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AGCO Corporation’s Common Stock and Junior Preferred Stock
purchase rights are registered pursuant to Section 12(b) of
the Act and are listed on the New York Stock Exchange.
AGCO Corporation is a well-known seasoned issuer.
AGCO Corporation is required to file reports pursuant to
Section 13 or Section 15(d) of the Act. AGCO
Corporation (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Act during the preceding
12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
will be contained in a definitive proxy statement, portions of
which are incorporated by reference into Part III of this
Form 10-K.
AGCO Corporation is not yet required to submit electronically
and post on its corporate web site Interactive Data Files
required to be submitted and posted pursuant to Rule 405 of
regulation S-T.
The aggregate market value of AGCO Corporation’s Common
Stock (based upon the closing sales price quoted on the
New York Stock Exchange) held by non-affiliates as of
June 30, 2009 was approximately $2.0 billion. For this
purpose, directors and officers have been assumed to be
affiliates. As of February 12, 2010, 92,453,742 shares
of AGCO Corporation’s Common Stock were outstanding.
AGCO Corporation is a large accelerated filer and is not a shell
company.
Portions of AGCO Corporation’s Proxy Statement for the 2010
Annual Meeting of Stockholders are incorporated by reference
into Part III of this
Form 10-K.
AGCO Corporation (“AGCO,”“we,”“us,” or the “Company”) was incorporated in
Delaware in April 1991. Our executive offices are located at
4205 River Green Parkway, Duluth, Georgia30096, and our
telephone number is
(770) 813-9200.
Unless otherwise indicated, all references in this
Form 10-K
to the Company include our subsidiaries.
General
We are a leading manufacturer and distributor of agricultural
equipment and related replacement parts throughout the world. We
sell a full range of agricultural equipment, including tractors,
combines, self-propelled sprayers, hay tools, forage equipment
and implements and a line of diesel engines. Our products are
widely recognized in the agricultural equipment industry and are
marketed under a number of well-known brands, including:
Challenger®,
Fendt®,
Massey
Ferguson®
and
Valtra®.
We distribute most of our products through a combination of
approximately 2,700 independent dealers and distributors in more
than 140 countries. In addition, we provide retail financing in
the United States, Canada, Brazil, Germany, France, the United
Kingdom, Australia, Ireland and Austria through our retail
finance joint ventures with Coöperatieve Centrale
Raiffeisen-Boerenleenbank B.A., which we refer to as
“Rabobank.”
Products
Tractors
Our compact tractors (under 40 horsepower) are typically used on
small farms and in specialty agricultural industries, such as
dairies, landscaping and residential areas. We also offer a full
range of tractors in the utility tractor category (40 to 100
horsepower), including two-wheel and all-wheel drive versions.
Our utility tractors are typically used on small- and
medium-sized farms and in specialty agricultural industries,
including dairy, livestock, orchards and vineyards. In addition,
we offer a full range of tractors in the high horsepower segment
(primarily 100 to 570 horsepower). High horsepower tractors
typically are used on larger farms and on cattle ranches for hay
production. Tractors accounted for approximately 66% of our net
sales in 2009, 67% in 2008 and 68% in 2007.
Combines
Our combines are sold with a variety of threshing technologies.
All combines are complemented by a variety of crop-harvesting
heads, available in different sizes, that are designed to
maximize harvesting speed and efficiency while minimizing crop
loss. Combines accounted for approximately 6% of our net sales
in both 2009 and 2008 and 5% in 2007.
Our 50% investment in Laverda S.p.A. (“Laverda”), an
operating joint venture between AGCO and the Italian ARGO group,
is located in Breganze, Italy and manufactures harvesting
equipment. In addition to producing Laverda branded combines,
the Breganze factory manufactures mid-range combine harvesters
for our Massey Ferguson, Fendt and Challenger brands for
distribution in Europe, Africa and the Middle East. The joint
venture also includes Laverda’s ownership in Fella-Werke
GMBH, a German manufacturer of grass and hay machinery, and its
30% ownership in Gallignani S.p.A., an Italian manufacturer of
balers.
Application
Equipment
We offer self-propelled, three- and four-wheeled vehicles and
related equipment for use in the application of liquid and dry
fertilizers and crop protection chemicals. We manufacture
chemical sprayer equipment for use both prior to planting crops,
known as “pre-emergence,” and after crops emerge from
the ground, known as “post-emergence.” We also
manufacture related equipment, including vehicles used for waste
application that are specifically designed for subsurface liquid
injection and surface spreading of biosolids, such as sewage
sludge and other farm or industrial waste that can be safely
used for soil enrichment. Application equipment accounted for
approximately 4% of our net sales in 2009, 2008 and 2007.
Hay
Tools and Forage Equipment, Implements, Engines and Other
Products
Our hay tools and forage equipment include both round and
rectangular balers, self-propelled windrowers, disc mowers,
spreaders and mower conditioners and are used for the harvesting
and packaging of vegetative feeds used in the beef cattle,
dairy, horse and alternative fuel industries.
We also distribute a wide range of implements, planters and
other equipment for our product lines. Tractor-pulled implements
are used in field preparation and crop management. Implements
include: disc harrows, which improve field performance by
cutting through crop residue, leveling seed beds and mixing
chemicals with the soil; heavy tillage, which break up soil and
mix crop residue into topsoil, with or without prior discing;
and field cultivators, which prepare a smooth seed bed and
destroy weeds. Tractor-pulled planters apply fertilizer and
place seeds in the field. Other equipment primarily includes
loaders, which are used for a variety of tasks including lifting
and transporting hay crops.
We provide a variety of precision farming technologies that are
developed, manufactured, distributed and supported on a
worldwide basis. These technologies provide farmers with the
capability to enhance productivity and profitability on the
farm. Through the use of global positioning systems, or GPS, our
automated steering and guidance products use satellites to help
our customers eliminate skips and overlaps to optimize land use.
This technology allows for more precise farming practices, from
cultivation to planting to nutrient and pesticide applications.
AGCO also offers other advanced technology precision farming
products that gather information such as yield data, allowing
our customers to produce yield maps for the purpose of
maximizing planting and fertilizer applications. Many of our
tractors, combines, planters and sprayers are equipped with
these precision farming technologies at the customer’s
option. Our suite of farm management software converts a variety
of data generated by our machinery into valuable information
that can be used to enhance efficiency, productivity and
profitability and promote greater environmental stewardship.
While these products do not generate significant revenues, we
believe that these products and related services are desired and
highly valued by professional farmers around the world and are
integral to the growth of our machinery sales.
Our AGCO Sisu Power engines division produces diesel engines,
gears and generating sets. The diesel engines are manufactured
for use in Valtra tractors and certain other branded tractors,
combines and sprayers, as well as for sale to third parties. The
engine division specializes in the manufacturing of off-road
engines in the 50 to 500 horsepower range.
Hay tools and forage equipment, implements, engines and other
products accounted for approximately 10% of our net sales in
2009, 11% in 2008 and 10% in 2007.
Replacement
Parts
In addition to sales of new equipment, our replacement parts
business is an important source of revenue and profitability for
both us and our dealers. We sell replacement parts, many of
which are proprietary, for all of the products we sell. These
parts help keep farm equipment in use, including products no
longer in production. Since most of our products can be
economically maintained with parts and service for a period of
ten to 20 years, each product that enters the marketplace
provides us with a potential long-term revenue stream. In
addition, sales of replacement parts typically generate higher
gross profit margins and historically have been less cyclical
than new product sales. Replacement parts accounted for
approximately 14% of our net sales in 2009, 12% in 2008 and 13%
in 2007.
Marketing
and Distribution
We distribute products primarily through a network of
independent dealers and distributors. Our dealers are
responsible for retail sales to the equipment’s end user in
addition to after-sales service and support of the equipment.
Our distributors may sell our products through a network of
dealers supported by the distributor.
Our sales are not dependent on any specific dealer, distributor
or group of dealers. We intend to maintain the separate
strengths and identities of our core brand names and product
lines.
Europe
We market and distribute farm machinery, equipment and
replacement parts to farmers in European markets through a
network of approximately 1,100 independent dealers and
distributors. In certain markets, we also sell Valtra tractors
and parts directly to the end user. In some cases, dealers carry
competing or complementary products from other manufacturers.
Sales in Europe accounted for approximately 54% of our net sales
in 2009, 56% in 2008 and 57% in 2007.
North
America
We market and distribute farm machinery, equipment and
replacement parts to farmers in North America through a network
of approximately 1,000 independent dealers, each representing
one or more of our brand names. Dealers may also sell
competitive and dissimilar lines of products. Sales in North
America accounted for approximately 22% of our net sales in
2009, 21% in 2008 and 22% in 2007.
South
America
We market and distribute farm machinery, equipment and
replacement parts to farmers in South America through several
different networks. In Brazil and Argentina, we distribute
products directly to approximately 350 independent dealers. In
Brazil, dealers are generally exclusive to one manufacturer.
Outside of Brazil and Argentina, we sell our products in South
America through independent distributors. Sales in South America
accounted for approximately 18% of our net sales in both 2009
and 2008 and 16% in 2007.
Rest
of the World
Outside Europe, North America and South America, we operate
primarily through a network of approximately 250 independent
dealers and distributors, as well as associates and licensees,
marketing our products and providing customer service support in
approximately 85 countries in Africa, the Middle East, Australia
and Asia. With the exception of Australia and New Zealand, where
we directly support our dealer network, we generally utilize
independent distributors, associates and licensees to sell our
products. These arrangements allow us to benefit from local
market expertise to establish strong market positions with
limited investment. Sales outside Europe, North America and
South America accounted for approximately 6% of our net sales in
2009 and 5% in both 2008 and 2007.
Associates and licensees provide a distribution channel in some
markets for our products
and/or a
source of low-cost production for certain Massey Ferguson and
Valtra products. Associates are entities in which we have an
ownership interest, most notably in India. Licensees are
entities in which we have no direct ownership interest, most
notably in Pakistan. The associate or licensee generally has the
exclusive right to produce and sell Massey Ferguson or Valtra
equipment in its home country but may not sell these products in
other countries. We generally license to these associates and
licensees certain technology, as well as the right to use the
Massey Ferguson and Valtra trade names. We also sell products to
associates and licensees in the form of components used in local
manufacturing operations, tractor kits supplied in completely
knocked down form for local assembly and distribution, and fully
assembled tractors for local distribution only. In certain
countries, our arrangements with associates and licensees have
evolved to where we principally provide technology, technical
assistance and quality control. In these situations, licensee
manufacturers sell certain tractor models under the Massey
Ferguson and Valtra brand names in the licensed territory and
also may become a source of low-cost production for us.
Parts
Distribution
Parts inventories are maintained and distributed in a network of
master and regional warehouses throughout North America, South
America, Western Europe and Australia in order to provide timely
response to customer demand for replacement parts. Our primary
Western European master distribution warehouses are
located in Desford, United Kingdom; Ennery, France; and
Suolahti, Finland; and our North American master distribution
warehouses are located in Batavia, Illinois and Kansas City,
Missouri. Our South American master distribution warehouses are
located in Jundiai, São Paulo, Brazil; and in Haedo,
Argentina.
Dealer
Support and Supervision
We believe that one of the most important criteria affecting a
farmer’s decision to purchase a particular brand of
equipment is the quality of the dealer who sells and services
the equipment. We provide significant support to our dealers in
order to improve the quality of our dealer network. We monitor
each dealer’s performance and profitability and establish
programs that focus on continual dealer improvement. Our dealers
generally have sales territories for which they are responsible.
We believe that our ability to offer our dealers a full product
line of agricultural equipment and related replacement parts, as
well as our ongoing dealer training and support programs
focusing on business and inventory management, sales, marketing,
warranty and servicing matters, and products, helps ensure the
vitality and increase the competitiveness of our dealer network.
We also maintain dealer advisory groups to obtain dealer
feedback on our operations.
We provide our dealers with volume sales incentives,
demonstration programs and other advertising support to assist
sales. We design our sales programs, including retail financing
incentives, and our policies for maintaining parts and service
availability with extensive product warranties to enhance our
dealers’ competitive position. In general, either party may
cancel dealer contracts within certain notice periods.
Wholesale
Financing
Primarily in the United States and Canada, we engage in the
standard industry practice of providing dealers with floor plan
payment terms for their inventories of farm equipment for
extended periods. The terms of our wholesale finance agreements
with our dealers vary by region and product line, with fixed
payment schedules on all sales, generally ranging from one to
12 months. In the United States and Canada, dealers
typically are not required to make an initial down payment, and
our terms allow for an interest-free period generally ranging
from six to 12 months, depending on the product. All
equipment sales to dealers in the United States and Canada are
immediately due upon a retail sale of the equipment by the
dealer. If not previously paid by the dealer, installment
payments are required generally beginning after the
interest-free period with the remaining outstanding equipment
balance generally due within 12 months after shipment. We
also provide financing to dealers on used equipment accepted in
trade. We retain a security interest in a majority of the new
and used equipment we finance.
Typically, sales terms outside the United States and Canada are
of a shorter duration, generally ranging from 30 to
180 days. In many cases, we retain a security interest in
the equipment sold on extended terms. In certain international
markets, our sales are backed by letters of credit or credit
insurance.
For sales in most markets outside of the United States, Canada
and the majority of markets in South America, we do not
normally charge interest on outstanding receivables from our
dealers and distributors. For sales to certain dealers or
distributors in the United States, Canada and the majority of
markets in South America, where we generated approximately 37.9%
of our net sales in 2009, interest is generally charged at or
above prime lending rates on outstanding receivable balances
after interest-free periods. These interest-free periods vary by
product and generally range from one to 12 months, with the
exception of certain seasonal products, which bear interest
after periods of up to 23 months that vary depending on the
time of year of the sale and the dealer’s or
distributor’s sales volume during the preceding year. For
the year ended December 31, 2009, 18.5% and 2.9% of our net
sales had maximum interest-free periods ranging from one to six
months and seven to 12 months, respectively. Net sales with
maximum interest-free periods ranging from 13 to 23 months
were approximately 0.3% of our net sales during 2009. Actual
interest-free periods are shorter than suggested by these
percentages because receivables from our dealers and
distributors in the United States and Canada are generally
due immediately upon sale of the equipment to retail customers.
Under normal circumstances, interest is not forgiven and
interest-free periods are not extended. We have an agreement to
permit transferring, on an ongoing basis, substantially all of
our
wholesale interest-bearing and non-interest bearing receivables
in North America to our U.S. and Canadian retail finance
joint ventures, AGCO Finance LLC and AGCO Finance Canada, Ltd.
Upon transfer, the receivables maintain standard payment terms,
including required regular principal payments on amounts
outstanding, and interest charges at market rates. Qualified
dealers may obtain additional financing through our
U.S. and Canadian retail finance joint ventures at the
joint ventures’ discretion. In addition, AGCO Finance
entities provide wholesale financing to dealers in certain
markets in Europe and Brazil.
Retail
Financing
Through our AGCO Finance retail financing joint ventures located
in the United States, Canada, Brazil, Germany, France, the
United Kingdom, Australia, Ireland and Austria, end users of our
products are provided with a competitive and dedicated financing
source. These retail finance companies are owned 49% by us and
51% by a wholly-owned subsidiary of Rabobank. The AGCO Finance
joint ventures can tailor retail finance programs to prevailing
market conditions, and such programs can enhance our sales
efforts. Refer to “Retail Finance Joint Ventures”
within Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
for further information.
Manufacturing
and Suppliers
Manufacturing
and Assembly
We manufacture our products in locations intended to optimize
capacity, technology or local costs. Furthermore, we continue to
balance our manufacturing resources with externally-sourced
machinery, components and replacement parts to enable us to
better control inventory and our supply of components. We
believe that our manufacturing facilities are sufficient to meet
our needs for the foreseeable future.
Europe
Our tractor manufacturing operations in Europe are located in
Suolahti, Finland; Beauvais, France; and Marktoberdorf, Germany.
In addition, we maintain a combine assembly facility in Randers,
Denmark. See further discussion regarding the Randers facility
in “Recent Restructuring Actions” within Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The Suolahti facility
produces 75 to 220 horsepower tractors marketed under the Valtra
and Massey Ferguson brand names. The Beauvais facility produces
70 to 370 horsepower tractors primarily marketed under the
Massey Ferguson, Challenger, Valtra and AGCO brand names. The
Marktoberdorf facility produces 50 to 370 horsepower tractors
marketed under the Fendt brand name. The Randers facility
produces conventional combines under the Massey Ferguson,
Challenger and Fendt brand names. We also assemble cabs for our
Fendt tractors in Baumenheim, Germany. We have a diesel engine
manufacturing facility in Linnavuori, Finland. Our 50%
investment in Laverda, an operating joint venture between AGCO
and the Italian ARGO group, is located in Breganze, Italy and
manufactures harvesting equipment. In addition to producing
Laverda branded combines, the Breganze factory manufactures
mid-range combine harvesters for our Massey Ferguson, Fendt and
Challenger. We also have a joint venture with Claas Tractor SAS
for the manufacture of driveline assemblies for tractors
produced in our facility in Beauvais.
North
America
Our manufacturing operations in North America are located in
Beloit, Kansas; Hesston, Kansas; Jackson, Minnesota; and
Queretaro, Mexico, and produce products for a majority of our
brand names in North America as well as for export outside of
North America. The Beloit facility produces tillage and seeding
equipment. The Hesston facility produces hay and forage
equipment, rotary combines and planters. The Jackson facility
produces 270 to 570 horsepower track tractors and four-wheeled
drive articulated tractors, as well as self-propelled sprayers.
In Queretaro, we assemble tractors for distribution in the
Mexican market. In addition, we also have three tractor light
assembly operations throughout the United States for the final
assembly of imported tractors sold in the North American market.
Our manufacturing operations in South America are located in
Brazil. In Canoas, Rio Grande do Sul, Brazil, we manufacture and
assemble tractors, ranging from 50 to 220 horsepower, and
industrial loader-backhoes. The tractors are sold primarily
under the Massey Ferguson brand name. In Mogi das Cruzes,
Brazil, we manufacture and assemble tractors, ranging from 50 to
210 horsepower, marketed primarily under the Valtra and
Challenger brand names. We also manufacture diesel engines in
the Mogi das Cruzes facility. We manufacture combines marketed
under the Massey Ferguson, Valtra and Challenger brand names in
Santa Rosa, Rio Grande do Sul, Brazil. In Ibirubá, Rio
Grande do Sul, Brazil, we manufacture and distribute a line of
farm implements, including drills, planters, corn headers and
front loaders.
Third-Party
Suppliers
We externally source many of our machinery, components and
replacement parts. Our production strategy is intended to
optimize our research and development and capital investment
requirements and to allow us greater flexibility to respond to
changes in market conditions.
We purchase some of the products we distribute from third-party
suppliers. We purchase standard and specialty tractors from
Carraro S.p.A. and distribute these tractors worldwide. In
addition, we purchase some tractor models from our licensee in
India, Tractors and Farm Equipment Limited, and compact tractors
from Iseki & Company, Limited, a Japanese
manufacturer. We also purchase other tractors, implements and
hay and forage equipment from various third-party suppliers.
In addition to the purchase of machinery, third-party suppliers
supply us with significant components used in our manufacturing
operations, such as engines and transmissions. We select
third-party suppliers that we believe are low cost, high quality
and possess the most appropriate technology. We also assist in
the development of these products or component parts based upon
our own design requirements. Our past experience with outside
suppliers has generally been favorable.
Seasonality
Generally, retail sales by dealers to farmers are highly
seasonal and are a function of the timing of the planting and
harvesting seasons. To the extent practicable, we attempt to
ship products to our dealers and distributors on a level basis
throughout the year to reduce the effect of seasonal retail
demands on our manufacturing operations and to minimize our
investment in inventory. Our financing requirements are subject
to variations due to seasonal changes in working capital levels,
which typically increase in the first half of the year and then
decrease in the second half of the year. The fourth quarter is
also typically a period for large retail sales because of our
customers’ year end tax planning considerations, the
increase in availability of funds from completed harvests and
the timing of dealer incentives.
Competition
The agricultural industry is highly competitive. We compete with
several large national and international full-line suppliers, as
well as numerous short-line and specialty manufacturers with
differing manufacturing and marketing methods. Our two principal
competitors on a worldwide basis are Deere & Company
and CNH Global N.V. In certain Western European and South
American countries, we have regional competitors that have
significant market share in a single country or a group of
countries.
We believe several key factors influence a buyer’s choice
of farm equipment, including the strength and quality of a
company’s dealers, the quality and pricing of products,
dealer or brand loyalty, product availability, the terms of
financing, and customer service. See “Marketing and
Distribution” for additional information.
Engineering
and Research
We make significant expenditures for engineering and applied
research to improve the quality and performance of our products,
to develop new products and to comply with government safety and
engine
emissions regulations. Our expenditures on engineering and
research were approximately $191.9 million, or 2.9% of net
sales, in 2009, $194.5 million, or 2.3% of net sales, in
2008 and $154.9 million, or 2.3% of net sales, in 2007.
Intellectual
Property
We own and have licenses to the rights under a number of
domestic and foreign patents, trademarks, trade names and brand
names relating to our products and businesses. We defend our
patent, trademark and trade and brand name rights primarily by
monitoring competitors’ machines and industry publications
and conducting other investigative work. We consider our
intellectual property rights, including our rights to use our
trade and brand names, important in the operation of our
businesses. However, we do not believe we are dependent on any
single patent, trademark or trade name or group of patents or
trademarks, trade names or brand names.
Environmental
Matters and Regulation
We are subject to environmental laws and regulations concerning
emissions to the air, discharges of processed or other types of
wastewater, and the generation, handling, storage,
transportation, treatment and disposal of waste materials. These
laws and regulations are constantly changing, and the effects
that they may have on us in the future are impossible to predict
with accuracy. It is our policy to comply with all applicable
environmental, health and safety laws and regulations, and we
believe that any expense or liability we may incur in connection
with any noncompliance with any law or regulation or the cleanup
of any of our properties will not have a materially adverse
effect on us. We believe that we are in compliance in all
material respects with all applicable laws and regulations.
The United States Environmental Protection Agency has issued
regulations concerning permissible emissions from off-road
engines. We do not anticipate that the cost of compliance with
the regulations will have a material impact on us. Our AGCO Sisu
Power engines division, which specializes in the manufacturing
of off-road engines in the 40 to 500 horsepower range, currently
complies with Com II, Com IIIa, Tier II and Tier III
emissions requirements set by European and United States
regulatory authorities. We expect to meet future emissions
requirements, such as Tier 4a or Com IIIb requirements
effective starting in 2011, through the introduction of new
technology to our engines and exhaust after-treatment systems,
as necessary. In some markets (such as the United States) we
must obtain governmental environmental approvals in order to
import our products, and these approvals can be difficult or
time consuming to obtain or may not be obtainable at all. For
example, our AGCO Sisu Power engine division and our engine
suppliers are subject to air quality standards, and production
at our facilities could be impaired if AGCO Sisu Power and these
suppliers are unable to timely respond to any changes in
environmental laws and regulations affecting engine emissions.
Compliance with environmental and safety regulations has added,
and will continue to add, to the cost of our products and
increase the capital-intensive nature of our business.
Climate change as a result of emissions of greenhouse gases is a
significant topic of discussion and may generate U.S. and
other regulatory responses in the near future, including the
imposition of a so-called “cap and trade” system. It
is impracticable to predict with any certainty the impact on our
business of climate change or the regulatory responses to it,
although we recognize that they could be significant. The most
direct impacts are likely to be an increase in energy costs,
which would increase our operating costs (through increased
utility and transportations costs) and an increase in the costs
of the products we purchase from others. In addition, increased
energy costs for our customers could impact demand for our
equipment. It is too soon for us to predict with any certainty
the ultimate impact of additional regulation, either
directionally or quantitatively, on our overall business,
results of operations or financial condition.
Our international operations also are subject to environmental
laws, as well as various other national and local laws, in the
countries in which we manufacture and sell our products. We
believe that we are in compliance with these laws in all
material respects and that the cost of compliance with these
laws in the future will not have a materially adverse effect on
us.
Domestic and foreign political developments and government
regulations and policies directly affect the agricultural
industry in the United States and abroad and indirectly affect
the agricultural equipment business. The application,
modification or adoption of laws, regulations or policies could
have an adverse effect on our business.
We are subject to various federal, state and local laws
affecting our business, as well as a variety of regulations
relating to such matters as working conditions and product
safety. A variety of laws regulate our contractual relationships
with our dealers. These laws impose substantive standards on the
relationships between us and our dealers, including events of
default, grounds for termination, non-renewal of dealer
contracts and equipment repurchase requirements. Such laws could
adversely affect our ability to terminate our dealers.
Employees
As of December 31, 2009, we employed approximately
14,500 employees, including approximately
3,700 employees in the United States and Canada. A majority
of our employees at our manufacturing facilities, both domestic
and international, are represented by collective bargaining
agreements and union contracts with terms that expire on varying
dates. We currently do not expect any significant difficulties
in renewing these agreements.
Available
Information
Our Internet address is www.agcocorp.com. We make the
following reports filed by us available, free of charge, on our
website under the heading “SEC Filings” in the
“Investors” section:
•
annual reports on
Form 10-K;
•
quarterly reports on
Form 10-Q;
•
current reports on
Form 8-K;
•
proxy statements for the annual meetings of
stockholders; and
•
Forms 3, 4 and 5
The foregoing reports are made available on our website as soon
as practicable after they are filed with the Securities and
Exchange Commission (“SEC”).
We also provide corporate governance and other information on
our website. This information includes:
•
charters for the committees of our board of directors, which are
available under the heading “Committee Charters” in
the “Corporate Governance” section of our
website’s “Investors” section; and
•
our Code of Conduct, which is available under the heading
“Code of Conduct” in the “Corporate
Governance” section of our website’s
“Investors” section.
In addition, in the event of any waivers of our Code of Conduct,
those waivers will be available under the heading “Office
of Ethics and Compliance” in the “Corporate
Governance” section of our website’s
“Investors” section.
Financial
Information on Geographical Areas
For financial information on geographic areas, see pages 98
through 100 of this
Form 10-K
under the caption “Segment Reporting,” which
information is incorporated herein by reference.
Item 1A.
Risk
Factors
We make forward-looking statements in this report, in other
materials we file with the SEC or otherwise release to the
public, and on our website. In addition, our senior management
might make forward-looking
statements orally to analysts, investors, the media and others.
Statements concerning our future operations, prospects,
strategies, products, manufacturing facilities, legal
proceedings, financial condition, future economic performance
(including growth and earnings) and demand for our products and
services, and other statements of our plans, beliefs, or
expectations, including the statements contained in Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” regarding industry
conditions, market demand, farm incomes and land values, weather
conditions, farm industry legislation, general economic
conditions, availability of financing, the impact of certain
recent accounting pronouncements, net sales and income,
inventory management and production levels, gross margin
improvements, restructuring and other infrequent expenses,
engineering expenses and pension costs, compliance with
financial covenants, support of lenders, funding of our
postretirement plans and pensions, uncertain income tax
provisions, impacts of unrecognized actuarial losses related to
our postretirement benefit plans, elimination of guarantees of
retail finance joint venture debt, conversion features of our
notes, or realization of net deferred tax assets, are
forward-looking statements. The forward-looking statements we
make are not guarantees of future performance and are subject to
various assumptions, risks, and other factors that could cause
actual results to differ materially from those suggested by
these forward-looking statements. These factors include, among
others, those set forth below and in the other documents that we
file with the SEC. There also are other factors that we may not
describe, generally because we currently do not perceive them to
be material, that could cause actual results to differ
materially from our expectations.
We expressly disclaim any obligation to update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
Our
financial results depend entirely upon the agricultural
industry, and factors that adversely affect the agricultural
industry generally, including declines in the general economy,
increases in farm input costs, lower commodity prices and
changes in the availability of credit for our retail customers,
will adversely affect us.
Our success depends heavily on the vitality of the agricultural
industry. Historically, the agricultural industry, including the
agricultural equipment business, has been cyclical and subject
to a variety of economic factors, governmental regulations and
legislation, and weather conditions. Sales of agricultural
equipment generally are related to the health of the
agricultural industry, which is affected by farm income, farm
input costs, debt levels and land values, all of which reflect
levels of commodity prices, acreage planted, crop yields,
agricultural product demand including crops used for renewable
energies, government policies and government subsidies. Sales
also are influenced by economic conditions, interest rate and
exchange rate levels, and the availability of retail financing,
as well as the ongoing economic downturn that recently adversely
impacted our sales in certain regions and is likely to continue
to have an adverse impact on our sales in the future; the extent
of which we cannot predict. Trends in the industry, such as farm
consolidations, may affect the agricultural equipment market. In
addition, weather conditions, such as heat waves or droughts,
and pervasive livestock diseases can affect farmers’ buying
decisions. Downturns in the agricultural industry due to these
or other factors could vary by market and are likely to result
in decreases in demand for agricultural equipment, which would
adversely affect our sales, growth, results of operations and
financial condition. During previous downturns in the farm
sector, we experienced significant and prolonged declines in
sales and profitability, and we expect our business to remain
subject to similar market fluctuations in the future.
The
agricultural equipment industry is highly seasonal, and seasonal
fluctuations significantly impact results of operations and cash
flows.
