 million, or 22.5%, and $1.9 million, or 2.9% for
the third quarter and first nine months of 1999, respectively, compared to the
same periods in the prior year primarily due to a slight improvement in market
conditions.
Gross profit was $97.1 million (17.0% of net sales) for the third
quarter of 1999 compared to $131.2 million (19.7% of net sales) for the same
period in the prior year. Gross profit for the first nine months of 1999 was
$287.2 million (15.8% of net sales) compared with $432.2 million (19.8% of net
sales) for the same period in 1998. Gross margins were negatively impacted for
the quarter and year to date results primarily due to: (1) lower production
overhead absorption resulting from lower production volumes; (2) unfavorable
sales mix of higher margin products; and (3) lower price realization in certain
market segments.
Selling, general and administrative expenses ("SG&A expenses") for the
third quarter of 1999 were $55.7 million (9.8% of net sales) compared to $71.2
million (10.7% of net sales) for the same period in the prior year. For the
first nine months of 1999, SG&A expenses were $170.0 million (9.4% of net sales)
compared to $202.9 million (9.3% of net sales) for the same period in the prior
year. While the Company's cost reduction efforts reduced SG&A expenses by $15.5
million and $32.9 million, respectively, for the third quarter and first nine
months of 1999, SG&A expenses increased as a percentage of net sales primarily
due to lower sales volumes in 1999 compared to 1998. Engineering expenses for
the three and nine months ended September 30, 1999 were $11.2 million (2.0% of
net sales) and $34.1 million (1.9% of net sales), respectively, compared to
$13.9 million (2.1% of net sales) and $42.1 million (1.9% of net sales),
respectively, for the same periods in the prior year.
Income from operations was $30.2 million (5.3% of net sales) and $83.1
million (4.6% of net sales) for the three and nine months ended September 30,
1999, respectively, as compared to $46.1 million (6.9% of net sales) and $187.2
million (8.6% of net sales), respectively, for the same periods in 1998.
Operating income, as a percentage of net sales, was lower primarily because of
lower gross profit margins.
Interest expense, net was $13.3 million and $45.0 million, respectively,
for the three and nine months ended September 30, 1999 compared to $17.3 million
and $50.6 million, respectively, for the same periods in 1998. The decrease in
interest expense, net was primarily the result of lower effective interest rates
in 1999 as well as lower average borrowings during the third quarter of 1999.
13
The Company recorded an income tax provision of $3.8 million and $5.8
million, respectively, for the three and nine months ended September 30, 1999
compared to $8.2 million and $42.8 million, respectively, for the same periods
in 1998. The Company's effective tax rate for the third quarter increased to 46%
from 37% recorded in the same period in 1998. This increase is attributable to
losses in certain tax jurisdictions for which no benefit was recognized. The
Company's effective tax rate for the nine month period was 43% in 1999 compared
to 37% in 1998 due to the higher effective tax rate in the third quarter of
1999.
Equity in earnings of affiliates was $3.1 million and $8.0 million,
respectively, for the three and nine months ended September 30, 1999 compared to
$3.7 million and $10.0 million, respectively, for the same periods in 1998. The
reduction in earnings was due to lower net income in the Company's Engine Joint
Venture in Argentina and its retail finance joint ventures due to unfavorable
market conditions.
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. The current lending commitment under the
Company's revolving credit facility is $1.0 billion with borrowings limited to
the sum of 90% of eligible accounts receivable and 60% of eligible inventory. As
of September 30, 1999, approximately $585.8 million was outstanding under the
Company's revolving credit facility and available borrowings were approximately
$414.0 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 $938.6 million
of working capital at September 30, 1999, a decrease of $91.3 million from
working capital of $1,029.9 million at December 31, 1998. The decrease in
working capital was primarily due to lower accounts receivables primarily
related to the reduction of net sales during 1999 compared to 1998 and the
planned reduction of North America dealer inventories.
Cash flow provided by operating activities was $75.1 million for the
nine months ended September 30, 1999 compared to a use of cash of $188.4 million
for the same period during 1998. The increase in cash flow provided by operating
activities was primarily due to a reduction in the Company's receivable and
inventory levels offset to some extent by lower net income, compared to the
prior year. The improved cash flow compared to the prior year reflects the
impact of the Company's initiatives to reduce receivable and inventory levels
during 1999.