The agricultural equipment business is highly seasonal, which
causes our quarterly results and our available cash flow to
fluctuate during the year. The fourth quarter is also typically
a large period for retail sales because of our customers’
year end tax planning considerations, the increase in
availability of funds from completed harvests and the timing of
dealer incentives. In addition, farmers purchase agricultural
equipment in the Spring and Fall in conjunction with the major
planting and harvesting seasons. Our net sales and income from
operations have historically been the lowest in the first
quarter and have increased in subsequent quarters as dealers
increase inventory in anticipation of increased retail sales in
the third and fourth quarters.
Most
of our sales depend on the retail customers’ obtaining
financing, and any disruption in their ability to obtain
financing, whether due to the current economic downturn or
otherwise, will result in the sale of fewer products by us. In
addition, the collectability of receivables that are created
from our sales, as well as from such retail financing, is
critical to our business.
Most retail sales of the products that we manufacture are
financed, either by our joint ventures with Rabobank or by a
bank or other private lender. During 2009, our joint ventures
with Rabobank, which are controlled by Rabobank and are
dependent upon Rabobank for financing as well, financed
approximately 50% of the retail sales of our tractors and
combines in the markets where the joint ventures operate. Any
difficulty by Rabobank to continue to provide that financing, or
any business decision by Rabobank as the controlling member not
to fund the business or particular aspects of it (for example, a
particular country or region), would require the joint ventures
to find other sources of financing (which may be difficult to
obtain), or us to find another source of retail financing for
our customers, or our customers would be required to utilize
other retail financing providers. As a result of the ongoing
economic downturn, financing for capital equipment purchases
generally has become more difficult and expensive to obtain. To
the extent that financing is not available or available only at
unattractive prices, our sales would be negatively impacted.
In some cases, the financing provided by our joint venture with
Rabobank or by others is supported by a government subsidy or
guarantee. The programs under which those subsidies and
guarantees are provided generally are of limited duration and
subject to renewal and contain various caps and other
limitations. In some markets, i.e., Brazil, this support is
quite significant. In the event the governments that provide
this support elect not to renew these programs, and were
financing not available, whether through our joint ventures or
otherwise, it is likely that our sales would decline.
In addition, both AGCO and our retail finance joint ventures
have substantial accounts receivable from dealers and end
customers, and we would be adversely impacted if the
collectability of these receivables was not consistent with
historical experience; this collectability is dependent on the
financial strength of the farm industry, which in turn is
dependent upon the general economy and commodity prices, as well
as several of the other factors discussed in this “Risk
Factors” section.
Our
success depends on the introduction of new products, which
requires substantial expenditures.
Our long-term results depend upon our ability to introduce and
market new products successfully. The success of our new
products will depend on a number of factors, including:
•
innovation;
•
customer acceptance;
•
the efficiency of our suppliers in providing component parts;
•
the economy;
•
the performance and quality of our products relative to those of
our competitors; and
•
the strength of our dealer networks.
As both we and our competitors continuously introduce new
products or refine versions of existing products, we cannot
predict the level of market acceptance or the amount of market
share our new products will achieve. Any manufacturing delays or
problems with our new product launches could adversely affect
our operating results. We have experienced delays in the
introduction of new products in the past, and we cannot assure
you that we will not experience delays in the future. In
addition, introducing new products could result in a decrease in
revenues from our existing products. Consistent with our
strategy of offering new products and product refinements, we
expect to continue to use a substantial amount of capital for
further product development and refinement. We may need more
capital for product development and refinement than is available
to us, which could adversely affect our business, financial
condition or results of operations.
We
face significant competition and, if we are unable to compete
successfully against other agricultural equipment manufacturers,
we would lose customers and our net sales and profitability
would decline.
The agricultural equipment business is highly competitive,
particularly in North America, Europe and Latin America. We
compete with several large national and international companies
that, like us, offer a full line of agricultural equipment. We
also compete with numerous short-line and specialty
manufacturers and suppliers of farm equipment products. Our two
key competitors, Deere & Company and CNH Global N.V.,
are substantially larger than we are and have greater financial
and other resources. In addition, in some markets, we compete
with smaller regional competitors with significant market share
in a single country or group of countries. Our competitors may
substantially increase the resources devoted to the development
and marketing, including discounting, of products that compete
with our products. We maintain an independent dealer and
distributor network in the markets where we sell products. The
financial and operational capabilities of our dealers and
distributors are critical for our ability to compete in these
markets. If we are unable to compete successfully against other
agricultural equipment manufacturers, we could lose dealers and
their end customers and our net sales and profitability may
decline. In addition, competitive pressures in the agricultural
equipment business may affect the market prices of new and used
equipment, which, in turn, may adversely affect our sales
margins and results of operations.
Rationalization
or restructuring of manufacturing facilities may cause
production capacity constraints and inventory
fluctuations.
The rationalization of our manufacturing facilities has at times
resulted in, and similar rationalizations or restructurings in
the future may result in, temporary constraints upon our ability
to produce the quantity of products necessary to fill orders and
thereby complete sales in a timely manner. A prolonged delay in
our ability to fill orders on a timely basis could affect
customer demand for our products and increase the size of our
product inventories, causing future reductions in our
manufacturing schedules and adversely affecting our results of
operations. Moreover, our continuous development and production
of new products will often involve the retooling of existing
manufacturing facilities. This retooling may limit our
production capacity at certain times in the future, which could
adversely affect our results of operations and financial
condition.
We
depend on suppliers for raw materials, components and parts for
our products, and any failure by our suppliers to provide
products as needed, or by us to promptly address supplier
issues, will adversely impact our ability to timely and
efficiently manufacture and sell products. We also are subject
to raw material price fluctuations, which can adversely affect
our manufacturing costs.
Our products include components and parts manufactured by
others. As a result, our ability to timely and efficiently
manufacture existing products, to introduce new products and to
shift manufacturing of products from one facility to another
depends on the quality of these components and parts and the
timeliness of their delivery to our facilities. At any
particular time, we depend on many different suppliers, and the
failure by one or more of our suppliers to perform as needed
will result in fewer products being manufactured, shipped and
sold. If the quality of the components or parts provided by our
suppliers is less than required and we do not recognize that
failure prior to the shipment of our products, we will incur
higher warranty costs. The timely supply of component parts for
our products also depends on our ability to manage our
relationships with suppliers, to identify and replace suppliers
that fail to meet our schedules or quality standards, and to
monitor the flow of components and accurately project our needs.
A significant increase in the price of any component or raw
material could adversely affect our profitability. We cannot
avoid exposure to global price fluctuations, such as occurred in
the past with the costs of steel and related products, and our
profitability depends on, among other things, our ability to
raise equipment and parts prices sufficiently enough to recover
any such material or component cost increases.
A
majority of our sales and manufacturing take place outside the
United States, and, as a result, we are exposed to risks related
to foreign laws, taxes, economic conditions, labor supply and
relations, political conditions and governmental policies. These
risks may delay or reduce our realization of value from our
international operations.
For the year ended December 31, 2009, we derived
approximately $5,526.8 million, or 83%, of our net sales
from sales outside the United States. The primary foreign
countries in which we do business are Germany, France, Brazil,
the United Kingdom, Finland and Canada. In addition, we have
significant manufacturing operations in France, Germany, Brazil
and Finland. Our results of operations and financial condition
may be adversely affected by the laws, taxes, economic
conditions, labor supply and relations, political conditions,
and governmental policies of the foreign countries in which we
conduct business. Our businesses practices in these foreign
countries must comply with U.S. law, including the Foreign
Corrupt Practices Act (“FCPA”). We have a compliance
program in place designed to reduce the likelihood of potential
violations of the FCPA. If violations were to occur, they could
subject us to fines and other penalties as well as increased
compliance costs. Some of our international operations also are
subject to various risks that are not present in domestic
operations, including restrictions on dividends and the
repatriation of funds. Foreign developing markets may present
special risks, such as unavailability of financing, inflation,
slow economic growth and price controls.
Domestic and foreign political developments and government
regulations and policies directly affect the international
agricultural industry, which affects the demand for agricultural
equipment. If demand for agricultural equipment declines, our
sales, growth, results of operations and financial condition may
be adversely affected. The application, modification or adoption
of laws, regulations, trade agreements or policies adversely
affecting the agricultural industry, including the imposition of
import and export duties and quotas, expropriation and
potentially burdensome taxation, could have an adverse effect on
our business. The ability of our international customers to
operate their businesses and the health of the agricultural
industry, in general, are affected by domestic and foreign
government programs that provide economic support to farmers. As
a result, farm income levels and the ability of farmers to
obtain advantageous financing and other protections would be
reduced to the extent that any such programs are curtailed or
eliminated. Any such reductions would likely result in a
decrease in demand for agricultural equipment. For example, a
decrease or elimination of current price protections for
commodities or of subsidy payments for farmers in the European
Union, the United States, Brazil or elsewhere in South America
could negatively impact the operations of farmers in those
regions, and, as a result, our sales may decline if these
farmers delay, reduce or cancel purchases of our products.
We
recently have experienced substantial and sustained volatility
with respect to currency exchange rate and interest rate changes
which can adversely affect our reported results of operations
and the competitiveness of our products.
We conduct operations in many areas of the world involving
transactions denominated in a variety of currencies. Our
production costs, profit margins and competitive position are
affected by the strength of the currencies in countries where we
manufacture or purchase goods relative to the strength of the
currencies in countries where our products are sold. In
addition, we are subject to currency exchange rate risk to the
extent that our costs are denominated in currencies other than
those in which we earn revenues and to risks associated with
translating the financial statements of our foreign subsidiaries
from local currencies into United States dollars. Similarly,
changes in interest rates affect our results of operations by
increasing or decreasing borrowing costs and finance income. Our
most significant transactional foreign currency exposures are
the Euro, the Brazilian real and the Canadian dollar in relation
to the United States dollar, and the Euro in relation to the
British pound. Where naturally offsetting currency positions do
not occur, we attempt to manage these risks by economically
hedging some, but not all, of our exposures through the use of
foreign currency forward exchange or option contracts. As with
all hedging instruments, there are risks associated with the use
of foreign currency forward exchange contracts, interest rate
swap agreements and other risk management contracts. While the
use of such hedging instruments provides us with protection from
certain fluctuations in currency exchange and interest rates, we
potentially forego the benefits that might result from
favorable fluctuations in currency exchange and interest rates.
In addition, any default by the counterparties to these
transactions could adversely affect us. Despite our use of
economic hedging transactions, currency exchange rate or
interest rate fluctuations may adversely affect our results of
operations, cash flow or financial condition.
We are
subject to extensive environmental laws and regulations, and our
compliance with, or our failure to comply with, existing or
future laws and regulations could delay production of our
products or otherwise adversely affect our
business.
We are subject to increasingly stringent environmental laws and
regulations in the countries in which we operate. These
regulations govern, among other things, emissions into the air,
discharges into water, the use, handling and disposal of
hazardous substances, waste disposal and the remediation of soil
and groundwater contamination. Our costs of complying with these
or any other current or future environmental regulations may be
significant. For example, the European Union and the United
States have adopted more stringent environmental regulations
regarding emissions into the air, and it is possible that the
U.S. Congress will pass emissions-related legislation in
connection with concerns regarding greenhouse gases. As a
result, we will likely incur increased engineering expenses and
capital expenditures to modify our products to comply with these
regulations. Further, we may experience production delays if we
or our suppliers are unable to design and manufacture components
for our products that comply with environmental standards
established by regulators. For instance, we are currently
working with federal and state regulators in the United States
with respect to approvals for our latest generation of certain
high horsepower tractors. While there is a risk that such
approval will be delayed, we do not believe the impact of a
delayed approval will be material to our business or results of
operations. We may also be adversely impacted by costs,
liabilities or claims with respect to our operations under
existing laws or those that may be adopted in the future. If we
fail to comply with existing or future laws and regulations, we
may be subject to governmental or judicial fines or sanctions
and our business and results of operations could be adversely
affected. For instance, we will be required to meet future
emissions requirements, such as Tier 4a or ComIIIb
requirements effective starting in 2011. We expect to meet these
requirements through the introduction of new technology to our
engines and exhaust after-treatment systems, as necessary.
Failure to meet such requirements could materially affect our
business and results of operations.
Our
labor force is heavily unionized, and our contractual and legal
obligations under collective bargaining agreements and labor
laws subject us to the risks of work interruption or stoppage
and could cause our costs to be higher.
Most of our employees, most notably at our manufacturing
facilities, are represented by collective bargaining agreements
and union contracts with terms that expire on varying dates.
Several of our collective bargaining agreements and union
contracts are of limited duration and, therefore, must be
re-negotiated frequently. As a result, we could incur
significant administrative expenses associated with union
representation of our employees. Furthermore, we are at greater
risk of work interruptions or stoppages than non-unionized
companies, and any work interruption or stoppage could
significantly impact the volume of goods we have available for
sale. In addition, collective bargaining agreements, union
contracts and labor laws may impair our ability to reduce our
labor costs by streamlining existing manufacturing facilities
and in restructuring our business because of limitations on
personnel and salary changes and similar restrictions.
We
have significant pension obligations with respect to our
employees and our available cash flow may be adversely affected
in the event that payments became due under any pension plans
that are unfunded or underfunded. Declines in the market value
of the securities used to fund these obligations result in
increased pension expense in future periods.
A portion of our active and retired employees participate in
defined benefit pension plans under which we are obligated to
provide prescribed levels of benefits regardless of the value of
the underlying assets, if any, of the applicable pension plan.
To the extent that our obligations under a plan are unfunded or
underfunded, we will have to use cash flow from operations and
other sources to pay our obligations either as they become due
or over some shorter funding period. In addition, since the
assets that we already have provided to fund these obligations
are invested in debt instruments and other securities, the value
of these assets varies due to market factors. Recently, these
fluctuations have been significant and adverse, and there can be
no assurances that they will not be significant in the future.
As of December 31, 2009, we had approximately
$286.7 million in unfunded or underfunded obligations
related to our pension and other postretirement health care
benefits.
Our
business routinely is subject to claims and legal actions, some
of which could be material.
We routinely are a party to claims and legal actions incidental
to our business. These include claims for personal injuries by
users of farm equipment, disputes with distributors, vendors and
others with respect to commercial matters, and disputes with
taxing and other governmental authorities regarding the conduct
of our business.
We
have a substantial amount of indebtedness, and, as a result, we
are subject to certain restrictive covenants and payment
obligations that may adversely affect our ability to operate and
expand our business.
We have a substantial amount of indebtedness. As of
December 31, 2009, we had total long-term indebtedness,
including current portions of long-term indebtedness, of
approximately $647.1 million, total stockholders’
equity of approximately $2,400.8 million and a ratio of
total indebtedness to equity of approximately 0.27 to 1.0. We
also had short-term obligations of $167.6 million, capital
lease obligations of $4.1 million, unconditional purchase
or other long-term obligations of $436.9 million, and
amounts funded under an accounts receivable securitization
facility of $149.9 million. In addition, we had guaranteed
indebtedness owed to third parties and our retail finance joint
ventures of approximately $74.1 million, primarily related
to dealer and end-user financing of equipment.
Holders of our
13/4%
convertible senior subordinated notes due 2033 and our
11/4%
convertible senior subordinated notes due 2036 may convert
the notes if, during any fiscal quarter, the closing sales price
of our common stock exceeds 120% of the conversion price of
$22.36 per share for our
13/4%
convertible senior subordinated notes and $40.73 per share for
our
11/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending on the last
trading day of the preceding fiscal quarter. As of
December 31, 2009, the closing sales price of our common
stock had exceeded 120% of the conversion price of the
13/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending December 31,2009, and, therefore, we classified the notes as a current
liability. In accordance with Accounting Standards Update
No. 2009-04,
“Accounting for Redeemable Equity Instruments,” we
also classified the equity component of the
13/4%
convertible senior subordinated notes as “temporary
equity.” Future classification of both notes between
current and long-term debt and classification of the equity
component of both notes as “temporary equity” is
dependent on the closing sales price of our common stock during
future quarters. In the event the notes are converted in the
future, we believe we could repay the notes with available cash
on hand, funds from our $300.0 million multi-currency
revolving credit facility or a combination of these sources.
Our substantial indebtedness could have important adverse
consequences. For example, it could:
•
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, which would
reduce the availability of our cash flow to fund future working
capital, capital expenditures, acquisitions and other general
corporate purposes;
•
increase our vulnerability to general adverse economic and
industry conditions;
•
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
•
restrict us from introducing new products or pursuing business
opportunities;
•
place us at a competitive disadvantage compared to our
competitors that have relatively less indebtedness;
limit, along with the financial and other restrictive covenants
in our indebtedness, among other things, our ability to borrow
additional funds, pay cash dividends or engage in or enter into
certain transactions; and
•
prevent us from selling additional receivables to our commercial
paper conduits.
Item 1B.
Unresolved
Staff Comments
Not applicable.
Item 2.
Properties
Our principal properties as of January 31, 2010, were as
follows:
Leased
Owned
Location
Description of Property
(Sq. Ft.)
(Sq. Ft.)
United States:
Batavia, Illinois
Parts Distribution
310,200
Beloit, Kansas
Manufacturing
192,200
Duluth, Georgia
Corporate Headquarters
125,000
Hesston, Kansas
Manufacturing
1,288,300
Jackson, Minnesota
Manufacturing
596,000
Kansas City, Missouri
Parts Distribution/Warehouse
593,600
International:
Neuhausen, Switzerland
Regional Headquarters
20,200
Stoneleigh, United Kingdom
Sales and Administrative Office
85,000
Desford, United Kingdom
Parts Distribution
298,000
Beauvais,
France(1)
Manufacturing
1,144,400
Ennery, France
Parts Distribution
417,500
Marktoberdorf, Germany
Manufacturing
129,000
972,900
Baumenheim, Germany
Manufacturing
561,000
Hohenmoelsen, Germany
Manufacturing
318,300
Randers, Denmark
Manufacturing
145,100
143,400
Linnavuori, Finland
Manufacturing
257,700
Suolahti, Finland
Manufacturing/Parts Distribution
550,900
Sunshine, Victoria, Australia
Regional Headquarters/Parts Distribution
94,600
Haedo, Argentina
Parts Distribution/Sales Office
32,000
Canoas, Rio Grande do Sul, Brazil
Regional Headquarters/ Manufacturing/Parts Distribution
615,300
Santa Rosa, Rio Grande do Sul, Brazil
Manufacturing
386,500
Mogi das Cruzes, Brazil
Manufacturing/Parts Distribution
722,200
Ibirubá, Rio Grande do Sul, Brazil
Manufacturing
136,800
(1)
Includes our joint venture with
GIMA, in which we own a 50% interest.
We consider each of our facilities to be in good condition and
adequate for its present use. We believe that we have sufficient
capacity to meet our current and anticipated manufacturing
requirements.
In September 2009, we resolved inquiries by the SEC and the
Department Of Justice (“DOJ”) relating to our sales of
equipment to the Iraq government between 2000 and 2002 under the
United Nations Oil for Food Program. As part of this resolution,
we entered into a consent agreement with the SEC and a deferred
prosecution agreement with the DOJ and paid approximately
$19.9 million to the government consisting of disgorgement
of profits arising from the sales together with related fines,
penalties and interest. We also paid $0.6 million to the
Danish authorities to resolve a related inquiry. No further
governmental inquiries are pending against AGCO relating to the
United Nations Oil for Food Program.
On June 27, 2008, the Republic of Iraq filed a civil action
in a federal court in New York, Case No. 08 CIV
59617, naming as defendants three of our foreign subsidiaries
that participated in the United Nations Oil for Food Program.
Ninety-one other entities or companies were also named as
defendants in the civil action due to their participation in the
United Nations Oil for Food Program. The complaint purports to
assert claims against each of the defendants seeking damages in
an unspecified amount. Although our subsidiaries intend to
vigorously defend against this action, it is not possible at
this time to predict the outcome of this action or its impact,
if any, on us, although if the outcome was adverse, we could be
required to pay damages.
In August 2008, as part of a routine audit, the Brazilian taxing
authorities disallowed deductions relating to the amortization
of certain goodwill recognized in connection with a
reorganization of our Brazilian operations and the related
transfer of certain assets to our Brazilian subsidiaries. The
amount of the tax disallowance through December 31, 2009,
not including interest and penalties, was approximately
90.6 million Brazilian reais (or approximately
$51.9 million). The amount ultimately in dispute will be
greater because of interest and penalties. We have been advised
by our legal and tax advisors that our position with respect to
the deductions is allowable under the tax laws of Brazil. We are
contesting the disallowance and believe that it is not likely
that the assessment, interest or penalties will be required to
be paid. However, the ultimate outcome will not be determined
until the Brazilian tax appeal process is complete, which could
take several years.
We are a party to various other legal claims and actions
incidental to our business. We believe that none of these claims
or actions, either individually or in the aggregate, is material
to our business or financial condition.
Item 4.
Submission
Of Matters to a Vote of Security Holders
Market
For Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange
(“NYSE”) and trades under the symbol AGCO. As of the
close of business on February 12, 2010, the closing stock
price was $33.79, and there were 478 stockholders of record
(this number does not include stockholders who hold their stock
through brokers, banks and other nominees). The following table
sets forth, for the periods indicated, the high and low sales
prices for our common stock for each quarter within the last two
years, as reported on the NYSE.
High
Low
2009
First Quarter
$
28.13
$
15.10
Second Quarter
30.79
20.63
Third Quarter
33.50
25.06
Fourth Quarter
32.78
26.15
High
Low
2008
First Quarter
$
70.50
$
54.35
Second Quarter
70.51
50.70
Third Quarter
63.06
40.99
Fourth Quarter
41.30
19.35
DIVIDEND
POLICY
We currently do not pay dividends. We cannot provide any
assurance that we will pay dividends in the foreseeable future.
Although we are in compliance with all provisions of our debt
agreements, both our credit facility and the indenture governing
our senior subordinated notes contain restrictions on our
ability to pay dividends in certain circumstances.
The following tables present our selected consolidated financial
data. The data set forth below should be read together with
Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and our
historical Consolidated Financial Statements and the related
notes. The Consolidated Financial Statements as of
December 31, 2009 and 2008 and for the years ended
December 31, 2009, 2008 and 2007 and the reports thereon
are included in Item 8 in this
Form 10-K.
The historical financial data may not be indicative of our
future performance.
Total long-term debt, excluding current
portion(1)
454.0
625.0
294.1
523.1
805.1
Stockholders’ equity
2,400.8
2,020.0
2,120.1
1,584.1
1,457.5
Other Data:
Number of employees
14,456
15,606
13,720
12,804
13,023
(1)
Holders of our $201.3 million
13/4%
convertible senior subordinated notes due 2033 and our
$201.3 million
11/4%
convertible senior subordinated notes due 2036 may convert
the notes if, during any fiscal quarter, the closing sales price
of our common stock exceeds 120% of the conversion price of
$22.36 per share for our
13/4%
convertible senior subordinated notes and $40.73 per share for
our
11/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending on the last
trading day of the preceding fiscal quarter. As of
December 31, 2009, the criteria was met for our
11/4%
convertible senior subordinated notes, and, therefore, we
classified these notes as current liabilities. As of
December 31, 2008, this criteria was not met with respect
to either of the notes, and, therefore, we classified both notes
as long-term debt. As of December 31, 2007, the criteria
was met for both notes, and, therefore, we classified both notes
as current liabilities. As of December 31, 2006, the
criteria was met for our
13/4%
convertible senior subordinated notes, and, therefore, we
classified these notes as a current liability.
(2)
During the fourth quarter of 2006,
we concluded that the goodwill associated with our Sprayer
business was impaired. We recorded a write-down of the total
amount of such goodwill of approximately $171.4 million.
During the fourth quarter of 2005, we recognized a non-cash
income tax charge of approximately $90.8 million related to
increasing the valuation allowance for our U.S. deferred income
tax assets.
(3)
Our
11/4%
and
13/4%
convertible senior subordinated notes also potentially will
impact the dilution of weighted shares outstanding for the
excess conversion value using the treasury stock method. For the
years ended December 31, 2006 and 2005, approximately
1.2 million and 4.4 million shares, respectively, were
excluded from the diluted weighted average shares outstanding
calculation related to the assumed conversion of our
13/4%
convertible senior subordinates notes, as the impact would have
been antidilutive.
(4)
Operating data and balance sheet
data presented above have been retroactively restated for the
years ended December 31, 2008, 2007, 2006 and 2005 to
reflect adjustments made for the equity components of our
convertible senior subordinated notes and our noncontrolling
interests. Refer to Notes 1 and 7 of our Consolidated
Financial Statements for further discussion.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
We are a leading manufacturer and distributor of agricultural
equipment and related replacement parts throughout the world. We
sell a full range of agricultural equipment, including tractors,
combines, hay tools, sprayers, forage equipment and implements
and a line of diesel engines. Our products are widely recognized
in the agricultural equipment industry and are marketed under a
number of well-known brand names, including:
Challenger®,
Fendt®,
Massey
Ferguson®
and
Valtra®.
We distribute most of our products through a combination of
approximately 2,700 dealers, distributors, associates and
licensees. In addition, we provide retail financing in the
United States, Canada, Brazil, Germany, France, the United
Kingdom, Australia, Ireland and Austria through our retail
finance joint ventures with Rabobank.
Results
of Operations
We sell our equipment and replacement parts to our independent
dealers, distributors and other customers. A large majority of
our sales are to independent dealers and distributors that sell
our products to the end user. To the extent practicable, we
attempt to sell products to our dealers and distributors on a
level basis throughout the year to reduce the effect of seasonal
demands on our manufacturing operations and to minimize our
investment in inventory. However, retail sales by dealers to
farmers are highly seasonal and are linked to the planting and
harvesting seasons. In certain markets, particularly in North
America, there is often a time lag, which varies based on the
timing and level of retail demand, between our sale of the
equipment to the dealer and the dealer’s sale to a retail
customer.
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items included
in our Consolidated Statements of Operations:
Net sales for 2009 were approximately $1,794.2 million, or
21.3%, lower than 2008 primarily due to sales declines in most
of our geographical segments as well as the unfavorable impact
of currency translation. The volatility in commodity prices and
the expectation of lower farm income contributed to a weaker
demand in most of our major markets. Income from operations was
$219.3 million in 2009 compared to $565.0 million in
2008. The decrease in income from operations and operating
margins during 2009 was due primarily to lower net sales,
reduced production volumes and a weaker product mix, partially
offset by cost containment initiatives.
In our Europe/Africa/Middle East operations, income from
operations decreased approximately $294.8 million in 2009
compared to 2008, primarily due to decreased net sales, lower
production levels, unfavorable currency translation impacts and
increased engineering expenses. Income from operations in our
South American operations decreased approximately
$69.6 million in 2009 compared to 2008, primarily due to
lower net sales, lower production levels, unfavorable currency
translation impacts and a shift in sales mix in Brazil from
higher horsepower tractors to lower horsepower tractors. In
North America, income from operations increased approximately
$13.3 million in 2009 compared to 2008, primarily due to
improved margins from new products, productivity initiatives and
lower selling, general and administrative
(“SG&A”) expenses, partially offset by higher
levels of engineering costs and the impact of lower production.
Income from operations in our Asia/Pacific region decreased
approximately $7.1 million in 2009 compared to 2008,
primarily due to lower gross margins and unfavorable currency
translation impacts.
Retail
Sales
Worldwide industry equipment demand for farm equipment decreased
in 2009 in most major markets. The current global economic
downturn, volatility in farm commodity prices and prospects for
lower farm income in 2009 have contributed to the decreased
demand for equipment.
In the United States and Canada, industry unit retail sales of
tractors decreased approximately 21% in 2009 compared to 2008,
resulting from decreases in industry unit retail sales of
compact, utility and high horsepower tractors. Industry unit
retail sales of combines increased approximately 15% in 2009
when compared to the prior year. In North America, our unit
retail sales of tractors as well as combines decreased in 2009
compared to 2008 levels. In Europe, industry unit retail sales
of tractors decreased approximately 18% in 2009 compared to 2008
due to lower retail volumes in most major European markets.
Industry unit retail sales in Western Europe declined
approximately 13% in 2009 compared to 2008. Despite strong
harvests across most of Western Europe, lower commodity prices
and the outlook of reduced farmer profitability generated softer
demand. Industry unit retail sales in Eastern Europe and Russia
declined significantly compared to 2008 levels due to ongoing
credit constraints. Our unit retail sales of tractors for 2009
in Europe were also lower when compared to 2008. In South
America, industry unit retail sales of tractors in 2009
decreased approximately 17% compared to 2008. Weak industry
conditions in Argentina and other markets outside of Brazil
contributed to most of the decline in industry demand in the
region. Retail sales of tractors in the major market of Brazil
increased approximately 5% during 2009. A Brazilian
government-funded financing program for small tractors, as well
as a new government-sponsored low-interest financing program for
all equipment, has supported sales in the Brazilian market,
primarily in the low horsepower sector. Industry unit retail
sales of combines during 2009 were approximately 36% lower than
the prior year, with a decrease in Brazil of approximately 14%
compared to 2008. Our unit retail sales of tractors and combines
in South America were also lower in 2009 compared to 2008. In
other international markets, our net sales for 2009 were
approximately 4.7% higher than the prior year, due primarily to
higher sales in Australia and New Zealand resulting from
improved harvests.
Results
of Operations
Net sales for 2009 were $6,630.4 million compared to
$8,424.6 million for 2008. The decrease was primarily
attributable to net sales decreases in most of our geographical
regions as well as unfavorable foreign currency translation
impacts. Foreign currency translation negatively impacted net
sales by approximately $404.4 million, primarily due to the
weakening of the Euro and the Brazilian real during the first
nine months
of 2009 compared to 2008. The following table sets forth, for
the year ended December 31, 2009, the impact to net sales
of currency translation by geographical segment (in millions,
except percentages):
Change due to Currency
Change
Translation
2009
2008
$
%
$
%
North America
$
1,442.7
$
1,794.3
$
(351.6
)
(19.6
)%
$
(37.0
)
(2.1
)%
South America
1,167.1
1,496.5
(329.4
)
(22.0
)%
(61.1
)
(4.1
)%
Europe/Africa/ Middle East
3,782.1
4,905.4
(1,123.3
)
(22.9
)%
(296.7
)
(6.1
)%
Asia/Pacific
238.5
228.4
10.1
4.5
%
(9.6
)
(4.2
)%
$
6,630.4
$
8,424.6
$
(1,794.2
)
(21.3
)%
$
(404.4
)
(4.8
)%
The following is a reconciliation of net sales for the year
ended December 31, 2009 at actual exchange rates compared
to 2008 adjusted exchange rates (in millions):
Regionally, net sales in North America decreased during 2009
compared to 2008 primarily due to weaker market demand and
efforts to reduce dealer inventory levels. In the
Europe/Africa/Middle East region, net sales decreased in 2009
compared to 2008 primarily due to sales declines in Germany,
France and Scandinavia, as well as Eastern and Central Europe
and Russia. In South America, net sales decreased during 2009
compared to 2008 primarily as a result of weaker market
conditions in the region, particularly in Argentina, and a shift
in sales mix to lower horsepower tractors in the region. In the
Asia/Pacific region, net sales increased in 2009 compared to
2008 due to sales growth in Australia and New Zealand. We
estimate that worldwide average price increases in 2009 and 2008
were approximately 3% and 4%, respectively. Consolidated net
sales of tractors and combines, which consisted of approximately
72% of our net sales in 2009, decreased approximately 22% in
2009 compared to 2008. Unit sales of tractors and combines
decreased approximately 20% during 2009 compared to 2008. The
difference between the unit sales decrease and the decrease in
net sales was primarily the result of foreign currency
translation, pricing and sales mix changes.
The following table sets forth, for the years ended
December 31, 2009 and 2008, the percentage relationship to
net sales of certain items included in our Consolidated
Statements of Operations (in millions, except percentages):
Gross profit as a percentage of net sales decreased during 2009
as compared to 2008 primarily due to lower production volumes
and a weaker sales mix, partially offset by the impact of
reduced workforce levels and cost control initiatives. Sales mix
impacted margins primarily in South America due to a shift in
demand toward low horsepower tractors away from high horsepower
tractors and combines. Unit production of tractors and combines
during 2009 was approximately 24% lower than 2008. We recorded
approximately $0.1 million and $1.5 million of stock
compensation expense within cost of goods sold, during 2009 and
2008, respectively, as is more fully explained in Note 1 to
our Consolidated Financial Statements.
SG&A expenses as a percentage of net sales increased during
2009 compared to 2008, primarily due to the decline in net
sales. We recorded approximately $8.2 million and
$32.0 million of stock compensation expense, within
SG&A, during 2009 and 2008, respectively, as is more fully
explained in Note 1 to our Consolidated Financial
Statements. Engineering expenses decreased slightly but
increased as a percentage of sales during 2009 as compared to
2008. We maintained the level of engineering expenses relative
to the prior year to fund projects related to new product
development and Tier 4 emission requirements.
We recorded restructuring and other infrequent expenses of
approximately $13.2 million and $0.2 million during
2009 and 2008, respectively. The restructuring and other
infrequent expenses recorded in 2009 related primarily to
severance and other related costs associated with
rationalization of our operations in France, the United Kingdom,
Finland, Germany, the United States and Denmark. The
restructuring and other infrequent expenses recorded in 2008
related primarily to severance and employee relocation costs
associated with rationalization of our Valtra sales office
located in France.
Interest expense, net was $43.3 million for 2009 compared
to $33.2 million for 2008. The increase was primarily due
to lower interest income as a result of lower interest rates and
lower amounts of invested cash.
Other expense, net was $22.2 million in 2009 compared to
$20.1 million in 2008. Losses on sales of receivables
primarily under our securitization facilities were
$15.6 million in 2009 compared to $27.3 million in
2008. The decrease was primarily due to a reduction in interest
rates in 2009 compared to 2008. In addition, there were foreign
exchange losses in 2009 compared to foreign exchange gains in
2008.
We recorded an income tax provision of $56.5 million in
2009 compared to $164.6 million in 2008. Our tax provision
is impacted by the differing tax rates in the various tax
jurisdictions where we operate, permanent differences for items
treated differently for financial accounting and income tax
purposes, and losses in jurisdictions where no income tax
benefit is recorded. Our 2009 income tax rate reconciliation
provided in Note 6 to our Consolidated Financial Statements
includes a $39.5 million favorable “change in
valuation allowance” which was fully offset by a write-off
of certain foreign tax assets reflected in “tax effects of
permanent differences”. Due to the fact that these tax
assets had not been expected to be utilized in future years, we
had previously maintained a valuation allowance against the tax
assets. Accordingly, this write-off resulted in no impact to our
income tax provision for the year ended December 31, 2009.
A valuation allowance is established when it is more likely than
not that some portion or all of a company’s deferred tax
assets will not be realized. We assessed the likelihood that our
deferred tax assets would be recovered from estimated future
taxable income and available income tax planning strategies. At
December 31, 2009 and 2008, we had gross deferred tax
assets of $485.0 million and $471.4 million,
respectively, including $215.0 million and
$210.8 million, respectively, related to net operating loss
carryforwards. At December 31, 2009 and 2008, we had
recorded total valuation allowances as an offset to the gross
deferred tax assets of $261.7 million and
$294.4 million, respectively, primarily related to net
operating loss carryforwards in Brazil, Denmark, Switzerland,
The Netherlands and the United States. Realization of the
remaining deferred tax assets as of December 31, 2009 will
depend on generating sufficient taxable income in future
periods, net of reversing deferred tax liabilities. We believe
it is more likely than not that the remaining net deferred tax
assets will be realized.
As of December 31, 2009 and 2008, we had approximately
$21.8 million and $20.1 million, respectively, of
unrecognized tax benefits, all of which would impact our
effective tax rate if recognized. As of December 31, 2009
and 2008, we had approximately $3.5 million and
$7.6 million, respectively, of current accrued taxes
related to uncertain income tax positions connected with ongoing
tax audits in various jurisdictions that we expect to settle or
pay in the next 12 months. We recognize interest and
penalties related to uncertain income tax
positions in income tax expense. As of December 31, 2009
and 2008, we had accrued interest and penalties related to
unrecognized tax benefits of approximately $1.9 million and
$1.8 million, respectively. See Note 6 to our
Consolidated Financial Statements for further discussion of our
uncertain income tax positions.
Equity in net earnings of affiliates was $38.4 million in
2009 compared to $38.8 million in 2008. An increase in
earnings associated with our retail finance joint ventures was
offset by a decrease in earnings associated with our Laverda
operating joint venture during 2009 as compared to 2008. Refer
to “Retail Finance Joint Ventures” for further
information regarding our retail finance joint ventures and
their results of operations.
2008
Compared to 2007
Net income for 2008 was $385.9 million, or $3.95 per
diluted share, compared to net income for 2007 of
$232.9 million, or $2.41 per diluted share.
Net sales for 2008 were approximately $1,596.5 million, or
23.4%, higher than 2007 primarily due to improved industry
conditions in most major global agricultural equipment markets
and the positive impact of foreign currency translation. Sales
growth was achieved in all of our geographic operating segments.
Income from operations was $565.0 million in 2008 compared
to $394.8 million in 2007. The increase in income from
operations and operating margins during 2008 was due primarily
to sales volume growth, price increases, improved product mix
and cost control initiatives, partially offset by higher
material costs.
In our Europe/Africa/Middle East operations, income from
operations improved approximately $119.1 million in 2008
compared to 2007, primarily due to increased sales volumes,
favorable currency translation impacts, improved product mix and
margin improvements achieved through cost reduction initiatives.
Income from operations in our South American operations
increased approximately $32.9 million in 2008 compared to
2007, primarily due to higher sales volume resulting from
stronger market conditions, particularly in the major market of
Brazil, as well as favorable currency translation impacts. In
North America, income from operations increased approximately
$44.3 million in 2008 compared to 2007, primarily due to
higher sales as a result of strong industry demand for large
farm equipment and operating efficiencies. Income from
operations in our Asia/Pacific region increased approximately
$8.4 million in 2008 compared to 2007, primarily due to
sales growth in the Australian and New Zealand markets.
Retail
Sales
Worldwide industry equipment demand for farm equipment increased
in 2008 in most major markets. Healthy farm income driven by
higher farm commodity prices contributed to the improved demand
for equipment, particularly in the large farm equipment sector.
In 2008, farm commodity prices continued to be supported as a
result of strong global demand and historically low inventories
of commodities.
In the United States and Canada, industry unit retail sales of
tractors decreased approximately 7% in 2008 compared to 2007,
due to decreases in the compact and utility tractor segments,
offset by increases in the high horsepower tractor segment.
Industry unit retail sales of combines increased approximately
22% in 2008 when compared to the prior year. In North America,
our unit retail sales of compact and high horsepower tractors as
well as combines increased while our unit retail sales of
utility tractors decreased in 2008 compared to 2007 levels. In
Europe, industry unit retail sales of tractors increased
approximately 7% in 2008 compared to 2007. Demand was strongest
in the high horsepower segment and in the markets of France,
Germany, Central and Eastern Europe, and Russia, which offset
weaker markets in Spain, Finland and Scandinavia. Our unit
retail sales of tractors for 2008 in Europe were also higher
when compared to 2007. In South America, industry unit retail
sales of tractors in 2008 increased approximately 30% compared
to 2007. Retail sales of tractors in the major market of Brazil
increased approximately 39% during 2008. Industry unit retail
sales of combines during 2008 were approximately 50% higher than
the prior year, with an increase in Brazil of approximately 88%
compared to the prior year. Improved commodity prices
contributed to the strength of the row crop and sugar cane
sectors in Brazil, resulting in increased industry demand. Our
unit retail sales of tractors and combines in South America were
also higher in 2008 compared to 2007. In other international
markets, our net sales for 2008 were approximately 10.3% higher
than the prior year, due primarily to higher sales in Australia
and New Zealand resulting from improved harvests.
The rate of retail sales increases declined in most major
markets in the fourth quarter of 2008 as lower commodity prices
and tightened credit availability began to impact sales demand,
particularly in South America, Eastern Europe and Russia.
Results
of Operations
Net sales for 2008 were $8,424.6 million compared to
$6,828.1 million for 2007. The increase was primarily
attributable to net sales growth in all four of our geographical
regions as well as positive currency translation impacts.
Currency translation positively impacted net sales by
approximately $247.9 million, primarily due to the strength
of the Brazilian real and the Euro in the first nine months of
the year. The following table sets forth, for the year ended
December 31, 2008, the impact to net sales of currency
translation by geographical segment (in millions, except
percentages):
Change due to Currency
Change
Translation
2008
2007
$
%
$
%
North America
$
1,794.3
$
1,488.1
$
306.2
20.6
%
$
(11.6
)
(0.8
)%
South America
1,496.5
1,090.6
405.9
37.2
%
76.8
7.0
%
Europe/Africa/Middle East
4,905.4
4,067.1
838.3
20.6
%
181.3
4.5
%
Asia/Pacific
228.4
182.3
46.1
25.3
%
1.4
0.8
%
$
8,424.6
$
6,828.1
$
1,596.5
23.4
%
$
247.9
3.6
%
The following is a reconciliation of net sales for the year
ended December 31, 2008 at actual exchange rates compared
to 2007 adjusted exchange rates (in millions):
Regionally, net sales in North America increased during 2008
compared to 2007 primarily due to strong industry conditions
supporting increased sales of high horsepower tractors,
combines, hay equipment and sprayers. In the
Europe/Africa/Middle East region, net sales increased in 2008
primarily due to sales growth in France, Germany, the United
Kingdom, Austria, Eastern and Central Europe, and Russia. In
South America, net sales increased during 2008 compared to 2007
primarily as a result of stronger market conditions in the
region, particularly in the major market of Brazil. In the
Asia/Pacific region, net sales increased in 2008 compared to
2007 due to sales growth in Australia and New Zealand. We
estimate that worldwide consolidated average price increases
during 2008 contributed approximately 4% to the increase in net
sales. Consolidated net sales of tractors and combines, which
consisted of approximately 72% of our net sales in 2008,
increased approximately 23% in 2008 compared to 2007. Unit sales
of tractors and combines increased approximately 11% during 2008
compared to 2007. The difference between the unit sales increase
and the increase in net sales was the result of foreign currency
translation, pricing and sales mix changes.
The following table sets forth, for the years ended
December 31, 2008 and 2007, the percentage relationship to
net sales of certain items included in our Consolidated
Statements of Operations (in millions, except percentages):
2008
2007
% of
% of
$
Net Sales
$
Net Sales
Gross profit
$
1,499.7
17.8
%
$
1,191.0
17.4
%
Selling, general and administrative expenses
720.9
8.6
%
625.7
9.1
%
Engineering expenses
194.5
2.3
%
154.9
2.3
%
Restructuring and other infrequent expenses (income)
0.2
—
(2.3
)
—
Amortization of intangibles
19.1
0.2
%
17.9
0.2
%
Income from operations
$
565.0
6.7
%
$
394.8
5.8
%
Gross profit as a percentage of net sales increased during 2008
as compared to 2007 primarily due to the benefits of higher
production, and cost reduction initiatives, partially offset by
negative currency impacts and raw material cost inflation. Unit
production of tractors and combines during 2008 was
approximately 18% higher than 2007. In response to increases in
manufacturing input costs driven primarily by increases in steel
and energy costs, we instituted a series of price increases
during 2008. These pricing actions helped to partially offset
the impact of rising manufacturing input costs. Gross margins in
2008 and 2007 in North America were also affected by the weak
United States dollar on products imported from our European and
Brazilian manufacturing facilities. We recorded approximately
$1.5 million and $1.0 million of stock compensation
expense, within cost of goods sold, during 2008 and 2007,
respectively.
SG&A expenses as a percentage of net sales decreased during
2008 compared to 2007, primarily as a result of higher sales
volumes in 2008 and cost control initiatives. We recorded
approximately $32.0 million and $25.0 million of stock
compensation expense, within SG&A, during 2008 and 2007,
respectively. Engineering expenses increased during 2008 as a
result of continued spending to fund new products, product
improvements and cost reduction projects.
The restructuring and other infrequent expenses recorded in 2008
related primarily to severance and employee relocation costs
associated with rationalization of our Valtra sales office
located in France. The restructuring and other infrequent income
recorded in 2007 primarily related to a $3.2 million gain
on the sale of a portion of the buildings, land and improvements
associated with our Randers, Denmark facility. This gain was
partially offset by $0.9 million of charges primarily
related to severance and employee relocation costs associated
with the rationalization of our Valtra sales office located in
France as well as our rationalization of certain parts, sales
and marketing and administrative functions in Germany.
Interest expense, net was $33.2 million for 2008 compared
to $37.5 million for 2007. The decrease was primarily due
to a reduction in debt levels and increased interest income
earned during 2008 compared to 2007.
Other expense, net was $20.1 million in 2008 compared to
$43.4 million in 2007. Losses on sales of receivables
primarily under our securitization facilities were
$27.3 million in 2008 compared to $36.1 million in
2007. The decrease during 2008 was primarily due to lower
interest rates in 2008 compared to 2007, partially offset by
higher outstanding funding under the securitizations in 2008
compared to 2007. There was also an increase in foreign exchange
gains in 2008 compared to 2007.
We recorded an income tax provision of $164.6 million in
2008 compared to $111.4 million in 2007. We assessed the
likelihood that our deferred tax assets would be recovered from
estimated future taxable income and available income tax
planning strategies. Our effective tax rate was positively
impacted during 2008 primarily due to reductions in statutory
tax rates in the United Kingdom and Germany and a decrease in
losses incurred in the United States. At December 31, 2008
and 2007, we had gross deferred tax assets of
$471.4 million and $479.l million, respectively, including
$210.8 million and $247.8 million, respectively,
related to net operating loss carryforwards. At
December 31, 2008 and 2007, we had recorded total valuation
allowances as an offset to the gross deferred tax assets of
$294.4 million and $315.3 million, respectively,
primarily related to net operating loss carryforwards in Brazil,
Denmark, The Netherlands and the United States.
At December 31, 2008 and 2007, we had approximately
$20.1 million and $22.7 million, respectively, of
unrecognized tax benefits, all of which would impact our
effective tax rate if recognized. As of December 31, 2008
and 2007, we had approximately $7.6 million and
$14.0 million, respectively, of current accrued taxes
related to uncertain income tax positions connected with ongoing
tax audits in various jurisdictions that we expected to settle
or pay in the next 12 months. We recognize interest and
penalties related to uncertain income tax positions in income
tax expense. As of December 31, 2008 and 2007, we had
accrued interest and penalties related to unrecognized tax
benefits of approximately $1.8 million and
$1.1 million, respectively.
Equity in net earnings of affiliates was $38.8 million in
2008 compared to $30.4 million in 2007. The increase in
2008 was primarily due to income associated with our investment
in the Laverda operating joint venture acquired in September
2007, as well as increased earnings in our retail finance joint
ventures.
Quarterly
Results
The following table presents unaudited interim operating
results. We believe that the following information includes all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly our results of operations for the
periods presented. The operating results for any period are not
necessarily indicative of results for any future period.
Three Months Ended
March 31
June 30
September 30
December 31
(In millions, except per share data)
2009:
Net sales
$
1,579.0
$
1,795.2
$
1,403.7
$
1,852.5
Gross profit
272.3
291.5
241.4
267.3
Income from
operations(1)
58.6
77.8
34.0
48.9
Net
income(1)
34.3
57.0
10.0
34.4
Net (income) loss attributable to noncontrolling interests
(0.6
)
0.4
1.1
(0.9
)
Net income attributable to AGCO Corporation and subsidiaries
33.7
57.4
11.1
33.5
Net income per common share attributable to AGCO Corporation and
subsidiaries —
diluted(1)
0.36
0.61
0.12
0.35
2008:
Net sales
$
1,786.6
$
2,395.4
$
2,085.4
$
2,157.2
Gross profit
315.2
428.2
380.1
376.2
Income from
operations(1)
94.2
189.1
141.7
140.0
Net
income(1)(2)
58.8
129.6
99.0
98.5
Net income attributable to noncontrolling
interests(2)
—
—
—
—
Net income attributable to AGCO Corporation and
subsidiaries(2)
58.8
129.6
99.0
98.5
Net income per common share attributable to AGCO Corporation and
subsidiaries —
diluted(1)(2)
0.59
1.31
1.01
1.05
(1)
For 2009, the quarters ended
March 31, June 30, September 30 and December 31
included restructuring and other infrequent expenses of
$0.0 million, $2.8 million, $1.0 million and
$9.4 million, respectively, thereby impacting net income
per common share on a diluted basis by $0.00, $0.02, $0.01,
$0.07, respectively.
For 2008, the quarters ended
March 31, June 30, September 30 and December 31
included restructuring and other infrequent expenses (income) of
$0.1 million, $0.1 million, $0.1 million and
$(0.1) million, respectively, with no impact to net income
per common share on a diluted basis.
(2)
Amounts presented above for the
three months ended March 31, June 30,
September 30, and December 31, 2008 have been
retroactively restated to reflect adjustments made for the
amortization of the debt discounts related to our convertible
senior subordinated notes. Refer to Notes 1 and 7 of our
Consolidated Financial Statements for further discussion.
Our AGCO Finance retail finance joint ventures provide retail
financing and wholesale financing to our dealers in the United
States, Canada, Brazil, Germany, France, the United Kingdom,
Australia, Ireland, Austria and Argentina. The joint ventures
are owned 49% by AGCO and 51% by a wholly owned subsidiary of
Rabobank, a AAA rated financial institution based in The
Netherlands. The majority of the assets of the retail finance
joint ventures represent finance receivables. The majority of
the liabilities represent notes payable and accrued interest.
Under the various joint venture agreements, Rabobank or its
affiliates provide financing to the joint ventures, primarily
through lines of credit. We do not guarantee the debt
obligations of the joint ventures other than a portion of the
retail portfolio in Brazil that is held outside the joint
venture by Rabobank Brazil, which was approximately
$3.7 million as of December 31, 2009, and will
gradually be eliminated over time. As of December 31, 2009,
our capital investment in the retail finance joint ventures,
which is included in “Investment in affiliates” on our
Consolidated Balance Sheets, was approximately
$258.7 million compared to $187.8 million as of
December 31, 2008. The total finance portfolio in our
retail finance joint ventures was approximately
$6.3 billion and $4.8 billion as of December 31,2009 and 2008, respectively. The total finance portfolio as of
December 31, 2009 included approximately $5.6 billion
of retail receivables and $0.7 billion of wholesale
receivables from AGCO dealers. The total finance portfolio as of
December 31, 2008 included approximately $4.6 billion
of retail receivables and $0.2 billion of wholesale
receivables from AGCO dealers. The wholesale receivables were
either sold directly to AGCO Finance without recourse from our
operating companies or AGCO Finance provided the financing
directly to the dealers. On December 22, 2009, we
terminated our U.S. and Canadian accounts receivable
securitization facilities and replaced them with new accounts
receivable sales agreements that will permit the transfer, on an
ongoing basis, of substantially all of our wholesale
interest-bearing and non-interest bearing receivables in North
America to AGCO Finance LLC and AGCO Finance Canada, Ltd., our
U.S. and Canadian retail finance joint ventures. During
2009, our share in the earnings of the retail finance joint
ventures, included in “Equity in net earnings of
affiliates” on our Consolidated Statements of Operations,
was $36.4 million compared to $29.7 million in 2008.
The increase during 2009 was due primarily to higher finance
revenues generated as a result of higher average retail finance
portfolios, particularly in Europe and Brazil.
The retail finance portfolio in our retail finance joint venture
in Brazil was $1.7 billion as of December 31, 2009
compared to $1.2 billion as of December 31, 2008. As a
result of weak market conditions in Brazil in 2005 and 2006, a
substantial portion of this portfolio has been included in a
payment deferral program directed by the Brazilian government.
The impact of the deferral program has resulted in higher
delinquencies and lower collateral coverage for the portfolio.
While the joint venture currently considers its reserves for
loan losses adequate, it continually monitors its reserves
considering borrower payment history, the value of the
underlying equipment financed and further payment deferral
programs implemented by the Brazilian government. To date, our
retail finance joint ventures in markets outside of Brazil have
not experienced any significant changes in the credit quality of
their finance portfolios as a result of the recent global
economic challenges. However, there can be no assurance that the
portfolio credit quality will not deteriorate, and, given the
size of the portfolio relative to the joint ventures’ level
of equity, a significant adverse change in the joint
ventures’ performance would have a material impact on the
joint ventures and on our operating results.
Outlook
Our operations are subject to the cyclical nature of the
agricultural industry. Sales of our equipment have been and are
expected to continue to be affected by changes in net cash farm
income, farm land values, weather conditions, the demand for
agricultural commodities, farm industry related legislation,
availability of financing and general economic conditions.
Worldwide industry demand is expected to be mixed in the first
six months of 2010, with stronger market conditions in Brazil
expected to offset weaker conditions in North America and
Europe. Demand in North America and Western Europe is expected
to stabilize during 2010, making comparisons to 2009 more
favorable in the second half of the year. Continued economic
weakness in Eastern and Central Europe and Russia is expected to
keep industry demand at very low levels in those markets
throughout 2010.
Our net sales in 2010 are expected to be flat compared to 2009.
We are targeting gross margin improvements to be offset by
higher engineering expenses for new product development and
Tier 4 emission requirements, as well as higher pension
costs. Net income is projected to be flat to slightly higher
than 2009.
Liquidity
and Capital Resources
Our financing requirements are subject to variations due to
seasonal changes in inventory and receivable levels. Internally
generated funds are supplemented when necessary from external
sources, primarily our revolving credit facility and accounts
receivable securitization facilities.
We believe that these facilities, together with available cash
and internally generated funds, will be sufficient to support
our working capital, capital expenditures and debt service
requirements for the foreseeable future:
•
Our $300 million revolving credit facility which expires in
May 2013 (no amounts were outstanding as of December 31,2009).
•
Our €200.0 million (or approximately
$286.5 million as of December 31,2009) 67/8% senior
subordinated notes, which mature in 2014.
•
Our $201.3 million
13/4%
convertible senior subordinated notes may be required to be
repurchased on December 31, 2010, or could be converted
earlier based on the closing sales price of our common stock
(see further discussion below). Our $201.3 million
11/4%
convertible senior subordinated notes may be required to be
repurchased on December 15, 2013, or could be converted
earlier based on the closing sales price of our common stock
(see further discussion below).
•
Our €140.0 million (or approximately
$200.6 million as of December 31,2009) securitization facility in Europe, which expires in
October 2011. As of December 31, 2009, outstanding funding
related to this facility was approximately
€104.6 million (or approximately $149.9 million).
•
Our new accounts receivable sales agreements in the United
States and Canada with AGCO Finance LLC and AGCO Finance Canada,
Ltd., with total funding of up to $600.0 million for
U.S. wholesale accounts receivable and up to
C$250.00 million (or approximately $234.7 million as
of December 31, 2009) for Canadian wholesale accounts
receivable. As of December 31, 2009, approximately
$444.6 million of proceeds had been received under these
agreements.
In addition, although we are in complete compliance with the
financial covenants contained in these facilities and currently
expect to continue to maintain such compliance, should we ever
encounter difficulties, our historical relationship with our
lenders has been strong and we anticipate their continued
long-term support of our business. However, it is impossible to
predict the length or severity of the current tightened credit
environment, which may impact our ability to obtain additional
financing sources or our ability to renew or extend the maturity
of our existing financing sources.
Current
Facilities
Our $201.3 million of
13/4%
convertible senior subordinated notes due December 31,2033, issued in June 2005, provide for (i) the settlement
upon conversion in cash up to the principal amount of the
converted notes with any excess conversion value settled in
shares of our common stock, and (ii) the conversion rate to
be increased under certain circumstances if the notes are
converted in connection with certain change of control
transactions occurring prior to December 10, 2010. The
notes are unsecured obligations and are convertible into cash
and shares of our common stock upon satisfaction of certain
conditions. Interest is payable on the notes at
13/4%
per annum, payable semi-annually in arrears in cash on June 30
and December 31 of each year. The notes are convertible into
shares of our common stock at an effective price of $22.36 per
share, subject to adjustment. This reflects an initial
conversion rate for the notes of 44.7193 shares of common
stock per $1,000 principal amount of notes. Beginning
January 1, 2011, we may redeem any of the notes at a
redemption price of 100% of their principal amount, plus accrued
interest. Holders of the notes may require us to repurchase the
notes at a repurchase price of 100% of their principal amount,
plus accrued interest, on December 31, 2010,
2013, 2018, 2023 and 2028. See Note 7 to our Consolidated
Financial Statements for a full description of these notes.
Our $201.3 million of
11/4%
convertible senior subordinated notes due December 15,2036, issued in December 2006, provide for (i) the
settlement upon conversion in cash up to the principal amount of
the notes with any excess conversion value settled in shares of
our common stock, and (ii) the conversion rate to be
increased under certain circumstances if the notes are converted
in connection with certain change of control transactions
occurring prior to December 15, 2013. Interest is payable
on the notes at
11/4%
per annum, payable semi-annually in arrears in cash on June 15
and December 15 of each year. The notes are convertible into
shares of our common stock at an effective price of $40.73 per
share, subject to adjustment. This reflects an initial
conversion rate for the notes of 24.5525 shares of common
stock per $1,000 principal amount of notes. Beginning
December 15, 2013, we may redeem any of the notes at a
redemption price of 100% of their principal amount, plus accrued
interest. Holders of the notes may require us to repurchase the
notes at a repurchase price of 100% of their principal amount,
plus accrued interest, on December 15, 2013, 2016, 2021,
2026 and 2031. See Note 7 to our Consolidated Financial
Statements for a full description of these notes.
As of December 31, 2009, the closing sales price of our
common stock had exceeded 120% of the conversion price of $22.36
per share for our
13/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending December 31,2009, and, therefore, we classified the notes as a current
liability. In the event the notes were converted, we believe we
could repay the notes with available cash on hand, funds from
our $300.0 million multi-currency revolving credit facility
or a combination of these sources. As of December 31, 2008,
the closing sales price of our common stock did not exceed 120%
of the conversion price of $22.36 and $40.73 per share,
respectively, for our
13/4%
convertible senior subordinated notes and our
11/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending December 31,2008, and, therefore, we classified both notes as long-term
debt. Future classification of the
13/4%
convertible senior subordinated notes and
11/4%
convertible senior subordinated notes between current and
long-term debt is dependent on the closing sales price of our
common stock during future quarters.