Capital expenditures for the nine months ended September 30, 1999 were
$29.4 million compared to $39.5 million for the same period in 1998. The Company
anticipates that additional capital expenditures for the remainder of 1999 will
14
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 improvements. In the third quarter of 1999, the
Company entered into a sale/leaseback transaction involving certain real
property. The proceeds from the transaction of $18.7 million were used to reduce
outstanding borrowings under the Company's revolving credit facility.
The Company's debt to capitalization ratio was 49.5% at September 30,
1999 compared to 48.5% at December 31, 1998. Although the Company's indebtedness
was reduced by $73.5 million from December 31, 1998, the debt to capitalization
ratio increased due to a negative cumulative translation adjustment to equity of
$132.6 million primarily related to the devaluation of the Brazilian Real and a
weakening of the Euro relative to the U.S. dollar.
In October 1999, the Company's Board of Directors declared a dividend
of $0.01 per share of common stock for the third quarter of 1999. 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 has substantially completed the necessary modifications to
its information technology systems and expects to complete any remaining testing
of its systems for Year 2000 compliance during the remainder of 1999. During
1998, the Company reviewed a majority of its embedded systems and identified a
small percentage of systems with Year 2000 problems. All identified critical
systems and a majority of non-critical systems with Year 2000 issues have been
modified or replaced and complete testing on the remaining non-critical systems
15
will occur during the remainder of 1999. Based on the work completed to date,
the Company estimates that the required costs to modify existing computer
systems, applications and embedded systems will be approximately $9.0 to $10.0
million of which $8.4 million has been incurred to date.
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.
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, and actual results could
differ materially from the results suggested by the forward-looking statements.
Factors that could impact results include those described above under "General."
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.
16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 are the British pound in
relation to other European currencies and the U.S. dollar as well as the
Canadian dollar in relation to the U.S. dollar. Fluctuations in the value of
foreign currencies create exposures which can adversely affect the Company's
results of operations.
The Company attempts to manage its transactional foreign exchange
exposure by hedging identifiable foreign currency cash flow commitments arising
from receivables, payables, and expected purchases and sales. Where naturally
offsetting currency positions do not occur, the Company hedges certain of its
exposures through the use of foreign currency forward contracts. The Company's
hedging policy prohibits foreign currency forward contracts for speculative
trading purposes. The Company's translation exposure resulting from translating
the financial statements of foreign subsidiaries into U.S. dollars is not
hedged. When practical, this translation impact is reduced by financing local
operations with local borrowings.
INTEREST RATE RISK
The Company manages its debt structure and interest rate risk through
the use of fixed and floating rate debt. The fixed rate debt is primarily the 8
1/2% Senior Subordinated Notes due 2006. The floating rate debt is primarily the
January 1997 Credit Facility (see "Liquidity and Capital Resources"). The
Company's net exposure to interest rate risk consists of its floating rate debt
which is tied to changes in U.S. and European libor rates. To further minimize
the effect of potential interest rate increases on floating rate debt in a
rising interest rate environment, the Company has entered into an interest rate
swap contract, which has the effect of converting a portion of the floating rate
indebtedness to a fixed rate over a certain period of time.
17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 - Amendment dated as of March 1, 1999, to the
Rights Agreement between the Company and
SunTrust Bank (incorporated by reference to
Form 8-A filing August 19, 1999).
27.1 - Financial Data Schedule - September 30, 1999
(electronic filing purposes only).
(b) Reports on Form 8-K
None
18
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 12, 1999 /s/ Patrick S. Shannon
------------------- ---------------------------
Patrick S. Shannon
Vice President and Chief
Financial Officer
19
EXHIBIT INDEX
Exhibit Sequentially Numbered
Number Description Page
- --------- --------------------------------------- ---------------------
4.1 Amendment dated as of March 1, 1999, to
the Rights Agreement between the Company
and SunTrust Bank (incorporated by
reference to Form 8-A filing August 19, 1999). --
27.1 Financial Data Schedule - September 30, 1999
(electronic filing purposes only). --
20
5
1,000,000
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
18
0
856
0
646
1,619
330
0
2,471
680
851
0
0
1
868
2,471
1,816
1,816
1,528
1,528
34
3
45
14
6
16
0
0
0
16
0.27
0.27