The
13/4%
convertible senior subordinated notes and the
11/4%
convertible senior subordinated notes will impact the diluted
weighted average shares outstanding in future periods depending
on our stock price for the excess conversion value using the
treasury stock method. Refer to Notes 1 and 7 of the
Company’s Consolidated Financial Statements for further
discussion.
Our $300.0 million unsecured multi-currency revolving
credit facility matures on May 16, 2013. Interest accrues
on amounts outstanding under the facility, at our option, at
either (1) LIBOR plus a margin ranging between 1.00% and
1.75% based upon our total debt ratio or (2) the higher of
the administrative agent’s base lending rate or one-half of
one percent over the federal funds rate plus a margin ranging
between 0.0% and 0.50% based upon our total debt ratio. The
facility contains covenants restricting, among other things, the
incurrence of indebtedness and the making of certain payments,
including dividends, and is subject to acceleration in the event
of a default, as defined in the facility. We also must fulfill
financial covenants in respect of a total debt to EBITDA ratio
and an interest coverage ratio, as defined in the facility. As
of December 31, 2009 and 2008, we had no outstanding
borrowings under the facility. As of December 31, 2009 and
2008, we had availability to borrow approximately
$290.7 million and $291.3 million, respectively, under
the facility.
Our €200.0 million
67/8% senior
subordinated notes due 2014 are unsecured obligations and are
subordinated in right of payment to any existing or future
senior indebtedness. Interest is payable on the notes
semi-annually on April 15 and October 15 of each year. As of and
subsequent to April 15, 2009, we may redeem the notes, in
whole or in part, initially at 103.438% of their principal
amount, plus accrued interest, declining to 100% of their
principal amount, plus accrued interest, at any time on or after
April 15, 2012. The notes include covenants restricting the
incurrence of indebtedness and the making of certain restricted
payments, including dividends.
Under our European securitization facility, we sell accounts
receivable in Europe on a revolving basis to commercial paper
conduits through a qualifying special purpose entity
(“QSPE”) in the United Kingdom. The
European facility expires in October 2011, but is subject to
annual renewal. On December 31, 2009, we expanded our
European facility by €40.0 million so that the total
amount of the facility was €140.0 million
(or approximately $200.6 million). The outstanding
funded balance of approximately €104.6 million
(or approximately $149.9 million) as of
December 31, 2009 has the effect of reducing accounts
receivable and short-term liabilities by the same amount. Our
risk of loss under the securitization facilities is limited to a
portion of the unfunded balance of receivables sold, which is
approximately 10% of the funded amount. We maintain reserves for
doubtful accounts associated with this risk where necessary. If
the facilities were terminated, we would not be required to
repurchase previously sold receivables but would be prevented
from selling additional receivables to the commercial paper
conduits.
This facility allow us to sell accounts receivables through
financing conduits, which obtain funding from commercial paper
markets. Future funding under the securitization facility
depends upon the adequacy of receivables, a sufficient demand
for the underlying commercial paper and the maintenance of
certain covenants concerning the quality of the receivables and
our financial condition. In the event commercial paper demand is
not adequate, our securitization facility provides for liquidity
backing from various financial institutions, including Rabobank.
These liquidity commitments would provide us with interim
funding to allow us to find alternative sources of working
capital financing, if necessary.
On December 22, 2009, we terminated our U.S. and
Canadian accounts receivable securitization facilities of
$280.0 million and $70.0 million, respectively, which
had outstanding funding of approximately $280.0 million and
$65.0 million, respectively. We replaced these
securitization facilities with new accounts receivable sales
agreements that will permit the transfer, on an ongoing basis,
of substantially all of our wholesale interest-bearing and
non-interest bearing receivables in North America to AGCO
Finance LLC and AGCO Finance Canada, Ltd., our U.S. and
Canadian retail finance joint ventures. We have a 49% ownership
in these joint ventures. This agreement also replaces a May 2005
agreement whereby we previously sold interest-bearing
receivables to AGCO Finance LLC and AGCO Finance Canada, Ltd. on
an ongoing basis. The new accounts receivable sales agreements
provide for funding up to $600.0 million of
U.S. accounts receivable and up to C$250.0 million (or
approximately $234.7 million as of December 31,2009) of Canadian accounts receivable, both of which may be
increased in the future at the discretion of AGCO Finance LLC
and AGCO Finance Canada, Ltd., respectively. The transfer of the
receivables is without recourse to us. These agreements are
accounted for as off-balance sheet transactions and, similar to
our securitization facility, have the effect of reducing
accounts receivable and short-term liabilities by the same
amount.
As of December 31, 2009, net cash received from receivables
sold under the U.S. and Canadian accounts receivable sales
agreements with AGCO Finance LLC and AGCO Finance Canada, Ltd.
was approximately $444.6 million. As of December 31,2008, the balance of interest-bearing receivables that had been
transferred to AGCO Finance LLC and AGCO Finance Canada, Ltd.
under our former arrangement to transfer wholesale
interest-bearing receivables was approximately
$59.0 million. The net cash impact from the proceeds of the
sale of accounts receivable under the new sales agreements less
the $345.0 million previously funded through our former
securitization facilities was approximately $40.6 million
and was reflected within “Net cash provided by Operating
Activities” within our Consolidated Statement of Cash Flows
for the year ended December 31, 2009.
Our AGCO Finance retail joint ventures in Europe, Brazil and
Australia also provide wholesale financing to our dealers. The
receivables associated with these arrangements are also without
recourse to us. As of December 31, 2009, these retail
finance joint ventures had approximately $176.9 million of
outstanding accounts receivable associated with these
arrangements. These arrangements are accounted for as
off-balance sheet transactions. In addition, we sell certain
trade receivables under factoring arrangements to other
financial institutions around the world. These arrangements are
also accounted for as off-balance sheet transactions.
Cash
Flows
Cash flow provided by operating activities was
$351.7 million during 2009, compared to $291.3 million
during 2008. The increase in cash flow provided by operating
activities during 2009 was primarily due to a reduction in our
net working capital. We lowered inventory and accounts
receivable levels by approximately
$558.7 million from 2008 year-end levels. This
reduction and positive impact to our cash flow was partially
offset by lower net income as well as a reduction in accounts
payable resulting from significant production cuts throughout
2009. The reduction in accounts receivable levels also includes
the net cash impact from the proceeds of the sale of accounts
receivable under the new accounts receivable sales agreements
discussed above less the $345.0 million previously funded
through our former securitization facilities, which was
approximately $40.6 million.
Our working capital requirements are seasonal, with investments
in working capital typically building in the first half of the
year and then reducing in the second half of the year. We had
$1,070.8 million in working capital at December 31,2009, as compared with $1,026.7 million at
December 31, 2008. Accounts receivable and inventories,
combined, at December 31, 2009 were $286.5 million
lower than at December 31, 2008. Accounts payable as of
December 31, 2009 were $382.8 million lower than at
December 31, 2008.
Capital expenditures for 2009 were $215.3 million compared
to $251.3 million during 2008. Capital expenditures during
2009 were used to support our manufacturing operations, systems
initiatives, and the development and enhancement of new and
existing products.
Our debt to capitalization ratio, which is total indebtedness
divided by the sum of total indebtedness and stockholders’
equity, was 21.4% at December 31, 2009 compared to 24.8% at
December 31, 2008.
Contractual
Obligations
The future payments required under our significant contractual
obligations, excluding foreign currency option and forward
contracts, as of December 31, 2009 are as follows (in
millions):
Payments Due By Period
2011 to
2013 to
2015 and
Total
2010
2012
2014
Beyond
Indebtedness(1)
$
689.2
$
201.4
$
—
$
286.5
$
201.3
Interest payments related to long-term
debt(1)
98.9
25.7
44.4
28.8
—
Capital lease obligations
4.1
2.1
1.8
0.2
—
Operating lease obligations
154.2
41.5
51.0
21.2
40.5
Unconditional purchase obligations
82.3
58.6
23.7
—
—
Other short-term and long-term
obligations(2)
269.1
41.8
58.6
48.3
120.4
Total contractual cash obligations
$
1,297.8
$
371.1
$
179.5
$
385.0
$
362.2
Amount of Commitment Expiration Per Period
2011 to
2013 to
2015 and
Total
2010
2012
2014
Beyond
Standby letters of credit and similar instruments
$
9.3
$
9.3
$
—
$
—
$
—
Guarantees
74.1
64.3
9.0
0.8
—
Total commercial commitments and letters of credit
$
83.4
$
73.6
$
9.0
$
0.8
$
—
(1)
Estimated interest payments are
calculated assuming current interest rates over minimum maturity
periods specified in debt agreements. Debt may be repaid sooner
or later than such minimum maturity periods. Indebtedness
amounts reflect the principal amount of our convertible senior
subordinated notes.
(2)
Other short-term and long-term
obligations include estimates of future minimum contribution
requirements under our U.S. and
non-U.S.
defined benefit pension and postretirement plans. These
estimates are based on current legislation in the countries we
operate within and are subject to change. Other short-term and
long-term obligations also include income tax liabilities
related to uncertain income tax positions connected with ongoing
income tax audits in various jurisdictions. In addition,
short-term obligations include amounts due to financial
institutions related to sales of certain receivables that did
not meet the off-balance sheet criteria.
We maintain a remarketing agreement with AGCO Finance LLC and
AGCO Finance Canada Ltd., our retail finance joint ventures in
North America, whereby we are obligated to repurchase
repossessed inventory at market values. We have an agreement
with AGCO Finance LLC which limits our purchase obligations
under this arrangement to $6.0 million in the aggregate per
calendar year. We believe that any losses that might be incurred
on the resale of this equipment will not materially impact our
financial position or results of operations, due to the fair
value of the underlying equipment.
At December 31, 2009, we guaranteed indebtedness owed to
third parties of approximately $74.1 million, primarily
related to dealer and end-user financing of equipment. Such
guarantees generally obligate us to repay outstanding finance
obligations owed to financial institutions if dealers or end
users default on such loans through 2014. We believe the credit
risk associated with these guarantees is not material to our
financial position. Losses under such guarantees have
historically been insignificant. In addition, we would be able
to recover any amounts paid under such guarantees from the sale
of the underlying financed farm equipment, as the fair value of
such equipment would be sufficient to offset a substantial
portion of the amounts paid.
Other
At December 31, 2009, we had outstanding foreign exchange
contracts with a gross notional amount of approximately
$1,247.7 million. The outstanding contracts as of
December 31, 2009 range in maturity through December 2010.
Gains and losses on such contracts are historically
substantially offset by losses and gains on the exposures being
hedged. See “Foreign Currency Risk Management” for
additional information.
As discussed in “Liquidity and Capital Resources,” we
sell substantially all of our wholesale accounts receivable in
North America to our U.S. and Canadian retail finance joint
ventures, we sell certain accounts receivable under our European
securitization facility and we sell certain accounts receivable
under factoring arrangements to financial institutions around
the world. We evaluate the sale of such receivables pursuant to
the guidelines of Accounting Standards Codification
(“ASC”) 860, “Transfers and Servicing,”
(“ASC 860”), and have determined that these facilities
should be accounted for as off-balance sheet transactions.
Contingencies
As a result of Brazilian tax legislation impacting value added
taxes (“VAT”), we have recorded a reserve of
approximately $11.6 million and $13.9 million against
our outstanding balance of Brazilian VAT taxes receivable as of
December 31, 2009 and 2008, respectively, due to the
uncertainty as to our ability to collect the amounts outstanding.
In February 2006, we received a subpoena from the SEC in
connection with a non-public, fact-finding inquiry entitled
“In the Matter of Certain Participants in the Oil for Food
Program.” We settled the matter with the SEC and DOJ, as
well as with the Danish government, in September 2009. In June
2008, the Republic of Iraq filed a civil action against three of
our foreign subsidiaries that participated in the United Nations
Oil for Food Program. In August 2008, as part of a routine
audit, the Brazilian taxing authorities disallowed deductions
relating to the amortization of certain goodwill recognized in
connection with a reorganization of our Brazilian operations and
the related transfer of certain assets to our Brazilian
subsidiaries. See Note 12 to our Consolidated Financial
Statements for further discussion of these matters.
Related
Parties
Rabobank is a 51% owner in our retail finance joint ventures,
which are located in the United States, Canada, Brazil, Germany,
France, the United Kingdom, Australia, Ireland and Austria.
Rabobank is also the principal agent and participant in our
revolving credit facility and our European securitization
facility. The majority of the assets of our retail finance joint
ventures represent finance receivables. The majority of the
liabilities represent notes payable and accrued interest. Under
the various joint venture agreements, Rabobank or its affiliates
provide financing to the joint venture companies, primarily
through lines of credit. We do not
guarantee the debt obligations of the retail finance joint
ventures other than a portion of the retail portfolio in Brazil
that is held outside the joint venture by Rabobank Brazil. Prior
to 2005, our joint venture in Brazil had an agency relationship
with Rabobank whereby Rabobank provided the funding. In February
2005, we made a $21.3 million investment in our retail
finance joint venture with Rabobank Brazil. With the additional
investment, the joint venture’s organizational structure is
now more comparable to our other retail finance joint ventures
and will result in the gradual elimination of our solvency
guarantee to Rabobank for the portfolio that was originally
funded by Rabobank Brazil. As of December 31, 2009, the
solvency requirement for the portfolio held by Rabobank was
approximately $3.7 million.
Our retail finance joint ventures provide retail financing and
wholesale financing to our dealers. The terms of the financing
arrangements offered to our dealers are similar to arrangements
they provide to unaffiliated third parties. In addition, we
transfer, on an ongoing basis, substantially all of our
wholesale interest-bearing and non-interest bearing accounts
receivable in North America to AGCO Finance LLC and AGCO Finance
Canada, Ltd., our retail finance joint ventures in North
America. See Note 4 to our Consolidated Financial
Statements for further discussion of these agreements. We
maintain a remarketing agreement with our U.S. retail
finance joint venture, AGCO Finance LLC, as discussed above
under “Commitments and Off-Balance Sheet
Arrangements.” In addition, as part of sales incentives
provided to end users, we may from time to time subsidize
interest rates of retail financing provided by our retail
finance joint ventures. The cost of those programs is recognized
at the time of sale to our dealers.
Foreign
Currency Risk Management
We have significant manufacturing operations in the United
States, France, Germany, Finland and Brazil, and we purchase a
portion of our tractors, combines and components from
third-party foreign suppliers, primarily in various European
countries and in Japan. We also sell products in over 140
countries throughout the world. The majority of our net sales
outside the United States are denominated in the currency of the
customer location, with the exception of sales in the Middle
East, Africa, Asia and parts of South America where net sales
are primarily denominated in British pounds, Euros or United
States dollars. See Note 14 to our Consolidated Financial
Statements for net sales by customer location. Our most
significant transactional foreign currency exposures are the
Euro, the Brazilian real and the Canadian dollar in relation to
the United States dollar, and the Euro in relation to the
British pound. Fluctuations in the value of foreign currencies
create exposures, which can adversely affect our results of
operations.
We attempt to manage our transactional foreign currency exposure
by hedging foreign currency cash flow forecasts and commitments
arising from the anticipated settlement of receivables and
payables and from future purchases and sales. Where naturally
offsetting currency positions do not occur, we hedge certain,
but not all, of our exposures through the use of foreign
currency contracts. Our translation exposure resulting from
translating the financial statements of foreign subsidiaries
into United States dollars is not hedged. Our most significant
translation exposures are the Euro, the British pound and the
Brazilian real in relation to the United States dollar.
When practical, this translation impact is reduced by financing
local operations with local borrowings. Our hedging policy
prohibits use of foreign currency contracts for speculative
trading purposes.
All derivatives are recognized on our Consolidated Balance
Sheets at fair value. On the date a derivative contract is
entered into, we designate the derivative as either (1) a
fair value hedge of a recognized liability, (2) a cash flow
hedge of a forecasted transaction, (3) a hedge of a net
investment in a foreign operation, or (4) a non-designated
derivative instrument. We currently engage in derivatives that
are cash flow hedges of forecasted transactions as well as
non-designated derivative instruments. Changes in the fair value
of non-designated derivative contracts are reported in current
earnings. During 2009, 2008 and 2007, we designated certain
foreign currency contracts as cash flow hedges of forecasted
sales and purchases. The effective portion of the fair value
gains or losses on these cash flow hedges are recorded in other
comprehensive income and subsequently reclassified into cost of
goods sold during the period the sales and purchases are
recognized. These amounts offset the effect of the changes in
foreign currency rates on the related sale and purchase
transactions. The amount of the (loss) gain recorded in other
comprehensive income (loss) that was reclassified to cost of
goods sold during the years ended December 31, 2009, 2008
and 2007 was approximately $(14.5) million,
$14.1 million and $4.1 million, respectively, on an
after-tax basis. The amount
of the (loss) gain recorded in other comprehensive income (loss)
related to the outstanding cash flow hedges as of
December 31, 2009, 2008 and 2007 was approximately
$(1.3) million, $(36.7) million and $7.7 million,
respectively, on an after-tax basis. The outstanding contracts
as of December 31, 2009 range in maturity through December
2010.
Generally, we have not required collateral from counterparties,
nor have we historically been asked to post collateral with
respect to hedging transactions, except that during 2009 and
2008, we deposited cash with a financial institution as security
against outstanding foreign currency contracts that matured
throughout 2009. As of December 31, 2008, the amount
deposited was approximately $33.8 million and was
classified as “Restricted cash” our Consolidated
Balance Sheets. This amount was recovered during 2009 as the
contracts matured. As of December 31, 2009, there were no
collateral requirements on any hedge transactions.
In previous years, we provided in our
Form 10-K
and
Form 10-Qs
a table that summarized all of our foreign currency contracts
used to hedge foreign currency exposures, which included
disclosure of notional amounts as well as fair value gains and
losses on such hedges denoted by foreign currency. Throughout
2009 and prospectively, we are disclosing market risk, as it
relates to our foreign currency exchange rate risk, using a
sensitivity model, through which we will analyze the impact on
all outstanding foreign currency contracts of a 10% change in
the applicable currency of the hedge contract. We believe this
provides better clarity of risk related to our foreign currency
instruments.
Assuming a 10% change relative to the currency of the hedge
contract, this could negatively impact the fair value of the
foreign currency instruments by approximately
$104.9 million as of December 31, 2009. Using the same
sensitivity analysis as of December 31, 2008, the fair
value of such instruments would have been negatively impacted by
approximately $119.0 million. Due to the fact that these
instruments are primarily entered into for hedging purposes, the
gains or losses on the contracts would be largely offset by
losses and gains on the underlying firm commitment or forecasted
transaction.
Interest
Rates
We manage interest rate risk through the use of fixed rate debt
and may in the future utilize interest rate swap contracts. We
have fixed rate debt from our senior subordinated notes and our
convertible senior subordinated notes. Our floating rate
exposure is related to our revolving credit facility and our
securitization facilities, which are tied to changes in United
States and European LIBOR rates. Assuming a 10% increase in
interest rates, interest expense, net and the cost of our
securitization facilities for the year ended December 31,2009 would have increased by approximately $1.6 million.
In June 2009, the Financial Accounting Standards Board (the
“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 167, “Amendments to
FASB Interpretation No. 46(R)”
(“SFAS No. 167”), as subsequently codified
under ASC 810, “Consolidation.” SFAS No. 167
amends FASB Interpretation No. 46(R), “Consolidation
of Variable Interest Entities,” to eliminate the
quantitative approach previously required for determining the
primary beneficiary of a variable interest entity and requires a
qualitative analysis to determine whether an enterprise’s
variable interest gives it a controlling financial interest in a
variable interest entity. This standard also requires ongoing
assessments of whether an enterprise is the primary beneficiary
of a variable interest entity. SFAS No. 167 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009. Earlier
adoption of SFAS No. 167 is prohibited. The adoption
of the standard will impact the consolidation of our joint
venture, GIMA. Refer to Note 1 to our Consolidated
Financial Statements for a further discussion of our GIMA joint
venture. We have completed a qualitative analysis of all of our
joint ventures, including our GIMA joint venture, and have
determined that we do not have a controlling financial interest
in GIMA based on the shared powers of both joint venture
partners to direct the activities that most significantly impact
GIMA’s financial performance. The deconsolidation of GIMA
will result in a prospective reclassification of
“Noncontrolling interests” within
equity to “Investments in affiliates” in our
Consolidated Balance Sheets of approximately $5.1 million.
We will reflect this reclassification during our first quarter
ended March 31, 2010. The deconsolidation will also result
in a reduction in our “Net sales” and “Income
from operations” within our Consolidated Statements of
Operations, but have no overall impact to our consolidated net
income, and will result in a reduction of our “Total
assets” and “Total liabilities” within our
Consolidated Balance Sheets, but have no net impact to our
“Total stockholders’ equity” other than the
reclassification previously mentioned.
In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets, an amendment
to SFAS No. 140, ‘Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities’ ” (“SFAS No. 166”),
as subsequently codified under ASC 860. SFAS No. 166
eliminates the concept of a qualifying special-purpose entity
(“QSPE”), changes the requirements for derecognizing
financial assets and requires additional disclosures in order to
enhance information reported to users of financial statements by
providing greater transparency about transfers of financial
assets, including securitization transactions, and an
entity’s continuing involvement in and exposure to the
risks related to transferred financial assets.
SFAS No. 166 is effective for fiscal years and interim
periods beginning after November 15, 2009. Earlier adoption
is prohibited. We have evaluated the impact of the adoption of
SFAS No. 166 on our accounts receivable securitization
facility in Europe, our new accounts receivable sales agreements
in the U.S. and Canada, as well as various other financing
facilities around the world (as are more fully described in
Note 4 to our Consolidated Financial Statements). Upon
adoption of SFAS No. 166, we will be required to
recognize accounts receivable sold through our European
securitization facility within our Consolidated Balance Sheets
with a corresponding liability equivalent to the funded balance
of the facility. The accounts receivable securitization facility
in Europe is approximately €140.0 million (or
approximately $200.6 million as of December 31, 2009).
See Note 1 to our Consolidated Financial Statements for
more information regarding other recent accounting
pronouncements.
Recent
Restructuring Actions
We recorded approximately $13.2 million of restructuring
and other infrequent expenses during 2009. These charges include
severance and other related costs associated with the
rationalization of our operations in France, the United Kingdom,
Finland, Germany , the United States and Denmark. Refer to
Note 3 of our Consolidated Financial Statements for a more
detailed description of these rationalizations.
European
and North American Manufacturing and Administrative Headcount
Reductions
During 2009 and January 2010, we announced and initiated several
actions to rationalize employee headcount at various
manufacturing facilities located in France, Finland, Germany and
the United States as well as at various administrative offices
located in the United Kingdom and the United States. The
headcount reductions were initiated in order to reduce costs and
SG&A expenses in response to softening global market demand
and reduced production volumes. We recorded approximately
$12.8 million of severance and other related costs
associated with such actions during 2009. The severance costs
recorded related to the termination of approximately
766 employees. Total cash restructuring costs associated
with the actions are expected to be approximately
$23.0 million to $25.0 million and such actions should
be completed during 2010. We estimate that the results of these
headcount reductions will generate annual savings within
SG&A expenses of approximately $16.0 million in 2010.
Savings associated with manufacturing employee headcount
reductions in future periods will be dependent on future
production volumes.
Randers,
Denmark closure
In November 2009, we announced our intention to close our
combine assembly operations located in Randers, Denmark. We
intend to cease operations in July 2010, and transfer such
assembly to our harvesting equipment manufacturing joint
venture, Laverda, located in Breganze, Italy. The land and
buildings associated with the Randers facility will be marketed
for sale after the assembly operations cease. Machinery,
equipment and tooling will either be transferred to Laverda or
one of our other manufacturing operations. The closure
will result in the termination of approximately
90 employees. We recorded approximately $0.4 million
of severance and other related costs in 2009 associated with the
facility closure. Employee retention payments paid to employees
who will remain employed until certain future termination dates
in 2010 will be accrued over the term of the retention period
commencing January 2010, and are expected to be approximately
$2.3 million. We anticipate savings associated with this
closure to be approximately $3.0 million commencing in 2011.
Critical
Accounting Estimates
We prepare our Consolidated Financial Statements in conformity
with U.S. generally accepted accounting principles. In the
preparation of these financial statements, we make judgments,
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. The significant accounting policies followed in the
preparation of the financial statements are detailed in
Note 1 to our Consolidated Financial Statements. We believe
that our application of the policies discussed below involves
significant levels of judgment, estimates and complexity.
Due to the level of judgment, complexity and period of time over
which many of these items are resolved, actual results could
differ from those estimated at the time of preparation of the
financial statements. Adjustments to these estimates would
impact our financial position and future results of operations.
Allowance
for Doubtful Accounts
We determine our allowance for doubtful accounts by actively
monitoring the financial condition of our customers to determine
the potential for any nonpayment of trade receivables. In
determining our allowance for doubtful accounts, we also
consider other economic factors, such as aging trends. We
believe that our process of specific review of customers
combined with overall analytical review provides an effective
evaluation of ultimate collectability of trade receivables. Our
loss or write-off experience was approximately 0.1% of net sales
in 2009.
Discount
and Sales Incentive Allowances
We provide various incentive programs with respect to our
products. These incentive programs include reductions in invoice
prices, reductions in retail financing rates, dealer
commissions, dealer incentive allowances and volume discounts.
In most cases, incentive programs are established and
communicated to our dealers on a quarterly basis. The incentives
are paid either at the time of invoice (through a reduction of
invoice price), at the time of the settlement of the receivable,
at the time of retail financing, at the time of warranty
registration, or at a subsequent time based on dealer purchases.
The incentive programs are product line specific and generally
do not vary by dealer. The cost of sales incentives associated
with dealer commissions and dealer incentive allowances is
estimated based upon the terms of the programs and historical
experience, is based on a percentage of the sales price, and is
recorded at the later of (a) the date at which the related
revenue is recognized, or (b) the date at which the sales
incentive is offered. The related provisions and accruals are
made on a product or product line basis and are monitored for
adequacy and revised at least quarterly in the event of
subsequent modifications to the programs. Volume discounts are
estimated and recognized based on historical experience, and
related reserves are monitored and adjusted based on actual
dealer purchases and the dealers’ progress towards
achieving specified cumulative target levels. We record the cost
of interest subsidy payments, which is a reduction in the retail
financing rates, at the later of (a) the date at which the
related revenue is recognized, or (b) the date at which the
sales incentive is offered. Estimates of these incentives are
based on the terms of the programs and historical experience.
All incentive programs are recorded and presented as a reduction
of revenue due to the fact that we do not receive an
identifiable benefit in exchange for the consideration provided.
Reserves for incentive programs that will be paid either through
the reduction of future invoices or through credit memos are
recorded as “accounts receivable allowances” within
our Consolidated Balance Sheets. Reserves for incentive programs
that will be paid in cash, as is the case with most of our
volume discount programs as well as sales incentives associated
with accounts
receivable sold to our U.S. and Canadian retail finance
joint ventures, are recorded within “Accrued expenses”
within our Consolidated Balance Sheets.
At December 31, 2009, we had recorded an allowance for
discounts and sales incentives of approximately
$97.5 million primarily related to reserves in our North
America geographical segment that will be paid either through a
reduction of future invoices or through credit memos to our
dealers. If we were to allow an additional 1% of sales
incentives and discounts at the time of retail sale, for those
sales subject to such discount programs, our reserve would
increase by approximately $5.7 million as of
December 31, 2009. Conversely, if we were to decrease our
sales incentives and discounts by 1% at the time of retail sale,
our reserve would decrease by approximately $5.7 million as
of December 31, 2009.
Inventory
Reserves
Inventories are valued at the lower of cost or market using the
first-in,
first-out method. Market is current replacement cost (by
purchase or by reproduction dependent on the type of inventory).
In cases where market exceeds net realizable value (i.e.,
estimated selling price less reasonably predictable costs of
completion and disposal), inventories are stated at net
realizable value. Market is not considered to be less than net
realizable value reduced by an allowance for an approximately
normal profit margin. Determination of cost includes estimates
for surplus and obsolete inventory based on estimates of future
sales and production. Changes in demand and product design can
impact these estimates. We periodically evaluate and update our
assumptions when assessing the adequacy of inventory adjustments.
Deferred
Income Taxes and Uncertain Income Tax Positions
A valuation allowance is established when it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. We establish valuation allowances for deferred tax
assets when we estimate it is more likely than not that the tax
assets will not be realized, and we periodically assess the
likelihood that our deferred tax assets will be recovered from
estimated future projected taxable income and available tax
planning strategies and determine if adjustments to the
valuation allowance are appropriate. As a result of these
assessments, there are certain tax jurisdictions where we do not
benefit further losses. Changes in industry conditions and the
competitive environment may impact the accuracy of our
projections.
At December 31, 2009 and 2008, we had gross deferred tax
assets of $485.0 million and $471.4 million,
respectively, including $215.0 million and
$210.8 million, respectively, related to net operating loss
carryforwards. At December 31, 2009 and 2008, we recorded
total valuation allowances as an offset to the gross deferred
tax assets of $261.7 million and $294.4 million,
respectively, primarily related to net operating loss
carryforwards in Brazil, Denmark, Switzerland, The Netherlands
and the United States. Realization of the remaining deferred tax
assets as of December 31, 2009 depends on generating
sufficient taxable income in future periods, net of reversing
deferred tax liabilities. We believe it is more likely than not
that the remaining net deferred tax assets will be realized.
At December 31, 2009 and 2008, we had approximately
$21.8 million and $20.1 million, respectively, of
unrecognized tax benefits, all of which would impact our
effective tax rate if recognized. As of December 31, 2009
and 2008, we had approximately $3.5 million and
$7.6 million, respectively, of current accrued taxes
related to uncertain income tax positions connected with ongoing
tax audits in various jurisdictions that we expect to settle or
pay in the next 12 months. We recognize interest and
penalties related to uncertain income tax positions in income
tax expense. As of December 31, 2009 and 2008, we had
accrued interest and penalties related to unrecognized tax
benefits of approximately $1.9 million and
$1.8 million, respectively. We maintain procedures designed
to appropriately reflect uncertain income tax positions in our
Consolidated Financial Statements. These procedures include the
evaluation of uncertainties both internally and, as necessary,
externally with third-party advisors. See Note 6 to our
Consolidated Financial Statements for further discussion of our
uncertain income tax positions.
We make provisions for estimated expenses related to product
warranties at the time products are sold. We base these
estimates on historical experience of the nature, frequency and
average cost of warranty claims. In addition, the number and
magnitude of additional service actions expected to be approved,
and policies related to additional service actions, are taken
into consideration. Due to the uncertainty and potential
volatility of these estimated factors, changes in our
assumptions could materially affect net income.
Our estimate of warranty obligations is reevaluated on a
quarterly basis. Experience has shown that initial data for any
product series line can be volatile; therefore, our process
relies upon long-term historical averages until sufficient data
is available. As actual experience becomes available, it is used
to modify the historical averages to ensure that the forecast is
within the range of likely outcomes. Resulting balances are then
compared with present spending rates to ensure that the accruals
are adequate to meet expected future obligations.
See Note 1 to our Consolidated Financial Statements for
more information regarding costs and assumptions for warranties.
Insurance
Reserves
Under our insurance programs, coverage is obtained for
significant liability limits as well as those risks required by
law or contract. It is our policy to self-insure a portion of
certain expected losses related primarily to workers’
compensation and comprehensive general, product liability and
vehicle liability. We provide insurance reserves for our
estimates of losses due to claims for those items for which we
are self-insured. We base these estimates on the expected
ultimate settlement amount of claims, which often have long
periods of resolution. We closely monitor the claims to maintain
adequate reserves.
Pensions
We sponsor defined benefit pension plans covering certain
employees principally in the United States, the United Kingdom,
Germany, Finland, Norway, France, Switzerland, Australia and
Argentina. Our primary plans cover certain employees in the
United States and the United Kingdom.
In the United States, we sponsor a funded, qualified pension
plan for our salaried employees, as well as a separate funded
qualified pension plan for our hourly employees. Both plans are
frozen, and we fund at least the minimum contributions required
under the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code to both plans. In addition, we sponsor
an unfunded, nonqualified pension plan for our executives.
In the United Kingdom, we sponsor a funded pension plan that
provides an annuity benefit based on participants’ final
average earnings and service. Participation in this plan is
limited to certain older, longer service employees and existing
retirees. No future employees will participate in this plan. See
Note 8 to our Consolidated Financial Statements for more
information regarding costs and assumptions for employee
retirement benefits.
Nature of Estimates Required. The measurement
of our pension obligations, costs and liabilities is dependent
on a variety of assumptions provided by management and used by
our actuaries. These assumptions include estimates of the
present value of projected future pension payments to all plan
participants, taking into consideration the likelihood of
potential future events such as salary increases and demographic
experience. These assumptions may have an effect on the amount
and timing of future contributions.
Assumptions and Approach Used. The assumptions
used in developing the required estimates include the following
key factors:
For the years ended December 31, 2009 and 2008, we based
the discount rate used to determine the projected benefit
obligation for our U.S. qualified pension plans and our
Executive Nonqualified Pension Plan by matching the projected
cash flows of our largest pension plan to the Citigroup Pension
Discount Curve. For our U.K. plan, we derived the discount rate
based on a yield curve developed from the constituents of the
Merrill Lynch AA-rated corporate bond index. The discount rate
for the U.K. plan is a single weighted-average rate based on the
approximate future cash flows of the plan. For countries within
the Euro Zone, we derived an AA-rated corporate bond yield curve
by selecting bonds included in the iBoxx corporate indices and
creating a discount rate curve based on a series of model cash
flows. Discount rates for each plan were then determined based
on each plan’s liability duration. The indices used in the
United States, the United Kingdom and other countries were
chosen to match our expected plan obligations and related
expected cash flows. As of December 31, 2009, the
measurement date with respect to our defined benefit plans is
December 31. ASC 715, “Compensation-Retirement
Benefits,” requires the measurement of all defined benefit
plan assets and obligations as of the date of our fiscal year
end for years ending after December 15, 2008, and,
therefore, the measurement date with respect to our U.K. pension
plan was changed from September 30 to December 31 upon adoption
of that measurement provision during 2008. Our inflation
assumption is based on an evaluation of external market
indicators. The salary growth assumptions reflect our long-term
actual experience, the near-term outlook and assumed inflation.
The expected return on plan asset assumptions reflects asset
allocations, investment strategy, historical experience and the
views of investment managers. Retirement and termination rates
are based primarily on actual plan experience and actuarial
standards of practice. The mortality rates for the
U.S. plans were updated during 2006 to reflect the most
recent study released by the Society of Actuaries, which
reflects pensioner experience and distinctions for blue and
white collar employees. The mortality rates for the U.K. plan
were updated in 2009 to reflect expected improvements in the
life expectancy of the plan participants. The effects of actual
results differing from our assumptions are accumulated and
amortized over future periods and, therefore, generally affect
our recognized expense in such periods.
Our U.S. and U.K. pension plans comprise approximately 89%
of our consolidated projected benefit obligation as of
December 31, 2009. If the discount rate used to determine
the 2009 projected benefit obligation for our U.S. pension
plans was decreased by 25 basis points, our projected
benefit obligation would have increased by approximately
$1.6 million at December 31, 2009, and our 2010
pension expense would increase by less than $0.1 million.
If the discount rate used to determine the 2009 projected
benefit obligation for our U.S. pension plans was increased
by 25 basis points, our projected benefit obligation would
have decreased by approximately $1.5 million, and our 2010
pension expense would decrease by less than $0.1 million.
If the discount rate used to determine the projected benefit
obligation for our U.K. pension plan was decreased by
25 basis points, our projected benefit obligation would
have increased by approximately $22.8 million at
December 31, 2009, and our 2010 pension expense would
increase by approximately $0.9 million. If the discount
rate used to determine the projected benefit obligation for our
U.K. pension plan was increased by 25 basis points, our
projected benefit obligation would have decreased by
approximately $21.8 million at December 31, 2009, and
our 2010 pension expense would decrease by approximately
$0.9 million.
Unrecognized actuarial losses related to our qualified pension
plans were $282.1 million as of December 31, 2009
compared to $186.1 million as of December 31, 2008.
The increase in unrecognized losses between years primarily
reflects a decrease in discount rates and the impact of foreign
currency translation. The unrecognized actuarial losses will be
impacted in future periods by actual asset returns, discount
rate changes, currency exchange rate fluctuations, actual
demographic experience and certain other factors. For some of
our qualified defined benefit pension plans, these losses will
be amortized on a straight-line basis over the average remaining
service period of active employees expected to receive benefits.
For our U.S. salaried, U.S. hourly and U.K. pension
plans, the population covered is predominantly inactive
participants, and losses related to those plans will be
amortized over the average remaining lives of those participants
while covered by the respective plan. As of December 31,2009, the average amortization period was 18 years for our
U.S. pension plans and 22 years for our
non — U.S. pension plans. The estimated net
actuarial loss for qualified defined benefit pension plans that
will be amortized from our accumulated other
comprehensive loss during the year ended December 31, 2010
is approximately $8.7 million compared to approximately
$6.5 million during the year ended December 31, 2009.
Investment
strategy and concentration of risk
The weighted average asset allocation of our U.S. pension
benefit plans at December 31, 2009 and 2008 are as follows:
Asset Category
2009
2008
Large and small cap domestic equity securities
24
%
24
%
International equity securities
15
%
11
%
Domestic fixed income securities
22
%
23
%
Other investments
39
%
42
%
Total
100
%
100
%
The weighted average asset allocation of our
non-U.S. pension
benefit plans at December 31, 2009 and 2008 are as follows:
Asset Category
2009
2008
Equity securities
39
%
39
%
Fixed income securities
35
%
33
%
Other investments
26
%
28
%
Total
100
%
100
%
All tax-qualified pension fund investments in the United States
are held in the AGCO Corporation Master Pension Trust. Our
global pension fund strategy is to diversify investments across
broad categories of equity and fixed income securities with
appropriate use of alternative investment categories to minimize
risk and volatility. The primary investment objective of our
pension plans is to secure participant retirement benefits. As
such, the key objective in the pension plans’ financial
management is to promote stability and, to the extent
appropriate, growth in funded status.
The investment strategy for the plans’ portfolio of assets
balances the requirement to generate returns with the need to
control risk. The asset mix is recognized as the primary
mechanism to influence the reward and risk structure of the
pension fund investments in an effort to accomplish the
plans’ funding objectives. The overall investment strategy
for the
U.S.-based
pension plans is to achieve a mix of approximately 20% of assets
for the near-term benefit payments and 80% for longer-term
growth. The overall U.S. pension funds invest in a broad
diversification of asset types. Our U.S. target allocation
of retirement fund investments is 35% large- and small- cap
domestic equity securities, 15% international equity securities,
20% broad fixed income securities, and 30% in alternative
investments. We have noted that over long investment horizons,
this mix of investments would achieve an average return in
excess of 8.5%. In arriving at the choice of an expected return
assumption of 8% for our
U.S.-based
plans, we have tempered this historical indicator with lower
expectation for returns and equity investment in the future as
well as the administrative costs of the plans. The overall
investment strategy for the
non-U.S. based
pension plans is to achieve a mix of approximately 28% of assets
for the near-term benefit payments and 72% for longer-term
growth. The overall
non-U.S. pension
funds invest in a broad diversification of asset types. Our
non-U.S. target
allocation of retirement fund investments is 40% equity
securities, 30% broad fixed income investments and 30% in
alternative investments. The majority of our
non-U.S. pension
fund investments are related to our pension plan in the United
Kingdom. We have noted that over very long periods, this mix of
investments would achieve an average return in excess of 7.5%.
In arriving at the choice of an expected return assumption of 7%
for our U.K.-based plans, we have tempered this historical
indicator with lower expectation for returns and equity
investment in the future as well as the administrative costs of
the plans.
Equity securities primarily include investments in large-cap and
small-cap companies located across the globe. Fixed income
securities include corporate bonds of companies from diversified
industries, mortgage-
backed securities, agency mortgages, asset-backed securities and
government securities. Alternative and other assets include
investments in hedge fund of funds that follow diversified
investment strategies. To date, we have not invested pension
funds in our own stock, and we have no intention of doing so in
the future.
Within each asset class, careful consideration is given to
balancing the portfolio among industry sectors, geographies,
interest rate sensitivity, dependence on economic growth,
currency and other factors affecting investment returns. The
assets are managed by professional investment firms. They are
bound by precise mandates and are measured against specific
benchmarks. Among assets managers, consideration is given, among
others, to balancing security concentration, issuer
concentration, investment style and reliance on particular
active investment strategies.
As of December 31, 2009, our unfunded or underfunded
obligations related to our qualified pension plans were
approximately $242.1 million, due primarily to our pension
plan in the United Kingdom. In 2009, we contributed
approximately $28.4 million towards those obligations, and
we expect to fund approximately $30.1 million in 2010.
Future funding is dependent upon compliance with local laws and
regulations and changes to those laws and regulations in the
future, as well as the generation of operating cash flows in the
future. We currently have an agreement in place with the
trustees of the U.K. defined benefit plan that obligates us to
fund approximately £13.0 million per year (or
approximately $21.2 million) towards that obligation for
the next 10 years. The funding arrangement is based upon
the current underfunded status and could change in the future as
discount rates, local laws and regulations, and other factors
change.
Other
Postretirement Benefits (Retiree Health Care and Life
Insurance)
We provide certain postretirement health care and life insurance
benefits for certain employees, principally in the United States
and Brazil. Participation in these plans has been generally
limited to older employees and existing retirees. See
Note 8 to our Consolidated Financial Statements for more
information regarding costs and assumptions for other
postretirement benefits.
Nature of Estimates Required. The measurement
of our obligations, costs and liabilities associated with other
postretirement benefits, such as retiree health care and life
insurance, requires that we make use of estimates of the present
value of the projected future payments to all participants,
taking into consideration the likelihood of potential future
events such as health care cost increases and demographic
experience, which may have an effect on the amount and timing of
future payments.
Assumptions and Approach Used. The assumptions
used in developing the required estimates include the following
key factors:
• Health care cost trends
• Inflation
• Discount rates
• Medical coverage elections
• Retirement rates
• Mortality rates
Our health care cost trend assumptions are developed based on
historical cost data, the near-term outlook, efficiencies and
other cost-mitigating actions, including further employee cost
sharing, administrative improvements and other efficiencies, and
an assessment of likely long-term trends. For the years ended
December 31, 2009 and 2008, we based the discount rate used
to determine the projected benefit obligation for our
U.S. postretirement benefit plans by matching the projected
cash flows of our largest pension plan to the Citigroup Pension
Discount Curve. For our Brazilian plan, we based the discount
rate on government bond indices within that country. The indices
used were chosen to match our expected plan obligations and
related expected cash flows. Our inflation assumptions are based
on an evaluation of external market indicators. Retirement and
termination rates are based primarily on actual plan experience
and actuarial standards of practice. The mortality rates for the
U.S. plans were updated during 2006 to reflect the most
recent study released by the Society of Actuaries, which
reflects pensioner experience and distinctions for blue and
white collar employees. The effects of actual results differing
from our assumptions are accumulated and amortized over future
periods and, therefore, generally affect our recognized expense
in such future periods.
Our U.S. postretirement health care and life insurance
plans represent approximately 97% of our consolidated projected
benefit obligation. If the discount rate used to determine the
2009 projected benefit
obligation for our U.S. postretirement benefit plans was
decreased by 25 basis points, our projected benefit
obligation would have increased by approximately
$0.7 million at December 31, 2009, and our 2010
postretirement benefit expense would increase by a nominal
amount. If the discount rate used to determine the 2009
projected benefit obligation for our U.S. postretirement
benefit plans was increased by 25 basis points, our
projected benefit obligation would have decreased by
approximately $0.7 million, and our 2010 pension expense
would decrease by a nominal amount.
Unrecognized actuarial losses related to our
U.S. postretirement benefit plans were $6.0 million as
of December 31, 2009 compared to $7.1 million as of
December 31, 2008. The decrease in losses primarily
reflects a more favorable claims experience during 2009. The
unrecognized actuarial losses will be impacted in future periods
by discount rate changes, actual demographic experience, actual
health care inflation and certain other factors.
These losses will be amortized on a straight-line basis over the
average remaining service period of active employees expected to
receive benefits, or the average remaining lives of inactive
participants, covered under the postretirement benefit plans. As
of December 31, 2009, the average amortization period was
14 years for our U.S. postretirement benefit plans.
The estimated net actuarial loss for postretirement health care
benefits that will be amortized from our accumulated other
comprehensive loss during the year ended December 31, 2010
is approximately $0.2 million, compared to approximately
$0.3 million during the year ended December 31, 2009.
As of December 31, 2009, we had approximately
$28.1 million in unfunded obligations related to our
U.S. and Brazilian postretirement health and life insurance
benefit plans. In 2009, we made benefit payments of
approximately $1.7 million towards these obligations, and
we expect to make benefit payments of approximately
$1.8 million towards these obligations in 2010.
For measuring the expected U.S. postretirement benefit
obligation at December 31, 2009, we assumed an 8.5% health
care cost trend rate for 2010, decreasing to 4.9% by 2060. For
measuring the Brazilian postretirement benefit plan obligation
at December 31, 2009, we assumed a 10.0% health care cost
trend rate for 2010, decreasing to 5.5% by 2019. Changing the
assumed health care cost trend rates by one percentage point
each year and holding all other assumptions constant would have
the following effect to service and interest cost for 2010 and
the accumulated postretirement benefit obligation at
December 31, 2009 (in millions):
One Percentage
One Percentage
Point Increase
Point Decrease
Effect on service and interest cost
$
0.2
$
(0.1
)
Effect on accumulated postretirement benefit obligation
$
3.0
$
(2.6
)
Litigation
We are party to various claims and lawsuits arising in the
normal course of business. We closely monitor these claims and
lawsuits and frequently consult with our legal counsel to
determine whether they may, when resolved, have a material
adverse effect on our financial position or results of
operations and accrue
and/or
disclose loss contingencies as appropriate.
Goodwill
and Indefinite-Lived Assets
We test goodwill and other indefinite-lived intangible assets
for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying value. Our initial
assessment and our annual assessments involve determining an
estimate of the fair value of our reporting units in order to
evaluate whether an impairment of the current carrying amount of
goodwill and other indefinite-lived intangible assets exists.
The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the fair
value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is not considered impaired, and thus the
second step of the impairment is unnecessary. If the carrying
amount of a reporting unit exceeds its fair value, the second
step of the goodwill impairment test is performed
to measure the amount of impairment loss, if any. Fair values
are derived based on an evaluation of past and expected future
performance of our reporting units. A reporting unit is an
operating segment or one level below an operating segment (e.g.,
a component). A component of an operating segment is a reporting
unit if the component constitutes a business for which discrete
financial information is available and our executive management
team regularly reviews the operating results of that component.
In addition, we combine and aggregate two or more components of
an operating segment as a single reporting unit if the
components have similar economic characteristics. Our reportable
segments are not our reporting units, with the exception of our
Asia/Pacific geographical segment.
The second step of the goodwill impairment test, used to measure
the amount of impairment loss, compares the implied fair value
of the reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill. The
implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination.
That is, we allocate the fair value of a reporting unit to all
of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of
the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied
fair value of goodwill.
We utilized a combination of valuation techniques, including a
discounted cash flow approach and a market multiple approach,
when making our annual and interim assessments. As stated above,
goodwill is tested for impairment on an annual basis and more
often if indications of impairment exist. The results of our
analyses conducted as of October 1, 2009, 2008 and 2007
indicated that no reduction in the carrying amount of goodwill
was required. The fair value of our reporting units was
substantially in excess of their carrying amounts for 2009, 2008
and 2007.
We make various assumptions including assumptions regarding
future cash flows, market multiples, growth rates and discount
rates. The assumptions about future cash flows and growth rates
are based on the current and long-term business plans of the
reporting unit. Discount rate assumptions are based on an
assessment of the risk inherent in the future cash flows of the
reporting unit. These assumptions require significant judgments
on our part and the conclusions that we reach could vary
significantly based upon these judgments.
As of December 31, 2009, we had approximately
$634.0 million of goodwill. While our annual impairment
testing in 2009 supported the carrying amount of this goodwill,
we may be required to reevaluate the carrying amount in future
periods, thus utilizing different assumptions that reflect the
then current market conditions and expectations, and, therefore,
we could conclude that an impairment has occurred.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
The Quantitative and Qualitative Disclosures about Market Risk
information required by this Item set forth under the captions
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Foreign Currency
Risk Management” and “— Interest Rates”
on pages 33 and 34 under Item 7 of this
Form 10-K
are incorporated herein by reference.
The following Consolidated Financial Statements of AGCO and its
subsidiaries for each of the years in the three-year period
ended December 31, 2009 are included in this Item:
We have audited the accompanying consolidated balance sheets of
AGCO Corporation and subsidiaries as of December 31, 2009
and 2008, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2009. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule as listed in Item 15(a)(2). These consolidated
financial statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of AGCO Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Notes 1 and 7, the Company changed its
methods of accounting for noncontrolling interests and
convertible debt instruments in 2009 due to the adoption of SFAS
No. 160, “Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51,
‘Consolidated Financial Statements,’ ’’
(incorporated into ASC Topic 810, “Consolidation”) and
FSP APB No. 14-1, “Accounting for Convertible Instruments
That May be Settled in Cash upon Conversion (including Partial
Cash Settlement),” (incorporated into ASC Topic 470,
“Debt”).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), AGCO
Corporation’s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 26, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Operations
and Summary of Significant Accounting Policies
Business
AGCO Corporation (“AGCO” or the “Company”)
is a leading manufacturer and distributor of agricultural
equipment and related replacement parts throughout the world.
The Company sells a full range of agricultural equipment,
including tractors, combines, hay tools, sprayers, forage
equipment and implements. The Company’s products are widely
recognized in the agricultural equipment industry and are
marketed under a number of well-known brand names including:
Challenger®,
Fendt®,
Massey
Ferguson®
and
Valtra®.
The Company distributes most of its products through a
combination of approximately 2,700 independent dealers and
distributors. In addition, the Company provides retail financing
in the United States, Canada, Brazil, Germany, France, the
United Kingdom, Australia, Ireland and Austria through its
retail finance joint ventures with Coöperative Centrale
Raiffeisen-Boerenleenbank B.A., or “Rabobank.”
Basis
of Presentation
The Consolidated Financial Statements represent the
consolidation of all wholly-owned companies, majority-owned
companies and joint ventures where the Company has been
determined to be the primary beneficiary under Accounting
Standard Codification (“ASC”) 810,
“Consolidation” (“ASC 810”). The Company
records investments in all other affiliate companies using the
equity method of accounting when it has significant influence.
Other investments including those representing an ownership of
less than 20% are recorded at cost. All significant intercompany
balances and transactions have been eliminated in the
Consolidated Financial Statements.
Joint
Ventures
The Company analyzed the provisions of ASC 810 as they relate to
the accounting for its investments in joint ventures and
determined that it is the primary beneficiary of one of its
joint ventures, GIMA. GIMA is a joint venture between AGCO and
Claas Tractor SAS (“Claas”) to cooperate in the field
of purchasing, design and manufacturing of components for
agricultural tractors. Each party has a 50% ownership in the
joint venture and has an investment of approximately
€4.2 million in the joint venture. Both parties
purchase all of the production output of the joint venture.
Purchases made by the Company from GIMA during 2009 were
approximately $211.0 million. In addition, the Company
charges GIMA with respect to the lease of a portion of its
facility in France and related utilities and for certain
administrative and back office support services. The amount paid
by GIMA to the Company for lease costs and support services
during 2009 was approximately $19.9 million. GIMA has
overdraft facilities with two third-party financial institutions
of up to €6.0 million (and no amounts were outstanding
with respect to the overdraft facilities as of December 31,2009). Such facilities are not secured by any of GIMA’s
assets, and neither joint venture partner provides a guarantee
with respect to the facilities. The joint venture partners
provide operating cash requirements to the joint venture on a
50/50 basis. Cash flow requirements are generally
structurally financed by the purchases of product by both
parties (on a cost plus basis) based upon the level of purchases
from both partners. Capital expenditures and additional
operating cash flow requirements by the joint venture are funded
on a 50/50 basis by the joint venture partners. There have been
no additional capital infusions into the joint venture since
inception. Per the joint venture agreement, both partners would
have to provide additional capital infusions if the joint
venture’s retained losses exceed more than half of its
share capital balance. This circumstance would be unlikely given
the structural setup of the joint venture and the financing of
the joint venture through purchases of all of its product by
both partners on a cost plus basis. In analyzing the provisions
of Financial Accounting Standards Board (“FASB”)
Interpretation No. 46(R), “Consolidation of Variable
Interest Entities,” (“FIN 46(R)”), the
Company determined that it was the primary beneficiary of the
joint venture due to the fact that the Company purchases a
majority of the production output, and thus absorbs a majority
of the gains or losses associated with the joint venture. The
equity interest of Claas is reported as a noncontrolling
interest and is included as a
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
component of equity in the accompanying Consolidated Balance
Sheets as of December 31, 2009 and 2008. Refer to
“Recent Accounting Pronouncements” regarding the
impact to the Company’s consolidation of GIMA for the year
ended December 31, 2010 pursuant to the adoption of
Statement of Financial Accounting Standards (“SFAS”)
No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS No. 167”), as
subsequently codified under ASC 810.
Rabobank is a 51% owner in the Company’s retail finance
joint ventures which are located in the United States, Canada,
Brazil, Germany, France, the United Kingdom, Australia, Ireland
and Austria. The majority of the assets of the Company’s
retail finance joint ventures represent finance receivables. The
majority of the liabilities represent notes payable and accrued
interest. Under the various joint venture agreements, Rabobank
or its affiliates provide financing to the joint venture
companies, primarily through lines of credit. The Company does
not guarantee the debt obligations of the retail finance joint
ventures other than an insignificant portion of the retail
portfolio in Brazil that is held outside the joint venture by
Rabobank Brazil (Note 13). The Company’s retail
finance joint ventures provide retail financing and wholesale
financing to its dealers. The terms of the financing
arrangements offered to the Company’s dealers are similar
to arrangements the retail finance joint ventures provide to
unaffiliated third parties. The Company maintains a remarketing
agreement with its U.S. retail finance joint venture, AGCO
Finance LLC (Note 12). In addition, as part of sales
incentives provided to end users, the Company may from time to
time subsidize interest rates of retail financing provided by
its retail joint ventures. In addition, the Company transfers
substantially all of its wholesale interest-bearing and
non-interest bearing receivables in North America to AGCO
Finance LLC and AGCO Finance Canada, Ltd., on an ongoing basis.
The transfer of the receivables is without recourse to the
Company, and the Company does not service the receivables. The
Company does not maintain any direct retained interest in the
receivables (Note 4). In analyzing the provisions of ASC
810, the Company determined that the retail finance joint
ventures did not meet the consolidation requirements and should
be accounted for under the voting interest model. In making this
determination, the Company evaluated the sufficiency of the
equity at risk for each retail finance joint venture, the
ability of the joint venture investors to make decisions about
the joint ventures’ activities that have a significant
effect on the success of the entities and their economic
performance, the obligations to absorb expected losses of the
joint ventures, and the rights to receive expected residual
returns.
Revenue
Recognition
Sales of equipment and replacement parts are recorded by the
Company when title and risks of ownership have been transferred
to an independent dealer, distributor or other customer. Payment
terms vary by market and product with fixed payment schedules on
all sales. The terms of sale generally require that a purchase
order or order confirmation accompany all shipments. Title
generally passes to the dealer or distributor upon shipment, and
the risk of loss upon damage, theft or destruction of the
equipment is the responsibility of the dealer, distributor or
third-party carrier. In certain foreign countries, the Company
retains a form of title to goods delivered to dealers until the
dealer makes payment so that the Company can recover the goods
in the event of customer default on payment. This occurs as the
laws of some foreign countries do not provide for a
seller’s retention of a security interest in goods in the
same manner as established in the United States Uniform
Commercial Code. The only right the Company retains with respect
to the title are those enabling recovery of the goods in the
event of customer default on payment. The dealer or distributor
may not return equipment or replacement parts while its contract
with the Company is in force. Replacement parts may be returned
only under promotional and annual return programs. Provisions
for returns under these programs are made at the time of sale
based on the terms of the program and historical returns
experience. The Company may provide certain sales incentives to
dealers and distributors. Provisions for sales incentives are
made at the time of sale for existing incentive programs. These
provisions are revised in the event of subsequent modification
to the incentive program. See “Accounts and Notes
Receivable” for further discussion.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the United States and Canada, all equipment sales to dealers
are immediately due upon a retail sale of the equipment by the
dealer. If not previously paid by the dealer in the United
States and Canada, installment payments are required generally
beginning after the interest-free period with the remaining
outstanding equipment balance generally due within
12 months after shipment. Interest generally is charged on
the outstanding balance six to 18 months after shipment.
Sales terms of some highly seasonal products provide for payment
and due dates based on a specified date during the year
regardless of the shipment date. Equipment sold to dealers in
the United States and Canada is paid in full on average within
12 months of shipment. Sales of replacement parts generally
are payable within 30 days of shipment with terms for some
larger seasonal stock orders generally requiring payment within
six months of shipment.
In other international markets, equipment sales are generally
payable in full within 30 to 180 days of shipment. Payment
terms for some highly seasonal products have a specified due
date during the year regardless of the shipment date. Sales of
replacement parts generally are payable within 30 to
90 days of shipment with terms for some larger seasonal
stock orders generally payable within six months of shipment.
In certain markets, particularly in North America, there is a
time lag, which varies based on the timing and level of retail
demand, between the date the Company records a sale and when the
dealer sells the equipment to a retail customer.
Foreign
Currency Translation
The financial statements of the Company’s foreign
subsidiaries are translated into United States currency in
accordance with ASC 830, “Foreign Currency Matters.”
Assets and liabilities are translated to United States dollars
at period-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the
period. Translation adjustments are included in
“Accumulated other comprehensive loss” in
stockholders’ equity. Gains and losses, which result from
foreign currency transactions, are included in the accompanying
Consolidated Statements of Operations.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The estimates made by
management primarily relate to accounts and notes receivable,
inventories, deferred income tax valuation allowances,
intangible assets and certain accrued liabilities, principally
relating to reserves for volume discounts and sales incentives,
warranty obligations, product liability and workers’
compensation obligations, and pensions and postretirement
benefits.
Cash
and Cash Equivalents
Cash at December 31, 2009 and 2008 of $328.6 million
and $92.3 million, respectively, consisted primarily of
cash on hand and bank deposits. The Company considers all
investments with an original maturity of three months or less to
be cash equivalents. Cash equivalents at December 31, 2009
and 2008 of $324.1 million and $419.9 million,
respectively, consisted primarily of money market deposits,
certificates of deposits and overnight investments.
Restricted
Cash
During 2009 and 2008, the Company deposited cash with a
financial institution as security against outstanding foreign
currency contracts that matured throughout 2009. As of
December 31, 2008, the amount deposited was approximately
$33.8 million and was classified as “Restricted
cash” in the Company’s
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Consolidated Balance Sheets. This amount was recovered during
2009 as the contracts matured. As of December 31, 2009,
there are no collateral requirements on any hedge transactions.
Accounts
and Notes Receivable
Accounts and notes receivable arise from the sale of equipment
and replacement parts to independent dealers, distributors or
other customers. Payments due under the Company’s terms of
sale generally range from one to 12 months and are not
contingent upon the sale of the equipment by the dealer or
distributor to a retail customer. Under normal circumstances,
payment terms are not extended and equipment may not be
returned. In certain regions, including the United States and
Canada, the Company is obligated to repurchase equipment and
replacement parts upon cancellation of a dealer or distributor
contract. These obligations are required by national, state or
provincial laws and require the Company to repurchase a dealer
or distributor’s unsold inventory, including inventory for
which the receivable has already been paid.
For sales in most markets outside of the United States, Canada
and a majority of markets in South America, the Company does not
normally charge interest on outstanding receivables with its
dealers and distributors. For sales to certain dealers or
distributors in the United States, Canada and a majority of
markets in South America, where approximately 37.9% of the
Company’s net sales were generated in 2009, interest is
charged at or above prime lending rates on outstanding
receivable balances after interest-free periods. These
interest-free periods vary by product and generally range from
one to 12 months, with the exception of certain seasonal
products, which bear interest after various periods up to
23 months depending on the time of year of the sale and the
dealer’s or distributor’s sales volume during the
preceding year. For the year ended December 31, 2009, 18.5%
and 2.9% of the Company’s net sales had maximum
interest-free periods ranging from one to six months and seven
to 12 months, respectively. Net sales with maximum
interest-free periods ranging from 13 to 23 months were
approximately 0.3% of the Company’s net sales during 2009.
Actual interest-free periods are shorter than above because the
equipment receivable from dealers or distributors in the United
States and Canada is due immediately upon sale of the equipment
to a retail customer. Under normal circumstances, interest is
not forgiven and interest-free periods are not extended. The
Company has an agreement to permit transferring, on an ongoing
basis, substantially all of it wholesale interest-bearing and
non-interest bearing accounts receivable in North America to its
U.S. and Canadian retail finance joint ventures. Upon
transfer, the receivables maintain standard payment terms,
including required regular principal payments on amounts
outstanding, and interest charges at market rates. Qualified
dealers may obtain additional financing through the
Company’s U.S. and Canadian retail finance joint
ventures at the joint ventures’ discretion.
The Company provides various incentive programs with respect to
its products. These incentive programs include reductions in
invoice prices, reductions in retail financing rates, dealer
commissions, dealer incentive allowances and volume discounts.
In most cases, incentive programs are established and
communicated to the Company’s dealers on a quarterly basis.
The incentives are paid either at the time of invoice (through a
reduction of invoice price), at the time of the settlement of
the receivable, at the time of retail financing, at the time of
warranty registration, or at a subsequent time based on dealer
purchases. The incentive programs are product line specific and
generally do not vary by dealer. The cost of sales incentives
associated with dealer commissions and dealer incentive
allowances is estimated based upon the terms of the programs and
historical experience, is based on a percentage of the sales
price, and is recorded at the later of (a) the date at
which the related revenue is recognized, or (b) the date at
which the sales incentive is offered. The related provisions and
accruals are made on a product or product line basis and are
monitored for adequacy and revised at least quarterly in the
event of subsequent modifications to the programs. Volume
discounts are estimated and recognized based on historical
experience, and related reserves are monitored and adjusted
based on actual dealer purchases and the dealers’ progress
towards achieving specified cumulative target levels. The
Company records the cost of interest subsidy payments, which is
a reduction in the retail financing rates, at the later of
(a) the date at which the related revenue is recognized, or
(b) the date at which the sales incentive is offered.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Estimates of these incentives are based on the terms of the
programs and historical experience. All incentive programs are
recorded and presented as a reduction of revenue due to the fact
that the Company does not receive an identifiable benefit in
exchange for the consideration provided. Reserves for incentive
programs that will be paid either through the reduction of
future invoices or through credit memos are recorded as
“accounts receivable allowances” within the
Company’s Consolidated Balance Sheet. Reserves for
incentive programs that will be paid in cash, as is the case
with most of the Company’s volume discount programs as well
as sales incentives associated with accounts receivable sold to
our U.S. and Canadian retail finance joint ventures, are
recorded within “Accrued expenses” within the
Company’s Consolidated Balance Sheet. As a result of the
Company’s new accounts receivable sales agreements in the
U.S. and Canada with AGCO Finance LLC and AGCO Finance
Canada, Ltd. entered into in December 2009, cash payments will
be made to the U.S. and Canadian retail finance joint
ventures related to outstanding accounts receivable sold. The
Company, therefore, reclassified sales inventive discount
reserves associated with these accounts receivable sold in
December 2009 from “accounts receivable allowances” to
“Accrued expenses” within the Company’s
Consolidated Balance Sheets. The balance of such sales discounts
reserves classified in “accrued expenses” was
approximately $94.5 million as of December 31, 2009.
Refer to Note 4 for further information.
Accounts and notes receivable are shown net of allowances for
sales incentive discounts available to dealers and for doubtful
accounts. Cash flows related to the collection of receivables
are reported within “Cash flows from operating
activities” within the Company’s Consolidated
Statements of Cash Flows. Accounts and notes receivable
allowances at December 31, 2009 and 2008 were as follows
(in millions):
2009
2008
Sales incentive discounts
$
3.0
$
125.1
Doubtful accounts
35.0
28.1
$
38.0
$
153.2
The Company transfers certain accounts receivable to various
financial institutions primarily under its accounts receivable
securitization facility in Europe and its accounts receivable
agreements with its retail finance joint ventures (Note 4).
The Company records such transfers as sales of accounts
receivable when it is considered to have surrendered control of
such receivables under the provisions of ASC 860,
“Transfers and Servicing” (“ASC 860”).
Inventories
Inventories are valued at the lower of cost or market using the
first-in,
first-out method. Market is current replacement cost (by
purchase or by reproduction dependent on the type of inventory).
In cases where market exceeds net realizable value (i.e.,
estimated selling price less reasonably predictable costs of
completion and disposal), inventories are stated at net
realizable value. Market is not considered to be less than net
realizable value reduced by an allowance for an approximately
normal profit margin. At December 31, 2009 and 2008, the
Company had recorded $90.5 million and $106.0 million,
respectively, as an adjustment for surplus and obsolete
inventories. These adjustments are reflected within
“Inventories, net.”
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash flows related to the sale of inventories are reported
within “Cash flows from operating activities” within
the Company’s Consolidated Statements of Cash Flows.
Property,
Plant and Equipment
Property, plant and equipment are recorded at cost, less
accumulated depreciation and amortization. Depreciation is
provided on a straight-line basis over the estimated useful
lives of ten to 40 years for buildings and improvements,
three to 15 years for machinery and equipment and three to
ten years for furniture and fixtures. Expenditures for
maintenance and repairs are charged to expense as incurred.
Property, plant and equipment, net at December 31, 2009 and
2008 consisted of the following (in millions):
2009
2008
Land
$
60.1
$
54.5
Buildings and improvements
363.1
297.3
Machinery and equipment
1,145.1
969.9
Furniture and fixtures
202.3
172.7
Gross property, plant and equipment
1,770.6
1,494.4
Accumulated depreciation and amortization
(827.6
)
(683.3
)
Property, plant and equipment, net
$
943.0
$
811.1
Goodwill
and Other Intangible Assets
ASC 350, “Intangibles — Goodwill and Other”
establishes a method of testing goodwill and other
indefinite-lived intangible assets for impairment on an annual
basis or on an interim basis if an event occurs or circumstances
change that would reduce the fair value of a reporting unit
below its carrying value. The Company’s annual assessments
involve determining an estimate of the fair value of the
Company’s reporting units in order to evaluate whether an
impairment of the current carrying amount of goodwill and other
indefinite-lived intangible assets exists. The first step of the
goodwill impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit
is not considered impaired, and thus the second step of the
impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of
impairment loss, if any. Fair values are derived based on an
evaluation of past and expected future performance of the
Company’s reporting units. A reporting unit is an operating
segment or one level below an operating segment, for example, a
component. A component of an operating segment is a reporting
unit if the component constitutes a business for which discrete
financial information is available and the Company’s
executive management team regularly reviews the operating
results of that component. In addition, the Company combines and
aggregates two or more components of an operating segment as a
single reporting unit if the components have similar economic
characteristics. The Company’s reportable segments are not
its reporting units, with the exception of its Asia/Pacific
geographical segment.
The second step of the goodwill impairment test, used to measure
the amount of impairment loss, compares the implied fair value
of the reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill. The
implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination.
That is, the Company allocates the fair value of a reporting
unit to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the price paid to
acquire the reporting unit. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill.
The Company utilizes a combination of valuation techniques,
including a discounted cash flow approach and a market multiple
approach, when making its annual and interim assessments. As
stated above, goodwill is tested for impairment on an annual
basis and more often if indications of impairment exist. The
results of the Company’s analyses conducted as of
October 1, 2009, 2008 and 2007 indicated that no reduction
in the carrying amount of goodwill was required.
Changes in the carrying amount of goodwill during the years
ended December 31, 2009, 2008 and 2007 are summarized as
follows (in millions):
During 2009, 2008 and 2007, the Company reduced goodwill for
financial reporting purposes by approximately $9.2 million,
$16.8 million and $7.7 million, respectively, related
to the realization of tax benefits associated with the excess
tax basis deductible goodwill resulting from the Company’s
acquisition of Valtra.
The Company amortizes certain acquired intangible assets
primarily on a straight-line basis over their estimated useful
lives, which range from three to 30 years. The acquired
intangible assets have a weighted average useful life as follows:
Weighted-Average
Intangible Asset
Useful Life
Trademarks and tradenames
30 years
Technology and patents
7 years
Customer relationships
10 years
For the years ended December 31, 2009, 2008 and 2007,
acquired intangible asset amortization was $18.0 million,
$19.1 million and $17.9 million, respectively. The
Company estimates amortization of existing intangible assets
will be $18.7 million for 2010, $11.3 million for
2011, $11.3 million for 2012, $11.2 million for 2013
and $1.1 million for 2014.
The Company has previously determined that two of its trademarks
have an indefinite useful life. The Massey Ferguson trademark
has been in existence since 1952 and was formed from the merger
of Massey-Harris (established in the 1890’s) and Ferguson
(established in the 1930’s). The Massey Ferguson brand is
currently sold in over 140 countries worldwide, making it one of
the most widely sold tractor brands in the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
world. The Company has also identified the Valtra trademark as
an indefinite-lived asset. The Valtra trademark has been in
existence since the late 1990’s, but is a derivative of the
Valmet trademark which has been in existence since 1951. Valtra
and Valmet are used interchangeably in the marketplace today and
Valtra is recognized to be the tractor line of the Valmet name.
The Valtra brand is currently sold in approximately
50 countries around the world. Both the Massey Ferguson
brand and the Valtra brand are primary product lines of the
Company’s business and the Company plans to use these
trademarks for an indefinite period of time. The Company plans
to continue to make investments in product development to
enhance the value of these brands into the future. There are no
legal, regulatory, contractual, competitive, economic or other
factors that the Company is aware of that the Company believes
would limit the useful lives of the trademarks. The Massey
Ferguson and Valtra trademark registrations can be renewed at a
nominal cost in the countries in which the Company operates.
Changes in the carrying amount of acquired intangible assets
during 2009 and 2008 are summarized as follows (in millions):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Long-Lived
Assets
During 2009, 2008 and 2007, the Company reviewed its long-lived
assets for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may
not be recoverable. Under ASC 360, an impairment loss is
recognized when the undiscounted future cash flows estimated to
be generated by the asset to be held and used are not sufficient
to recover the unamortized balance of the asset. An impairment
loss would be recognized based on the difference between the
carrying values and estimated fair value. The estimated fair
value is determined based on either the discounted future cash
flows or other appropriate fair value methods with the amount of
any such deficiency charged to income in the current year. If
the asset being tested for recoverability was acquired in a
business combination, intangible assets resulting from the
acquisition that are related to the asset are included in the
assessment. Estimates of future cash flows are based on many
factors, including current operating results, expected market
trends and competitive influences. The Company also evaluates
the amortization periods assigned to its intangible assets to
determine whether events or changes in circumstances warrant
revised estimates of useful lives. Assets to be disposed of by
sale are reported at the lower of the carrying amount or fair
value, less estimated costs to sell.
Accrued
Expenses
Accrued expenses at December 31, 2009 and 2008 consisted of
the following (in millions):
2009
2008
Reserve for volume discounts and sales incentives
$
264.6
$
169.8
Warranty reserves
161.8
164.3
Accrued employee compensation and benefits
144.4
183.9
Accrued taxes
112.8
135.9
Other
151.2
145.9
$
834.8
$
799.8
Warranty
Reserves
The warranty reserve activity for the years ended
December 31, 2009, 2008 and 2007 consisted of the following
(in millions):
2009
2008
2007
Balance at beginning of the year
$
183.4
$
167.1
$
136.9
Accruals for warranties issued during the year
141.6
170.3
148.5
Settlements made (in cash or in kind) during the year
(150.9
)
(142.8
)
(129.9
)
Foreign currency translation
7.5
(11.2
)
11.6
Balance at the end of the year
$
181.6
$
183.4
$
167.1
The Company’s agricultural equipment products are generally
under warranty against defects in material and workmanship for a
period of one to four years. The Company accrues for future
warranty costs at the time of sale based on historical warranty
experience. Approximately $19.8 million and
$19.1 million of warranty reserves are included in
“Other noncurrent liabilities” in the Company’s
Consolidated Balance Sheet as of December 31, 2009 and
2008, respectively.
Insurance
Reserves
Under the Company’s insurance programs, coverage is
obtained for significant liability limits as well as those risks
required to be insured by law or contract. It is the policy of
the Company to self-insure a portion
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of certain expected losses related primarily to workers’
compensation and comprehensive general, product and vehicle
liability. Provisions for losses expected under these programs
are recorded based on the Company’s estimates of the
aggregate liabilities for the claims incurred.
Stock
Incentive Plans
Stock compensation expense was recorded as follows (in
millions). Refer to Note 10 for additional information
regarding the Company’s stock incentive plans during 2009,
2008 and 2007:
Research and development expenses are expensed as incurred and
are included in engineering expenses in the Company’s
Consolidated Statements of Operations.
Advertising
Costs
The Company expenses all advertising costs as incurred.
Cooperative advertising costs are normally expensed at the time
the revenue is earned. Advertising expenses for the years ended
December 31, 2009, 2008 and 2007 totaled approximately
$51.5 million, $65.6 million and $52.5 million,
respectively.
Shipping
and Handling Expenses
All shipping and handling fees charged to customers are included
as a component of net sales. Shipping and handling costs are
included as a part of cost of goods sold, with the exception of
certain handling costs included in selling, general and
administrative expenses in the amount of $26.3 million,
$25.7 million and $22.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Interest
Expense, Net
Interest expense, net for the years ended December 31,2009, 2008 and 2007 consisted of the following (in millions):
2009
2008
2007
Interest expense
$
65.7
$
67.4
$
63.9
Interest income
(22.4
)
(34.2
)
(26.4
)
$
43.3
$
33.2
$
37.5
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Net
Income Per Common Share
Basic income per common share is computed by dividing net income
by the weighted average number of common shares outstanding
during each period. Diluted income per common share assumes
exercise of outstanding stock options, vesting of restricted
stock and performance share awards, and the appreciation of the
excess conversion value of the contingently convertible senior
subordinated notes using the treasury stock method when the
effects of such assumptions are dilutive.
The Company’s $201.3 million aggregate principal
amount of
13/4%
convertible senior subordinated notes and its
$201.3 million aggregate principal amount of
11/4%
convertible senior subordinated notes provide for (i) the
settlement upon conversion in cash up to the principal amount of
the converted notes with any excess conversion value settled in
shares of the Company’s common stock, and (ii) the
conversion rate to be increased under certain circumstances if
the new notes are converted in connection with certain change of
control transactions. Dilution of weighted shares outstanding
will depend on the Company’s stock price for the excess
conversion value using the treasury stock method (Note 7).
A reconciliation of net income attributable to AGCO Corporation
and its subsidiaries and weighted average common shares
outstanding for purposes of calculating basic and diluted income
per share during the years ended December 31, 2009, 2008
and 2007 is as follows (in millions, except per share data):
2009
2008
2007
Basic net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
135.7
$
385.9
$
232.9
Weighted average number of common shares outstanding
92.2
91.7
91.5
Basic net income per share attributable to AGCO Corporation and
subsidiaries
$
1.47
$
4.21
$
2.55
Diluted net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
135.7
$
385.9
$
232.9
Weighted average number of common shares outstanding
92.2
91.7
91.5
Dilutive stock options, performance share awards and restricted
stock awards
0.4
0.4
0.3
Weighted average assumed conversion of contingently convertible
senior subordinated notes
1.5
5.6
4.8
Weighted average number of common and common share equivalents
outstanding for purposes of computing diluted income per share
94.1
97.7
96.6
Diluted net income per share attributable to AGCO and
subsidiaries
$
1.44
$
3.95
$
2.41
Stock-settled stock appreciation rights (“SSARs”) to
purchase 0.3 million and 0.4 million shares for the
years ended December 31, 2009 and 2008, respectively, were
outstanding but not included in the calculation of weighted
average common and common equivalent shares outstanding because
they had an antidilutive impact.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Comprehensive
Income (Loss)
The Company reports comprehensive income (loss), defined as the
total of net income (loss) and all other non-owner changes in
equity and the components thereof in its Consolidated Statements
of Stockholders’ Equity. The components of other
comprehensive income (loss) and the related tax effects for the
years ended December 31, 2009, 2008 and 2007 are as follows
(in millions):
The carrying amounts reported in the Company’s Consolidated
Balance Sheets for “Cash and cash equivalents,”“Accounts and notes receivable” and “Accounts
payable” approximate fair value due to the immediate or
short-term maturity of these financial instruments. The carrying
amount of long-term debt under the Company’s credit
facility (Note 7) approximates fair value based on the
borrowing rates currently available to the Company for loans
with similar terms and average maturities. At December 31,2009, the estimated fair values of the Company’s
67/8% senior
subordinated notes,
13/4%
convertible notes (Note 7) and
11/4%
convertible notes (Note 7), based on their listed market
values, were $272.2 million, $300.8 million and
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$211.3 million, respectively, compared to their carrying
values of $286.5 million, $193.0 million and
$167.5 million, respectively. At December 31, 2008,
the estimated fair values of the Company’s
67/8% senior
subordinated notes,
13/4%
convertible notes (Note 7) and
11/4%
convertible notes (Note 7), based on their listed market
values, were $171.5 million, $230.4 million and
$145.4 million, respectively, compared to their carrying
values of $279.4 million, $185.3 million and
$160.3 million, respectively.
The Company uses foreign currency contracts to hedge the foreign
currency exposure of certain receivables and payables. The
contracts are for periods consistent with the exposure being
hedged and generally have maturities of one year or less. These
contracts are classified as non-designated derivative
instruments. The Company also enters into foreign currency
contracts designated as cash flow hedges of expected sales. At
December 31, 2009 and 2008, the Company had foreign
currency contracts outstanding with gross notional amounts of
$1,247.7 million and $807.5 million,
respectively. The Company had unrealized gains (losses) of
approximately $12.9 million and $(27.2) million on
foreign currency contracts at December 31, 2009 and 2008,
respectively. At December 31, 2009 and 2008, approximately
$11.3 million and $20.7 million, respectively, of
unrealized gains were reflected in the Company’s results of
operations, as the gains related to non-designated contracts.
The Company’s foreign currency contracts mitigate risk due
to exchange rate fluctuations because gains and losses on these
contracts generally offset gains and losses on the exposure
being hedged. The Company had $1.4 million and
$54.1 million of unrealized losses as of December 31,2009 and 2008, respectively, related to designated cash flow
hedges that were reflected in other comprehensive loss. Refer to
Note 11 for further information.
The notional amounts of the foreign currency contracts do not
represent amounts exchanged by the parties and therefore are not
a measure of the Company’s risk. The amounts exchanged are
calculated on the basis of the notional amounts and other terms
of the contracts. The credit and market risks under these
contracts are not considered to be significant. The
Company’s hedging policy prohibits it from entering into
any foreign currency contracts for speculative trading purposes.
Recent
Accounting Pronouncements
In June 2009, the FASB issued ASC 105, “Generally Accepted
Accounting Principles” (“ASC 105”), which
stipulates that the FASB Accounting Standards Codification is
the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. ASC 105 is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of
ASC 105 did not have an impact on the Company’s
consolidated financial position or results of operations.
In June 2009, the FASB issued SFAS No. 167, as
subsequently codified under ASC 810. SFAS No. 167
amends FIN 46(R) to eliminate the quantitative approach
previously required for determining the primary beneficiary of a
variable interest entity and requires a qualitative analysis to
determine whether an enterprise’s variable interest gives
it a controlling financial interest in a variable interest
entity. This standard also requires ongoing assessments of
whether an enterprise is the primary beneficiary of a variable
interest entity. SFAS No. 167 is effective for
financial statements issued for fiscal years and interim periods
beginning after November 15, 2009. Earlier adoption of
SFAS No. 167 is prohibited. The adoption of the
standard will impact the consolidation of our joint venture,
GIMA. The Company has completed a qualitative analysis of all of
its joint ventures, including its GIMA joint venture, and has
determined that the Company does not have a controlling
financial interest in GIMA based on the shared powers of both
joint venture partners to direct the activities that most
significantly impact GIMA’s financial performance. The
deconsolidation of GIMA will result in a prospective
reclassification of “Noncontrolling interests” within
equity to “Investments in affiliates” in the
Company’s Consolidated Balance Sheets of approximately
$5.1 million. The Company will reflect this
reclassification during our first quarter ended March 31,2010. The deconsolidation will also result in a reduction in the
Company’s “Net sales” and “Income from
operations” within its Consolidated Statements of
Operations, but have no overall impact to the Company’s
consolidated net income, and will result in a
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reduction of the Company’s “Total assets” and
“Total liabilities” within its Consolidated Balance
Sheets, but have no net impact to the Company’s “Total
stockholders’ equity” other than the reclassification
previously mentioned.
In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets, an amendment
to SFAS No. 140, ‘Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities’ ” (“SFAS No. 166”),
as subsequently codified under ASC 860, “Transfers and
Servicing.” SFAS No. 166 eliminates the concept
of a qualifying special-purpose entity (“QSPE”),
changes the requirements for derecognizing financial assets and
requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater
transparency about transfers of financial assets, including
securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred
financial assets. SFAS No. 166 is effective for fiscal
years and interim periods beginning after November 15,2009. Earlier adoption is prohibited. The Company has evaluated
the impact of the adoption of SFAS No. 166 on its
accounts receivable securitization facility in Europe, its new
accounts receivable sales agreements in the U.S. and
Canada, as well as various other financing facilities around the
world (as are more fully described in Note 4). Upon
adoption of SFAS No. 166, the Company will be required
to recognize accounts receivable sold through its European
securitization facility within the Company’s Consolidated
Balance Sheets with a corresponding liability equivalent to the
funded balance of the facility. The accounts receivable
securitization facility in Europe is approximately
€140.0 million (or approximately $200.6 million
as of December 31, 2009).
In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events,”
(“SFAS No. 165”), as included in ASC
855-10-50.
SFAS No. 165 provides guidance on management’s
assessment of subsequent events and incorporates this guidance
into accounting literature. The Standard is effective
prospectively for interim and annual periods ending after
June 15, 2009. The implementation of SFAS No. 165
did not have an impact on the Company’s financial position
or results of operations. The Company evaluated subsequent
events through February 26, 2010.
In April 2009, the FASB issued FASB Staff Position
(“FSP”)
SFAS No. 157-4,
“Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly”
(“FSP
SFAS 157-4”).
FSP
SFAS 157-4,
as included in ASC 820, “Fair Value Measurements and
Disclosures,” provides additional guidance for estimating
fair value when the volume and level of activity for the asset
or liability have significantly decreased in relation to normal
market activity. Additionally, FSP
SFAS 157-4
provides guidance on identifying circumstances that indicate a
transaction is not orderly. FSP
SFAS 157-4
requires interim disclosures of the inputs and valuation
techniques used to measure fair value reflecting changes in the
valuation techniques and related inputs. FSP
SFAS 157-4
is effective for interim and annual reporting periods ending
after June 15, 2009 and is to be applied prospectively. The
adoption of FSP
SFAS 157-4
did not have an impact on the Company’s results of
operations or financial position.
In April 2009, the FASB issued FSP
SFAS No. 107-1
and Accounting Principles Board (“APB”)
No. 28-1,
“Interim Disclosures about Fair Value of Financial
Instruments” (“FSP
SFAS 107-1
and
APB 28-1”).
FSP
FAS 107-1
and APB
28-1, as
included in ASC
825-10-50,
“Financial Instruments,” requires disclosures about
fair value of financial instruments not measured on the balance
sheet at fair value in interim and annual financial statements.
Prior to the FSP, fair value for these assets and liabilities
was only disclosed annually. FSP
FAS 107-1
and APB 28-1
applies to all financial instruments within the scope of
SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires all entities to
disclose the methods and significant assumptions used to
estimate the fair value of financial instruments. FSP
FAS 107-1
and APB 28-1
is effective for interim periods ending after June 15,2009. In periods after initial adoption, the FSP requires
comparative disclosures only for periods ending after initial
adoption. The adoption
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of FSP
FAS 107-1
and APB 28-1
did not have an impact on the Company’s results of
operations or financial position.
In December 2008, the FASB affirmed FSP
SFAS No. 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP
SFAS 132(R)-1”). FSP FAS 132(R)-1, as included in
ASC 715-20-50,
“Compensation-Retirement Benefits,” requires
additional disclosures about assets held in an employer’s
defined benefit pension or postretirement plan, primarily
related to categories and fair value measurements of plan
assets. FSP FAS 132(R)-1 is effective for fiscal years
ending after December 15, 2009. The Company adopted the
disclosure requirements for its fiscal year ended
December 31, 2009.
In May 2008, the FASB issued FSP APB
No. 14-1,
“Accounting for Convertible Debt Instruments That May be
Settled in Cash upon Conversion (including Partial Cash
Settlement)” (“FSP APB
14-1”).
The FSP, as included in ASC
470-20,
“Debt,” requires that the liability and equity
components of convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement),
commonly referred to as an Instrument C under Emerging Issues
Task Force Issue
No. 90-19,
“Convertible Bonds with Issuer Options to Settle for Cash
upon Conversion,” be separated to account for the fair
value of the debt and equity components as of the date of
issuance to reflect the issuer’s nonconvertible debt
borrowing rate. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008
and is to be applied retrospectively to all periods presented
(retroactive restatement) pursuant to the guidance in ASC 250,
“Accounting Changes and Error Corrections.” The
adoption of the FSP on January 1, 2009 impacted the
accounting treatment of the Company’s
13/4%
convertible senior subordinated notes due 2033 and its
11/4%
convertible senior subordinated notes due 2036 by reclassifying
a portion of the convertible notes balances to additional
paid-in capital representing the estimated fair value of the
conversion feature as of the date of issuance and creating a
discount on the convertible notes that will be amortized through
interest expense over the lives of the convertible notes. The
resulting amortization resulted in a significant increase in
interest expense and, therefore, reduced net income and basic
and diluted earnings per share within the Company’s
Consolidated Statements of Operations. On January 1, 2009,
the Company reduced its “Retained earnings” and
convertible senior subordinated notes balance included within
“Long-term debt” by approximately $37.2 million
and $57.0 million, respectively, and increased its
“Additional paid-in capital” balance by approximately
$94.2 million. Due to a tax valuation allowance established
in the United States, there was no deferred tax impact upon
adoption. In accordance with the provisions of FSP APB
14-1, prior
periods have been retroactively restated to reflect the adoption
of the standard (Note 7).
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161, as
included in ASC 815, “Derivatives and Hedging,”
is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their
effects on an entity’s financial position, financial
performance and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company
adopted SFAS No. 161 on January 1, 2009.
Effective January 1, 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an Amendment of ARB No. 51
‘Consolidated Financial Statements,’ ’’
as included in ASC 810. In accordance with ASC 810, the Company
reports all noncontrolling interests as “equity”
within its Consolidated Balance Sheets. Upon adoption, the
Company reclassified approximately $6.0 million and
$5.6 million related to its GIMA joint venture from
“Other noncurrent liabilities” to a component of
equity within the Company’s Consolidated Balance Sheets for
the years ended December 31, 2008 and 2007, respectively.
The Company has disclosed net income for both AGCO and its
subsidiaries and its noncontrolling interests within the
Company’s Consolidated Statements of Operations. The
calculation of earnings per share is based on amounts
attributable to AGCO Corporation and its subsidiaries.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2. Acquisition
On September 10, 2007, the Company acquired Industria
Agricola Fortaleza Limitada (“SFIL”), a Brazilian
company, for approximately 38.0 million Brazilian Reais (or
approximately $20.0 million). In accordance with the
purchase agreement, cash of approximately 5.2 million
Brazilian reais (or approximately $2.7 million) was placed
in escrow on the date of acquisition. This portion of the
purchase price was established to fund certain disclosed
contingent obligations and to compensate the Company for
potential customer bad debt losses. During 2009 and 2008, a
portion of the escrowed funds was released to the sellers due to
the resolution of certain contingencies and the collection of
outstanding accounts receivable. The balance of escrowed funds
as of December 31, 2009 and 2008 was approximately
$1.6 million and $1.8 million, respectively. The
escrowed funds are reflected within “Other current
assets” and “Other assets” in the Company’s
Consolidated Balance Sheet as of December 31, 2009 and
2008. SFIL is located in Ibirubá, Rio Grande do Sul, Brazil
and manufactures and distributes a line of farm implements,
including drills, planters, corn headers and front loaders. The
acquisition was financed with available cash on hand.
3.
Restructuring
and Other Infrequent Expenses (Income)
The Company recorded restructuring and other infrequent expenses
(income) of $13.2 million, $0.2 million and
$(2.3) million for the years ended December 31, 2009,
2008 and 2007, respectively. The charges in 2009 primarily
related to severance and other related costs associated with the
Company’s rationalization of its operations in France, the
United Kingdom, Finland, Germany, the United States and Denmark.
The charges in 2008 primarily related to severance and employee
relocation costs associated with the Company’s
rationalization of its Valtra sales office located in France.
The income in 2007 primarily related to a $3.2 million gain
on the sale of a portion of the buildings, land and improvements
associated with the Company’s Randers, Denmark facility.
The gain was partially offset by $0.9 million of severance,
employee relocation and other facility closure costs associated
with the rationalization of the Company’s Valtra sales
office located in France as well as the rationalization of
certain parts, sales and marketing and administrative functions
in Germany.
European
and North American Manufacturing and Administrative Headcount
Reductions
During 2009 and January 2010, the Company announced and
initiated several actions to rationalize employee headcount at
various manufacturing facilities located in France, Finland,
Germany and the United States as well as at various
administrative offices located in the United Kingdom and the
United States. The headcount reductions were initiated in order
to reduce costs and selling, general and administrative expenses
in response to softening global market demand and reduced
production volumes. The Company recorded approximately
$12.8 million of severance and other related costs
associated with such actions during 2009. Approximately
$11.7 million of these costs were recorded with respect to
the Company’s Europe/Africa/Middle East geographical
segment and approximately $1.1 million of these costs were
recorded with respect to the Company’s North American
geographical segment. The severance costs recorded related to
the termination of approximately 766 employees.
Approximately $5.0 million of severance and other related
costs had been paid as of December 31, 2009, and 497 of the
766 employees had been terminated. All of the
rationalization actions are expected to be completed during 2010
and the $7.6 million of severance and other related costs
accrued as of December 31, 2009 are expected to be paid
during 2010. Total cash restructuring costs associated with the
actions are expected to be approximately $23.0 million to
$25.0 million.
Randers,
Denmark closure
In November 2009, the Company announced its intention to close
its combine assembly operations located in Randers, Denmark. The
Company intends to cease operations in July 2010, and transfer
such assembly to its harvesting equipment manufacturing joint
venture, Laverda, located in Breganze, Italy. The
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
land and buildings associated with the Randers facility will be
marketed for sale after the assembly operations cease.
Machinery, equipment and tooling will either be transferred to
Laverda or the Company’s other manufacturing operations.
The closure will result in the termination of approximately
90 employees. The Company recorded approximately
$0.4 million of severance and other related costs in 2009
associated with the facility closure. None of the severance
costs had been paid as of December 31, 2009 and none of the
employees had been terminated. Employee retention payments paid
to employees who will remain employed until certain future
termination dates in 2010 will be accrued over the term of the
retention period commencing January 2010, and are expected to be
approximately $2.3 million.
During 2007, the Company sold a portion of the land, buildings
and improvements related to a closed portion of the Randers
facility that contained the Company’s former component
manufacturing operations. The Company received proceeds of
approximately $4.4 million associated with this sale and
recorded a gain of approximately $3.2 million associated
with the sale. The gain was reflected in “Restructuring and
other infrequent expenses (income)” within the
Company’s Consolidated Statements of Operations for the
year ended December 31, 2007.
4.
Accounts
Receivable Securitization
At December 31, 2009, the Company had an accounts
receivable securitization facility in Europe totaling
approximately €140.0 million (or approximately
$200.6 million). Outstanding funding under the European
facility totaled approximately €104.6 million (or
approximately $149.9 million) at December 31, 2009. At
December 31, 2008, the Company had accounts receivable
securitization facilities in the United States and Canada and in
Europe totaling approximately $489.7 million. Outstanding
funding under these facilities totaled approximately
$483.2 million at December 31, 2008. The funded
balance has the effect of reducing accounts receivable and
short-term liabilities by the same amount. The European facility
expires in October 2011, and is subject to annual renewal. On
December 31, 2009, the Company expanded its European
securitization facility by €40.0 million (or
approximately $57.3 million). On December 22, 2009,
the Company terminated and replaced its U.S. and Canadian
accounts receivable securitization facilities of
$280.0 million and $70.0 million, respectively, with
new accounts receivable sales agreements with AGCO Finance LLC
and AGCO Finance Canada, Ltd.
Wholesale accounts receivable are sold on a revolving basis to
commercial paper conduits under the European facility through a
wholly-owned qualifying special purpose entity (a
“QSPE”) in the United Kingdom. Prior to
December 22, 2009, wholesale accounts receivable were sold
on a revolving basis to commercial paper conduits under the
U.S. and Canadian facilities through a wholly-owned special
purpose U.S. subsidiary. In Europe, the commercial paper
conduit that purchases a majority of the receivables is deemed
to be the majority beneficial interest holder of the QSPE, and,
thus, consolidation by the Company is not appropriate, as the
Company does not absorb a majority of losses under such
transactions. In addition, these facilities are accounted for as
off-balance sheet transactions. See Note 1, “Recent
Accounting Pronouncements” for discussion regarding the
impact of the adoption of SFAS No. 166 and
SFAS No. 167 on the Company’s European
securitization, which are effective January 1, 2010.
Losses on sales of receivables primarily from securitization
facilities were $15.3 million in 2009, $27.3 million
in 2008 and $36.1 million in 2007, and are included in
“other expense, net” in the Company’s
Consolidated Statements of Operations. The losses were
determined by calculating the estimated present value of
receivables sold compared to their carrying amount. The present
value is based on historical collection experience and a
discount rate representing the spread over LIBOR as prescribed
under the terms of the agreements. Losses on sales of
receivables related to the U.S. and Canadian accounts
receivable securitization
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
facilities were incurred and recorded through December 21,2009. Other information related to these facilities and
assumptions used in loss calculations are summarized below
(dollar amounts in millions):
United States
Canada
Europe
Total
2009
2008
2009
2008
2009
2008
2009
2008
Unpaid balance of receivables sold at December 31
$
—
$
336.2
$
—
$
74.5
$
205.9
$
154.5
$
205.9
$
565.2
Retained interest in receivables sold
$
—
$
55.8
$
—
$
9.4
$
56.0
$
16.2
$
56.0
$
82.0
Credit losses on receivables sold
$
—
$
0.4
$
—
$
0.1
$
—
$
—
$
—
$
0.5
Average liquidation period (months)
—
2.7
—
2.7
2.2
2.1
Discount rate
—
3.6
%
—
4.2
%
1.5
%
4.7
%
The Company continues to service the receivables sold and
maintains a retained interest in the receivables with respect to
the European facility. No servicing asset or liability has been
recorded as the estimated fair value of the servicing of the
receivables approximates the servicing income. The retained
interest in the receivables sold is included in the caption
“Accounts and notes receivable, net” in the
accompanying Consolidated Balance Sheets. The Company’s
risk of loss under the European securitization facility is
limited to a portion of the unfunded balance of receivables
sold, which is approximately 10% of the funded amount. The
Company maintains reserves for the portion of the residual
interest it estimates is uncollectible. At December 31,2009 and 2008, the fair value of the retained interest recorded
was approximately $55.9 million and $81.4 million,
respectively, compared to the carrying amount of
$56.0 million and $82.0 million, respectively, and was
based on the present value of the receivables calculated in a
method consistent with the losses on sales of receivables
discussed above. The retained interest fair value measurement
falls within the Level 3 fair value hierarchy under ASC
820. Level 3 measurements are model-derived valuations in
which one or more significant inputs or significant
value-drivers are unobservable. Assuming a 10% and 20% increase
in the average liquidation period, the fair value of the
residual interest would decline by less than $0.1 million
and less than $0.1 million, respectively. Assuming a 10%
and 20% increase in the discount rate, the fair value of the
residual interest would decline by less than $0.1 million
and less than $0.1 million, respectively. For 2009, the
Company received approximately $1,498.7 million from sales
of receivables and approximately $5.2 million from
servicing fees. These amounts include sales of receivables under
the U.S. and Canadian securitization facilities through
December 21, 2009. For 2008, the Company received
approximately $1,745.6 million from sales of receivables
and approximately $4.7 million from servicing fees. For
2007, the Company received approximately $1,393.8 million
from sales of receivables and $4.6 million from servicing
fees.
The following table summarizes the activity with respect to the
fair value of the Company’s retained interest in
receivables sold during the year ended December 31, 2009
(in millions):
On December 22, 2009, the Company terminated and replaced
its U.S. and Canadian accounts receivable securitization
facilities with new accounts receivable sales agreements that
will permit the transfer, on an ongoing basis, substantially all
of its wholesale interest-bearing and non-interest bearing
receivables in North America to AGCO Finance LLC and AGCO
Finance Canada, Ltd., its U.S. and Canadian retail finance
joint
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ventures. The Company has a 49% ownership in these joint
ventures. This agreement also replaced a May 2005 agreement
whereby the Company previously sold interest-bearing receivables
to AGCO Finance LLC and AGCO Finance Canada, Ltd. on an ongoing
basis. The new accounts receivable sales agreements provide for
sales of up to $600.0 million of U.S. accounts
receivable and up to C$250.0 million dollars (or
approximately $234.7 million as of December 31,2009) of Canadian accounts receivable, both of which may be
increased in the future at the discretion of AGCO Finance LLC
and AGCO Finance Canada, Ltd. respectively. The transfer of the
receivables is without recourse to the Company. The Company does
not service the receivables after the sale occurs and does not
maintain any direct retained interest in the receivables. The
Company has reviewed its accounting for the new facilities in
accordance with ASC 860 and determined that these facilities
should be accounted for as off-balance sheet transactions.
As of December 31, 2009, approximately $400.4 million
of outstanding U.S. accounts receivable and approximately
$147.2 million of outstanding Canadian accounts receivable
had been sold to AGCO Finance LLC and AGCO Finance Canada, Ltd.,
respectively, of which $444.6 million of proceeds had been
received from the sale. As of December 31, 2008, the
balance of interest-bearing receivables that had been
transferred to AGCO Finance LLC and AGCO Finance Canada, Ltd.
under the Company’s former arrangement to transfer
wholesale interest-bearing receivables, was approximately
$59.0 million.
Under the terms of the new agreements, the Company will pay AGCO
Finance LLC and AGCO Finance Canada, Ltd. an annual servicing
fee related to the servicing of the sold receivables. The
Company will also pay AGCO Finance LLC and AGCO Finance Canada,
Ltd. a subsidized interest payment with respect to the new sales
agreements, calculated based upon LIBOR plus a margin on any
non-interest bearing accounts receivable outstanding and sold
under the facilities. Losses on the sale of these receivables,
reflected within “Other expense, net” in the
Company’s Consolidated Statements of Operations, were
approximately $0.3 million during 2009. In addition, as a
result of the new accounts receivables sales agreements, cash
payments will be made to AGCO Finance LLC and AGCO Finance
Canada Ltd. for sales incentive discounts provided to dealers
related to outstanding accounts receivables sold. The Company
therefore reclassified such sales incentive discounts reserves
from “accounts receivable allowances” to “Accrued
expenses” within the Company’s Consolidated Balance
Sheets. The balance of such sales discounts reserves classified
in “Accrued expenses” was approximately
$94.5 million as of December 31, 2009.
The Company’s AGCO Finance retail finance joint ventures in
Europe, Brazil and Australia also provide wholesale financing to
the Company’s dealers. The receivables associated with
these arrangements are also without recourse to the Company. The
Company does not service the receivables after the sale occurs
and does not maintain any direct retained interest in the
receivables. As of December 31, 2009, these retail finance
joint ventures had approximately $176.9 million of
outstanding accounts receivable associated with these
arrangements. The Company has reviewed its accounting for these
arrangements and determined that these arrangements should be
accounted for as off-balance sheet transactions.
In addition, the Company sells certain trade receivables under
factoring arrangements to other financial institutions around
the world. The Company evaluates the sale of such receivables
pursuant to the guidelines of ASC 860, and has determined that
these arrangements should be accounted for as off-balance sheet
transactions.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
5.
Investments
in Affiliates
Investments in affiliates as of December 31, 2009 and 2008
were as follows (in millions):
2009
2008
Retail finance joint ventures
$
258.7
$
187.8
Manufacturing joint ventures
78.0
75.0
Other joint ventures
10.8
12.3
$
347.5
$
275.1
The manufacturing joint ventures as of December 31, 2009
consisted of a joint venture with a third party manufacturer to
produce engines in South America and Laverda S.p.A.
(“Laverda”), an operating joint venture with the
Italian ARGO group that manufactures harvesting equipment. The
other joint ventures represent minority investments in farm
equipment manufacturers, distributors and licensees.
The majority of the assets of the Company’s retail finance
joint ventures represent finance receivables. The majority of
the liabilities represent notes payable and accrued interest.
Under the various joint venture agreements, Rabobank or its
affiliates provide financing to the joint venture companies. The
Company does not guarantee the debt obligations of the retail
finance joint ventures other than a portion of the retail
portfolio in Brazil that is held outside the joint venture by
Rabobank Brazil (Note 13).
On September 28, 2007, the Company acquired 50% of Laverda
for approximately €46.0 million (or approximately
$65.6 million), thereby creating an operating joint venture
between the Company and the Italian ARGO group. Laverda is
located in Breganze, Italy and manufactures harvesting
equipment. In addition to producing Laverda branded combines,
the Breganze factory manufactures mid-range combine harvesters
for AGCO’s Massey Ferguson, Fendt and Challenger brands for
distribution in Europe, Africa and the Middle
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
East. The joint venture also includes Laverda’s ownership
in Fella-Werke GMBH, a German manufacturer of grass and hay
machinery, and its 30% stake in Gallignani S.p.A., an Italian
manufacturer of balers. The Company identified approximately
$17.6 million of goodwill and $12.9 million of other
identifiable intangible assets as the Company’s investment
was greater than the fair value of the underlying equity in the
net assets received. The goodwill and intangible asset balances
are included in the recorded balance of the “Investments in
Affiliates” line of the Company’s Consolidated Balance
Sheet. The amortization of the other identifiable intangible
assets is included in the Company’s share of its earnings
or losses from its investment within the “Equity in net
earnings of affiliates” line item of the Company’s
Consolidated Statements of Operations. In addition, the Company
allocated approximately $28.2 million of its investment as
an addition to the joint venture’s property, plant and
equipment to reflect land, buildings, and machinery and
equipment at their respective fair values as compared to their
historical net book values. The depreciation expense associated
with the increase in recorded amounts with respect to property,
plant and equipment is also included in the Company’s share
of its earnings or losses from its investment. The investment
balance as of December 31, 2009 and 2008 includes
transaction costs and related fees incurred during 2008. The
acquired other identifiable assets are summarized in the
following table (in millions):
Weighted-Average
Intangible Asset
Amount
Useful Life
Tradenames
$
4.3
Indefinite
Technology and patents
0.8
5 years
Distribution network
7.8
17 years
$
12.9
The Company determined that the Laverda and Fella tradenames
have an indefinite useful life. The Laverda tradename has been
in existence since 1890 and is currently sold in over 35
countries worldwide. The Fella tradename has been in existence
since 1918. Both the Laverda brand and the Fella brand are
primary product lines of the Company’s Laverda operating
joint venture, and the joint venture partners plan to use these
tradenames for an indefinite period of time. The joint venture
partners plan to continue to make investments in product
development to enhance the value of these brands into the
future. There are no legal, regulatory, contractual,
competitive, economic or other factors that the joint venture
partners are aware of that they believe would limit the useful
lives of the tradenames. The Laverda and Fella tradename
registrations can be renewed at a nominal cost in the countries
in which the operating joint venture operates. The Company
performed an annual impairment test of the investment in Laverda
as of October 1, 2009 and 2008 and concluded that no
indication of impairment existed.
The investment balance in Laverda as of December 31, 2009
and 2008 was $74.6 million and $71.1 million,
respectively.
The portion of the Company’s retained earnings balance that
represents undistributed retained earnings of equity method
investees was approximately $176.6 million and
$138.2 million as of December 31, 2009 and 2008,
respectively.
6.
Income
Taxes
The sources of income (loss) before income taxes and equity in
net earnings of affiliates were as follows for the years ended
December 31, 2009, 2008 and 2007 (in millions):
2009
2008
2007
United States
$
(29.7
)
$
(67.6
)
$
(89.1
)
Foreign
183.5
579.3
403.0
Income before income taxes and equity in net earnings of
affiliates
$
153.8
$
511.7
$
313.9
The provision for income taxes by location of the taxing
jurisdiction for the years ended December 31, 2009, 2008
and 2007 consisted of the following (in millions):
2009
2008
2007
Current:
United States:
Federal
$
(4.0
)
$
(5.7
)
$
(6.7
)
State
0.2
—
—
Foreign
82.2
163.0
115.6
78.4
157.3
108.9
Deferred:
United States:
Federal
(0.4
)
1.5
0.1
State
—
—
—
Foreign
(21.5
)
5.8
2.4
(21.9
)
7.3
2.5
$
56.5
$
164.6
$
111.4
At December 31, 2009, the Company’s foreign
subsidiaries had approximately $2.1 billion of
undistributed earnings. These earnings are considered to be
indefinitely invested, and, accordingly, no income taxes have
been provided on these earnings. Determination of the amount of
unrecognized deferred taxes on these earnings is not practical;
however, unrecognized foreign tax credits would be available to
reduce a portion of the tax liability.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of income taxes computed at the United States
federal statutory income tax rate (35%) to the provision for
income taxes reflected in the Company’s Consolidated
Statements of Operations for the years ended December 31,2009, 2008 and 2007 is as follows (in millions):
2009
2008
2007
Provision for income taxes at United States federal statutory
rate of 35%
$
53.9
$
179.1
$
109.9
State and local income taxes, net of federal income tax benefit
0.7
(0.3
)
(2.5
)
Taxes on foreign income which differ from the United States
statutory rate
15.2
2.0
7.0
Tax effect of permanent differences
20.7
(23.7
)
(25.7
)
Change in valuation allowance
(38.8
)
6.9
22.6
Other
4.8
0.6
0.1
$
56.5
$
164.6
$
111.4
The “change in valuation allowance” for the year ended
December 31, 2009 includes a $39.5 million favorable
adjustment which was fully offset by a write-off of certain
foreign tax assets reflected in “tax effects of permanent
differences”. Due to the fact that these tax assets had not
been expected to be utilized in future years, the Company had
previously maintained a valuation allowance against the tax
assets. Accordingly, this write-off resulted in no impact to our
income tax provision for the year ended December 31, 2009.
The significant components of the deferred tax assets and
liabilities at December 31, 2009 and 2008 were as follows
(in millions):
2009
2008
Deferred Tax Assets:
Net operating loss carryforwards
$
215.0
$
210.8
Sales incentive discounts
40.4
51.2
Inventory valuation reserves
23.3
23.0
Pensions and postretirement health care benefits
86.6
63.7
Warranty and other reserves
92.5
75.6
Other
27.2
47.1
Total gross deferred tax assets
485.0
471.4
Valuation allowance
(261.7
)
(294.4
)
Total net deferred tax assets
223.3
177.0
Deferred Tax Liabilities:
Tax over book depreciation and amortization
178.1
171.3
Other
30.0
29.0
Total deferred tax liabilities
208.1
200.3
Net deferred tax assets (liabilities)
$
15.2
$
(23.3
)
Amounts recognized in Consolidated Balance Sheets:
Deferred tax assets — current
$
63.6
$
56.6
Deferred tax assets — noncurrent
70.3
29.9
Other current liabilities
—
(1.7
)
Other noncurrent liabilities
(118.7
)
(108.1
)
$
15.2
$
(23.3
)
The Company recorded a net deferred tax asset of
$15.2 million and a net deferred tax liability of
$23.3 million as of December 31, 2009 and 2008,
respectively. As reflected in the preceding table, the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company established a valuation allowance of $261.7 million
and $294.4 million as of December 31, 2009 and 2008,
respectively.
The change in the valuation allowance for the years ended
December 31, 2009, 2008 and 2007 was a decrease of
$32.7 million, an increase of $6.9 million and an
increase of $29.1 million, respectively. A valuation
allowance is established when it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The Company assessed the likelihood that its deferred
tax assets would be recovered from estimated future taxable
income and available tax planning strategies and determined that
the valuation allowance at December 31, 2009 and 2008 was
appropriate. In making this assessment, all available evidence
was considered including the current economic climate, as well
as reasonable tax planning strategies. The Company believes it
is more likely than not that the Company will realize the
remaining deferred tax assets, net of the valuation allowance,
in future years.
The Company had net operating loss carryforwards of
$707.8 million as of December 31, 2009, with
expiration dates as follows: 2014 — $0.9 million;
and thereafter or unlimited — $706.9 million.
These net operating loss carryforwards include United States net
loss carryforwards of $367.0 million and foreign net
operating loss carryforwards of $340.8 million. The Company
paid income taxes of $67.8 million, $152.2 million and
$67.0 million for the years ended December 31, 2009,
2008 and 2007, respectively.
At December 31, 2009 and December 31, 2008, the
Company had $21.8 million and $20.1 million,
respectively, of unrecognized income tax benefits, all of which
would affect the Company’s effective tax rate if
recognized. At December 31, 2009 and December 31,2008, the Company had approximately $3.5 million and
$7.6 million, respectively, of accrued or deferred taxes
related to uncertain income tax positions connected with ongoing
income tax audits in various jurisdictions that it expects to
settle or pay in the next 12 months. The Company accrues
interest and penalties related to unrecognized tax benefits in
its provision for income taxes. At December 31, 2009 and
December 31, 2008, the Company had accrued interest and
penalties related to unrecognized tax benefits of
$1.9 million and $1.8 million, respectively.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits as of and
during the year ended December 31, 2009 is as follows (in
millions):
The Company and its subsidiaries file income tax returns in the
United States and in various state, local and foreign
jurisdictions. The Company and its subsidiaries are routinely
examined by tax authorities in these jurisdictions. During 2009,
agreements reached previously with tax authorities in France for
various open tax years required settlement of approximately
$3.0 million. Also during 2009, a $1.0 million tax
position was settled in the United Kingdom. As of
December 31, 2009, a number of income tax examinations in
other foreign jurisdictions were currently ongoing. It is
possible that certain of these ongoing examinations may be
resolved within 12 months. Due to the potential for
resolution of federal, state and foreign examinations, and the
expiration of various statutes of limitation, it is reasonably
possible that the Company’s gross unrecognized tax benefits
balance may materially change within the next 12 months.
Due to the number of jurisdictions and issues involved and the
uncertainty regarding the timing of any settlements, the Company
is unable to provide a reasonable estimate of the change that
may occur within the next 12 months. Although there are
ongoing
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
examinations in various jurisdictions, the 2006 through 2009 tax
years generally remain subject to examination in the United
States by federal and state authorities. In the Company’s
significant foreign jurisdictions, primarily the United Kingdom,
France, Germany, Switzerland, Finland and Brazil, the 2004
through 2009 tax years generally remain subject to examination
by their respective tax authorities.
7.
Indebtedness
Indebtedness consisted of the following at December 31,2009 and 2008 (in millions):
13/4% Convertible
senior subordinated notes due 2033
193.0
185.3
11/4% Convertible
senior subordinated notes due 2036
167.5
160.3
Other long-term debt
0.1
0.1
647.1
625.1
Less: Current portion of long-term debt
(0.1
)
(0.1
)
13/4% Convertible
senior subordinated notes due 2033
(193.0
)
—
Total indebtedness, less current portion
$
454.0
$
625.0
At December 31, 2009, the aggregate scheduled maturities of
long-term debt, excluding the current portion of long-term debt,
are as follows (in millions):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Convertible
senior subordinated notes
The following table sets forth as of December 31, 2009 and
2008 the carrying amount of the equity component, the principal
amount of the liability component, the unamortized discount and
the net carrying amount of the Company’s
13/4%
convertible senior subordinated notes and its
11/4%
convertible senior subordinated notes (in millions):
13/4% Convertible
senior subordinated notes due 2033:
Carrying amount of the equity component
$
39.9
$
39.9
Principal amount of the liability component
$
201.3
$
201.3
Less: unamortized discount
(8.3
)
(16.0
)
Net carrying amount
$
193.0
$
185.3
11/4% Convertible
senior subordinated notes due 2036:
Carrying amount of the equity component
$
54.3
$
54.3
Principal amount of the liability component
$
201.3
$
201.3
Less: unamortized discount
(33.8
)
(41.0
)
Net carrying amount
$
167.5
$
160.3
The following table sets forth the interest expense recognized
relating to both the contractual interest coupon and the
amortization of the discount on the liability component for the
13/4%
convertible senior subordinated notes and
11/4%
convertible senior subordinated notes (in millions):
The effective interest rate on the liability component for the
13/4%
convertible senior subordinated notes and the
11/4%
convertible senior subordinated notes for the years ended
December 31, 2009, 2008 and 2007 was 6.1% for both notes.
The unamortized discount for the
13/4%
convertible senior subordinated notes and the
11/4%
convertible senior subordinated notes will be amortized through
December 2010 and December 2013, respectively, as these are the
earliest dates the notes holders can require the Company to
repurchase the notes.
Cash payments for interest were approximately
$52.3 million, $50.4 million and $51.1 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In accordance with the provisions of FSP APB
14-1, prior
periods have been retroactively restated, which resulted in an
adjustment of the following amounts (in millions, except per
share amounts):
Net income per common share attributable to AGCO and
subsidiaries:
Basic
$
2.69
$
(0.14
)
$
2.55
Diluted
$
2.55
$
(0.14
)
$
2.41
The Company’s $201.3 million of
11/4%
convertible senior subordinated notes due December 15,2036, issued in December 2006, provide for (i) the
settlement upon conversion in cash up to the principal amount of
the notes with any excess conversion value settled in shares of
the Company’s common stock, and (ii) the conversion
rate to be increased under certain circumstances if the notes
are converted in connection with certain change of control
transactions occurring prior to December 15, 2013. Interest
is payable on the notes at
11/4%
per annum, payable semi-annually in arrears in cash on June 15
and December 15 of each year. The notes are convertible into
shares of the Company’s common stock at an effective price
of $40.73 per share, subject to adjustment. This reflects an
initial conversion rate for the notes of 24.5525 shares of
common stock per $1,000 principal amount of notes. The notes
contain certain anti-dilution provisions designed to protect the
holders’ interests. If a change of control transaction that
qualifies as a “fundamental change” occurs on or prior
to December 15, 2013, under certain circumstances the
Company will increase the conversion rate for the notes
converted in connection with the transaction by a number of
additional shares (as used in this paragraph, the “make
whole shares”). A fundamental change is any transaction or
event in connection with which 50% or more of the Company’s
common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive consideration that is
not at least 90% common stock listed on a U.S. national
securities exchange, or approved for quotation on an automated
quotation system. The amount of the increase in the conversion
rate, if any, will depend on the effective date of the
transaction and an average price per share of the Company’s
common stock as of the effective date. No adjustment to the
conversion rate will be made if the price per share of common
stock is less than $31.33 per share or more than $180.00 per
share. The number of additional make whole shares range from
7.3658 shares per $1,000 principal amount at $31.33 per
share to 0.0314 shares per $1,000 principal amount at
$180.00 per share for the year ended
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 15, 2010, with the number of make whole shares
generally declining over time. If the acquirer or certain of its
affiliates in the fundamental change transaction has publicly
traded common stock, the Company may, instead of increasing the
conversion rate as described above, cause the notes to become
convertible into publicly traded common stock of the acquirer,
with principal of the notes to be repaid in cash, and the
balance, if any, payable in shares of such acquirer common
stock. At no time will the Company issue an aggregate number of
shares of the Company’s common stock upon conversion of the
notes in excess of 31.9183 shares per $1,000 principal
amount thereof. If the holders of the Company’s common
stock receive only cash in a fundamental change transaction,
then holders of notes will receive cash as well. Holders may
convert the notes only under the following circumstances:
(1) during any fiscal quarter, if the closing sales price
of the Company’s common stock exceeds 120% of the
conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the
preceding fiscal quarter; (2) during the five business day
period after a five consecutive trading day period in which the
trading price per note for each day of that period was less than
98% of the product of the closing sale price of the
Company’s common stock and the conversion rate; (3) if
the notes have been called for redemption; or (4) upon the
occurrence of certain corporate transactions. Beginning
December 15, 2013, the Company may redeem any of the notes
at a redemption price of 100% of their principal amount, plus
accrued interest. Holders of the notes may require the Company
to repurchase the notes at a repurchase price of 100% of their
principal amount, plus accrued interest, on December 15,2013, 2016, 2021, 2026 and 2031. Holders may also require the
Company to repurchase all or a portion of the notes upon a
fundamental change, as defined in the indenture, at a repurchase
price equal to 100% of the principal amount of the notes to be
repurchased, plus any accrued and unpaid interest. The notes are
senior subordinated obligations and are subordinated to all of
the Company’s existing and future senior indebtedness and
effectively subordinated to all debt and other liabilities of
the Company’s subsidiaries. The notes are equal in right of
payment with the Company’s
67/8% senior
subordinated notes due 2014 and its
13/4%
convertible senior subordinated notes due 2033.
The Company’s $201.3 million of
13/4%
convertible senior subordinated notes due December 31,2033, issued in June 2005, provide for (i) the settlement
upon conversion in cash up to the principal amount of the notes
with any excess conversion value settled in shares of the
Company’s common stock, and (ii) the conversion rate
to be increased under certain circumstances if the notes are
converted in connection with certain change of control
transactions occurring prior to December 10, 2010. The
notes are unsecured obligations and are convertible into cash
and shares of the Company’s common stock upon satisfaction
of certain conditions, as discussed below. Interest is payable
on the notes at
13/4%
per annum, payable semi-annually in arrears in cash on June 30
and December 31 of each year. The notes are convertible into
shares of the Company’s common stock at an effective price
of $22.36 per share, subject to adjustment. This reflects an
initial conversion rate for the notes of 44.7193 shares of
common stock per $1,000 principal amount of notes. The notes
contain certain anti-dilution provisions designed to protect the
holders’ interests. If a change of control transaction that
qualifies as a “fundamental change” occurs on or prior
to December 31, 2010, under certain circumstances the
Company will increase the conversion rate for the notes
converted in connection with the transaction by a number of
additional shares (as used in this paragraph, the “make
whole shares”). A fundamental change is any transaction or
event in connection with which 50% or more of the Company’s
common stock is exchanged for, converted into, acquired for or
constitutes solely the right to receive consideration that is
not at least 90% common stock listed on a U.S. national
securities exchange or approved for quotation on an automated
quotation system. The amount of the increase in the conversion
rate, if any, will depend on the effective date of the
transaction and an average price per share of the Company’s
common stock as of the effective date. No adjustment to the
conversion rate will be made if the price per share of common
stock is less than $17.07 per share or more than $110.00 per
share. The number of additional make whole shares range from
13.863 shares per $1,000 principal amount at $17.07 per
share to 0.0 shares per $1,000 principal amount at $110.00
per share for the year ended December 31, 2010, with the
number of make whole shares generally declining over time. If
the acquirer or certain of its affiliates in the fundamental
change transaction has publicly traded common stock, the Company
may, instead of increasing the conversion
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
rate as described above, cause the notes to become convertible
into publicly traded common stock of the acquirer, with
principal of the notes to be repaid in cash, and the balance, if
any, payable in shares of such acquirer common stock. At no time
will the Company issue an aggregate number of shares of the
Company’s common stock upon conversion of the notes in
excess of 58.5823 shares per $1,000 principal amount
thereof. If the holders of the Company’s common stock
receive only cash in a fundamental change transaction, then
holders of notes will receive cash as well. Holders may convert
the notes only under the following circumstances:
(1) during any fiscal quarter, if the closing sales price
of the Company’s common stock exceeds 120% of the
conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the
preceding fiscal quarter; (2) during the five business day
period after a five consecutive trading day period in which the
trading price per note for each day of that period was less than
98% of the product of the closing sale price of the
Company’s common stock and the conversion rate; (3) if
the notes have been called for redemption; or (4) upon the
occurrence of certain corporate transactions. Beginning
January 1, 2011, the Company may redeem any of the notes at
a redemption price of 100% of their principal amount, plus
accrued interest. Holders of the notes may require the Company
to repurchase the notes at a repurchase price of 100% of their
principal amount, plus accrued interest, on December 31,2010, 2013, 2018, 2023 and 2028.
As of December 31, 2009, the closing sales price of the
Company’s common stock had exceeded 120% of the conversion
price of the
13/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending December 31,2009, and, therefore, the Company classified the notes as a
current liability. In accordance with Accounting Standards
Update
No. 2009-04,
“Accounting for Redeemable Equity Instruments,” the
Company also classified the equity component of the
13/4%
convertible senior subordinated notes as “temporary
equity.” The amount classified as “temporary
equity” was measured as the excess of (i) the amount
of cash that would be required to be paid upon conversion over
(ii) the current carrying amount of the
liability-classified component. The Company believes it is
unlikely the holders of the notes would convert the notes under
the provisions of the indenture agreement, thereby requiring the
Company to repay the principal portion in cash. In the event the
notes were converted, the Company believes it could repay the
notes with available cash on hand, funds from the Company’s
$300.0 million multi-currency revolving credit facility or
a combination of these sources. As of December 31, 2008,
the closing sales price of the Company’s common stock did
not exceed 120% of the conversion price of $22.36 and $40.73 per
share, respectively, for the Company’s
13/4%
convertible senior subordinated notes and the Company’s
11/4%
convertible senior subordinated notes for at least 20 trading
days in the 30 consecutive trading days ending December 31,2008, and, therefore, the Company classified both notes as
long-term debt. Future classification of both notes between
current and long-term debt and classification of the equity
component of both notes as “temporary equity” is
dependent on the closing sales price of the Company’s
common stock during future quarters.
The Company has arrangements with various banks to issue standby
letters of credit or similar instruments, which guarantee the
Company’s obligations for the purchase or sale of certain
inventories and for potential claims exposure for insurance
coverage. At December 31, 2009 and 2008, outstanding
letters of credit issued under the revolving credit facility
totaled $9.3 million and $8.7 million, respectively.
Multi-currency
revolving credit facility
The Company’s $300.0 million unsecured multi-currency
revolving credit facility matures on May 16, 2013. Interest
accrues on amounts outstanding under the facility, at the
Company’s option, at either (1) LIBOR plus a margin
ranging between 1.00% and 1.75% based upon the Company’s
total debt ratio or (2) the higher of the administrative
agent’s base lending rate or one-half of one percent over
the federal funds rate plus a margin ranging between 0.0% and
0.50% based upon the Company’s total debt ratio. The
facility contains covenants restricting, among other things, the
incurrence of indebtedness and the making of certain payments,
including dividends, and is subject to acceleration in the event
of a default, as defined in the facility. The
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company also must fulfill financial covenants in respect of a
total debt to EBITDA ratio and an interest coverage ratio, as
defined in the facility. As of December 31, 2009 and 2008,
the Company had no outstanding borrowings under the facility. As
of December 31, 2009 and 2008, the Company had availability
to borrow $290.7 million and $291.3 million,
respectively, under the facility.
67/8% Senior
subordinated notes
The Company’s €200.0 million of
67/8% senior
subordinated notes due April 15, 2014, issued in April
2004, are unsecured obligations and are subordinated in right of
payment to the Company’s existing or future senior
indebtedness. Interest is payable on the notes at
67/8%
per annum, payable semi-annually on April 15 and October 15 of
each year. As of and subsequent to April 15, 2009, the
Company may redeem the notes, in whole or in part, initially at
103.438% of their principal amount, plus accrued interest,
declining to 100% of their principal amount, plus accrued
interest, at any time on or after April 15, 2012. The notes
include covenants restricting the incurrence of indebtedness and
the making of certain restricted payments, including dividends.
8.
Employee
Benefit Plans
The Company sponsors defined benefit pension plans covering
certain employees, principally in the United States, the United
Kingdom, Germany, Finland, Norway, France, Switzerland,
Australia and Argentina. The Company also provides certain
postretirement health care and life insurance benefits for
certain employees principally in the United States and Brazil.
ASC 715, “Compensation-Retirement Benefits” (“ASC
715”), requires companies to measure defined benefit plan
assets and obligations as of the date of the company’s
fiscal year-end. The measurement provision of ASC 715 was
effective for years ending after December 15, 2008. The
Company adopted the measurement provisions of ASC 715 during the
year ended December 31, 2008. This change only impacted the
measurement of the Company’s U.K. pension plan, which prior
to 2008 had a measurement date of September 30. The Company
adopted the second approach afforded by ASC 715 to transition
the Company’s U.K. pension plan to a December 31
measurement date. The impact of the adoption resulted in a
reduction to the Company’s opening retained earnings
balance as of January 1, 2008 of approximately
$1.1 million, net of taxes.
Net annual pension costs for the years ended December 31,2009, 2008 and 2007 are set forth below (in millions):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The weighted average assumptions used to determine the net
annual pension costs for the Company’s pension plans for
the years ended December 31, 2009, 2008 and 2007 are as
follows:
2009
2008
2007
All plans:
Weighted average discount rate
6.6
%
5.9
%
5.1
%
Weighted average expected long-term rate of return on plan assets
7.0
%
7.1
%
7.1
%
Rate of increase in future compensation
3.0-4.0
%
3.0-4.0
%
3.0-4.0
%
U.S.-based plans:
Weighted average discount rate
6.25
%
6.25
%
5.8
%
Weighted average expected long-term rate of return on plan assets
8.0
%
8.0
%
8.0
%
Rate of increase in future compensation
N/A
N/A
N/A
Net annual postretirement benefit costs for the years ended
December 31, 2009, 2008 and 2007 are set forth below (in
millions, except percentages):
Postretirement benefits
2009
2008
2007
Service cost
$
0.1
$
—
$
0.1
Interest cost
1.7
1.5
1.4
Amortization of prior service credit
(0.3
)
(0.3
)
(0.2
)
Amortization of unrecognized net loss
0.3
0.2
0.1
Other
—
0.1
0.2
Net annual postretirement benefit cost
$
1.8
$
1.5
$
1.6
Weighted average discount rate
6.33
%
6.25
%
5.8
%
The following tables set forth reconciliations of the changes in
benefit obligation, plan assets and funded status as of
December 31, 2009 and 2008 (in millions):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pension Benefits
Postretirement Benefits
Change in plan assets
2009
2008
2009
2008
Fair value of plan assets at beginning of year
$
399.3
$
657.8
$
—
$
—
Actual return on plan assets
57.7
(98.9
)
—
—
Employer contributions
28.4
31.7
1.7
2.0
Plan participants’ contributions
1.5
2.0
—
—
Benefits paid
(39.5
)
(53.5
)
(1.7
)
(2.0
)
Settlements
(1.4
)
(1.8
)
—
—
Other
—
1.6
—
—
Foreign currency exchange rate changes
43.2
(139.6
)
—
—
Fair value of plan assets at end of year
$
489.2
$
399.3
$
—
$
—
Funded status
$
(242.1
)
$
(139.2
)
$
(28.1
)
$
(28.6
)
Unrecognized net actuarial loss
282.1
186.1
6.0
7.1
Unrecognized prior service credit
(2.3
)
(2.5
)
(0.5
)
(0.8
)
Accumulated other comprehensive loss
(279.8
)
(183.6
)
(5.5
)
(6.3
)
Net amount recognized
$
(242.1
)
$
(139.2
)
$
(28.1
)
$
(28.6
)
Amounts recognized in Consolidated Balance Sheets:
Other long-term asset
$
0.6
$
—
$
—
$
—
Other current liabilities
(5.1
)
(4.2
)
(1.8
)
(1.9
)
Pensions and postretirement health care benefits (noncurrent)
(237.6
)
(135.0
)
(26.3
)
(26.7
)
Net amount recognized
$
(242.1
)
$
(139.2
)
$
(28.1
)
$
(28.6
)
Accrued pension costs of approximately $3.4 million and
$2.6 million have been classified as current liabilities
within “Accrued expenses” in the Company’s
Consolidated Balance Sheets as of December 31, 2009 and
2008, respectively, related to the Company’s phased
retirement plan obligations in Germany.
As of December 31, 2009, the Company’s accumulated
other comprehensive loss included a net actuarial loss of
approximately $282.1 million and a net prior service credit
of approximately $2.3 million related to the Company’s
defined benefit pension plans. The estimated net actuarial loss
and net prior service credit for defined benefit pension plans
that will be amortized from the Company’s accumulated other
comprehensive loss during the year ended December 31, 2010
are approximately $8.7 million and $0.2 million,
respectively.
As of December 31, 2009, the Company’s accumulated
other comprehensive loss included a net actuarial loss of
approximately $6.0 million and a net prior service credit
of approximately $0.5 million related to the Company’s
U.S. and Brazilian postretirement health care benefit
plans. The estimated net actuarial loss and net prior service
credit for postretirement health care benefit plans that will be
amortized from the Company’s accumulated other
comprehensive loss during the year ended December 31, 2010
are approximately $0.2 million and $0.3 million,
respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The weighted average assumptions used to determine the benefit
obligation for the Company’s pension plans as of
December 31, 2009 and 2008 are as follows:
2009
2008
All plans:
Weighted average discount rate
5.7
%
6.6
%
Rate of increase in future compensation
2.5-4.5
%
3.0-4.0
%
U.S.-based plans:
Weighted average discount rate
5.5
%
6.25
%
Rate of increase in future compensation
N/A
N/A
The weighted average discount rate used to determine the benefit
obligation for the Company’s postretirement benefit plans
for the years ended December 31, 2009 and 2008 was 5.65%
and 6.33%, respectively.
The aggregate projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for pension and other
postretirement plans with accumulated benefit obligations in
excess of plan assets were $749.8 million,
$681.7 million and $479.5 million, respectively, as of
December 31, 2009 and $561.1 million,
$509.5 million and $393.8 million, respectively, as of
December 31, 2008. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
the Company’s U.S.-based qualified pension plans were
$47.5 million, $47.5 million and $33.0 million,
respectively, as of December 31, 2009, and
$46.2 million, $46.2 million and $30.8 million,
respectively, as of December 31, 2008. The Company’s
accumulated comprehensive loss as of December 31, 2009
reflects a reduction of equity of $285.3 million, net of
taxes of $80.2 million, primarily related to the
Company’s U.K. pension plan where the projected benefit
obligation exceeded the plan assets. Approximately
$0.4 million of the $285.3 million reduction in equity
has been reflected in noncontrolling interests, net of taxes of
$0.1 million, related to the Company’s GIMA joint
venture, and the joint venture partner’s 50% portion of the
reduction in equity. The Company’s accumulated
comprehensive loss as of December 31, 2008 reflects a
reduction of equity of $189.9 million, net of taxes of
$52.9 million, primarily related to the Company’s U.K.
pension plan where the projected benefit obligation exceeded the
plan assets. Approximately $0.4 million of the
$189.9 million reduction in equity was reflected in
noncontrolling interests, net of taxes of $0.1 million,
related to the Company’s GIMA joint venture.
For the years ended December 31, 2009 and 2008, the Company
based the discount rate used to determine the projected benefit
obligation for its U.S. pension plans, postretirement
health care benefit plans and its Executive Nonqualified Pension
Plan (“ENPP”) by matching the projected cash flows of
its largest pension plan to the Citigroup Pension Discount
Curve. For the U.K. plan, the Company derived the discount rate
based on a yield curve developed from the constituents of the
Merrill Lynch AA- rated corporate bond index. The discount rate
for the U.K. plan is a single weighted-average rate based on the
approximate future cash flows of the plan. For countries within
the Euro Zone, the Company derived an AA-rated corporate bond
yield curve by selecting bonds included in the iBoxx corporate
indices and creating a discount rate curve based on a series of
model cash flows. Discount rates for each plan were then
determined based on each plan’s liability duration. The
indices used in the United States, the United Kingdom and other
countries were chosen to match the expected plan obligations and
related expected cash flows.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Investment
strategy and concentration of risk
The weighted average asset allocation of the Company’s
U.S. pension benefit plans as of December 31, 2009 and
2008 are as follows:
Asset Category
2009
2008
Large and small cap domestic equity securities
24
%
24
%
International equity securities
15
%
11
%
Domestic fixed income securities
22
%
23
%
Other investments
39
%
42
%
Total
100
%
100
%
The weighted average asset allocation of the Company’s
non-U.S. pension
benefit plans as of December 31, 2009 and 2008 are as
follows:
Asset Category
2009
2008
Equity securities
39
%
39
%
Fixed income securities
35
%
33
%
Other investments
26
%
28
%
Total
100
%
100
%
The fair value of assets as of December 31, 2009 is as
follows (in millions):
Total
Level 1
Level 2
Level 3
Equity securities:
Global equities
$
82.6
$
82.6
$
—
$
—
Non-U.S.
equities
4.8
4.8
—
—
U.K. equities
92.6
92.6
—
—
U.S. large cap equities
4.7
4.7
—
—
U.S. small cap equities
2.9
2.9
—
—
Total equity securities
187.6
187.6
—
—
Fixed income:
Aggregate fixed income
7.2
7.2
—
—
International fixed income
146.8
146.8
—
—
Total fixed income
share(1)
154.0
154.0
—
—
Cash and equivalents:
Cash
3.3
0.1
3.2
—
Total cash and equivalents
3.3
0.1
3.2
—
Alternative
investments(2)
127.6
—
—
127.6
Miscellaneous
funds(3)
16.7
—
—
16.7
Total assets
$
489.2
$
341.7
$
3.2
$
144.3
(1)
45% of fixed income securities are
in government treasuries; 25% in investment-grade corporate
bonds; 20% in foreign bonds; and 10% in other various fixed
income securities.
(2)
27% of alternative investments are
in long-short equity funds; 16% in multi-strategy funds; 15% in
event-driven funds; 11% in relative value funds; 11% in credit
funds; and 20% are distributed in hedged and non-hedged funds.
(3)
Miscellaneous funds consist of
pooled funds in Australia and insurance contracts in Finland,
Norway and Switzerland.
All tax-qualified pension fund investments in the United States
are held in the AGCO Corporation Master Pension Trust. The
Company’s global pension fund strategy is to diversify
investments across broad categories of equity and fixed income
securities with appropriate use of alternative investment
categories to minimize risk and volatility. The primary
investment objective of the Company’s pension plans is to
secure participant retirement benefits. As such, the key
objective in the pension plans’ financial management is to
promote stability and, to the extent appropriate, growth in
funded status.
The investment strategy for the plans’ portfolio of assets
balances the requirement to generate returns with the need to
control risk. The asset mix is recognized as the primary
mechanism to influence the reward and risk structure of the
pension fund investments in an effort to accomplish the
plans’ funding objectives. The overall investment strategy
for the
U.S.-based
pension plans is to achieve a mix of approximately 20% of assets
for the near-term benefit payments and 80% for longer-term
growth. The overall U.S. pension funds invest in a broad
diversification of asset types. The Company’s
U.S. target allocation of retirement fund investments is
35% large- and small-cap domestic equity securities, 15%
international equity securities, 20% broad fixed income
securities and 30% in alternative investments. The Company has
noted that over very long periods, this mix of investments would
achieve an average return in excess of 8.5%. In arriving at the
choice of an expected return assumption of 8% for its
U.S.-based
plans, the Company has tempered this historical indicator with
lower expectation for returns and equity investment in the
future as well as the administrative costs of the plans. The
overall investment strategy for the
non-U.S. based
pension plans is to achieve a mix of approximately 28% of assets
for the near-term benefit payments and 72% for longer-term
growth. The overall
non-U.S. pension
funds invest in a broad diversification of asset types. The
Company’s
non-U.S. target
allocation of retirement fund investments is 40% equity
securities, 30% broad fixed income investments and 30% in
alternative investments. The majority of the Company’s
non-U.S. pension
fund investments are related to the Company’s pension plan
in the United Kingdom. The Company has noted that over very long
periods, this mix of investments would achieve an average return
in excess of 7.5%. In arriving at the choice of an expected
return assumption of 7% for its U.K.-based plans, the Company
has tempered this historical indicator with lower expectation
for returns and equity investment in the future as well as the
administrative costs of the plans.
Equity securities primarily include investments in large-cap and
small-cap companies located in the across the globe. Fixed
income securities include corporate bonds of companies from
diversified industries, mortgage-backed securities, agency
mortgages, asset-backed securities and government securities.
Alternative and other assets include investments in hedge fund
of funds that follow diversified investment strategies. To date,
the Company has not invested pension funds in its own stock, and
has no intention of doing so in the future.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Within each asset class, careful consideration is given to
balancing the portfolio among industry sectors, geographies,
interest rate sensitivity, dependence on economic growth,
currency and other factors affecting investment returns. The
assets are managed by professional investment firms. They are
bound by precise mandates and are measured against specific
benchmarks. Among asset managers, consideration is given, among
others, to balancing security concentration, issuer
concentration, investment style and reliance on particular
active investment strategies.
For measuring the expected U.S. postretirement benefit
obligation at December 31, 2009 and 2008, the Company
assumed an 8.5% health care cost trend rate for 2010 and 2009,
respectively, decreasing to 4.9% by 2060. For measuring the
Brazilian postretirement benefit plan obligation at
December 31, 2009 and 2008, the Company assumed a 10.0%
health care cost trend rate for 2010 and 2009, respectively,
decreasing to 5.5% by 2019. Changing the assumed health care
cost trend rates by one percentage point each year and holding
all other assumptions constant would have the following effect
to service and interest cost for 2010 and the accumulated
postretirement benefit obligation at December 31, 2009 (in
millions):
One Percentage
One Percentage
Point Increase
Point Decrease
Effect on service and interest cost
$
0.2
$
(0.1
)
Effect on accumulated benefit obligation
$
3.0
$
(2.6
)
The Company currently estimates its minimum contributions to its
U.S.-based
defined pension plans for 2010 will aggregate approximately
$1.1 million. The Company currently estimates its benefit
payments for 2010 to its
U.S.-based
postretirement health care and life insurance benefit plans will
aggregate approximately $1.8 million. The Company currently
estimates its minimum contributions for underfunded plans and
benefit payments for unfunded plans for 2010 to its
non-U.S.-
based defined pension plans will aggregate approximately
$29.0 million, of which approximately $21.2 million
relates to its U.K. pension plan.
During 2009, approximately $40.9 million of benefit
payments, including settlements, were made related to the
Company’s pension plans. At December 31, 2009, the
aggregate expected benefit payments for all of the
Company’s pension plans are as follows (in millions):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2009, approximately $1.7 million of benefit payments
were made related to the Company’s U.S. and Brazilian
postretirement benefit plans. At December 31, 2009, the
aggregate expected benefit payments for the Company’s
U.S. and Brazilian postretirement benefit plans are as
follows (in millions):
2010
$
1.8
2011
1.8
2012
1.9
2013
1.9
2014
2.0
2015 through 2019
10.0
$
19.4
The ENPP provides a group of senior Company executives with
retirement income for a period of 15 years based on a
percentage of their average final salary and bonus, reduced by
the executive’s social security benefits and 401(k)
employer matching contributions account. The benefit paid to the
executives ranges from 2.25% to 3% of the average of the last
three years of their base salary plus bonus prior to their
termination of employment (“final earnings”) times
credited years of service, with a maximum benefit of 45% to 60%
of the final earnings, depending on the level of the executive.
Benefits under the ENPP vest if the participant has attained
age 50 with at least ten years of service (five years of
which include years of participation in the ENPP), but are not
payable until the participant reaches age 65 or upon
termination of services because of death or disability, adjusted
to reflect payment prior to age 65.
Net annual ENPP cost and the measurement assumptions for the
plans for the years ended December 31, 2009, 2008 and 2007
are set forth below (in millions, except percentages):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables set forth reconciliations of the changes in
benefit obligation and funded status as of December 31,2009 and 2008 (in millions):
Change in benefit obligation
2009
2008
Benefit obligation at beginning of year
$
12.4
$
10.2
Service cost
1.2
1.1
Interest cost
0.8
0.6
Actuarial loss
2.5
0.9
Benefits paid
(0.4
)
(0.4
)
Benefit obligation at end of year
$
16.5
$
12.4
Funded status
$
(16.5
)
$
(12.4
)
Unrecognized net actuarial loss (gain)
0.7
(2.0
)
Unrecognized prior service cost
2.9
3.4
Accumulated other comprehensive loss
(3.6
)
(1.4
)
Net amount recognized
$
(16.5
)
$
(12.4
)
Amounts recognized in Consolidated Balance Sheets:
Other current liabilities
$
(0.7
)
$
(0.5
)
Pensions and postretirement health care benefits (noncurrent)
(15.8
)
(11.9
)
Net amount recognized
$
(16.5
)
$
(12.4
)
The weighted average discount rate used to determine the benefit
obligation for the ENPP for the years ended December 31,2009 and 2008 was 5.5% and 6.25%, respectively.
At December 31, 2009, the Company’s accumulated other
comprehensive loss included a net actuarial loss of
approximately $0.7 million and a net prior service cost of
approximately $2.9 million related to the ENPP. The
estimated net actuarial loss and net prior service cost related
to the ENPP that will be amortized from the Company’s
accumulated other comprehensive loss during the year ended
December 31, 2010 are approximately $0.0 million and
$0.5 million, respectively.
At December 31, 2009 and 2008, the Company recorded a
reduction to equity of $3.6 million and $1.4 million,
respectively, related to the unfunded projected benefit
obligation of the ENPP. As the Company is not benefiting losses
for tax purposes in the United States, there was no tax impact
to these charges.
During 2009, approximately $0.4 million of benefit payments
were made related to the ENPP. At December 31, 2009, the
aggregate expected benefit payments for the ENPP are as follows
(in millions):
2010
$
0.7
2011
0.8
2012
0.9
2013
1.1
2014
1.1
2015 through 2019
7.3
$
11.9
The Company maintains separate defined contribution plans
covering certain employees primarily in the United States, the
United Kingdom and Brazil. Under the plans, the Company
contributes a specified
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
percentage of each eligible employee’s compensation. The
Company contributed approximately $9.1 million,
$9.2 million and $9.0 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
9.
Common
Stock
At December 31, 2009, the Company had 150.0 million
authorized shares of common stock with a par value of $0.01 per
share, with approximately 92.5 million shares of common
stock outstanding; approximately 1.9 million shares
reserved for issuance under the Company’s Option Plan
(Note 10); and approximately 0.8 million shares
reserved for issuance under the Company’s 2006 Long-Term
Incentive Plan (the “2006 Plan”) (Note 10).
The Company has a stockholder rights plan, which was adopted in
April 1994 following stockholder approval. The plan provides
that each share of common stock outstanding will have attached
to it the right to purchase a one-hundredth of a share of Junior
Cumulative Preferred Stock, with a par value $0.01 per share.
The purchase price per a one-hundredth of a share is $100.00,
subject to adjustment. The rights will be exercisable only if a
person or group (“acquirer”) acquires 20% or more of
the Company’s common stock or announces a tender offer or
exchange offer that would result in the acquisition of 20% or
more of the Company’s common stock or, in some
circumstances, if additional conditions are met. Once they are
exercisable, the plan allows stockholders, other than the
acquirer, to purchase the Company’s common stock or
securities of the acquirer with a then current market value of
two times the exercise price of the right. The rights are
redeemable for $0.01 per right, subject to adjustment, at the
option of the Company’s Board of Directors. The rights will
expire on April 26, 2014, unless they are extended,
redeemed or exchanged by the Company before that date.
10.
Stock
Incentive Plans
Under the 2006 Plan, up to 5.0 million shares of AGCO
common stock may be issued. The 2006 Plan allows the Company,
under the direction of the Board of Directors’ Compensation
Committee, to make grants of performance shares, stock
appreciation rights, stock options and restricted stock awards
to employees, officers and non-employee directors of the Company.
Employee
Plans
The 2006 Plan provides for participants to earn from 33% to 200%
of the target awards depending on the actual performance
achieved, with no shares earned if performance is below the
established minimum target. Awards earned under the performance
share plan are paid in shares of common stock at the end of each
performance period. The compensation expense associated with
these awards is amortized ratably over the vesting or
performance period based on the Company’s projected
assessment of the level of performance that will be achieved and
earned.
Compensation expense recorded during 2009, 2008 and 2007 with
respect to awards granted was based upon the stock price as of
the grant date. The weighted average grant-date fair value of
performance awards granted under the 2006 Plan during 2009, 2008
and 2007 was $21.55, $57.12 and $37.39, respectively. Based on
the level of performance achieved as of December 31, 2009,
883,188 shares were earned under the
2007-2009
performance period. The 2006 Plan allows for the participant to
have the option of forfeiting a portion of the shares awarded in
lieu of a cash payment contributed to the participant’s tax
withholding to satisfy the participant’s statutory minimum
federal, state and employment taxes which would be payable at
the time of grant. Approximately 551,152 shares will be
issued on February 26, 2010, net of approximately
332,036 shares that will be withheld for taxes related to
the earned awards. Based on the level of performance achieved as
of December 31, 2008, 887,124 shares were earned under
the
2006-2008
performance period and 581,393 shares were issued on
March 2, 2009, net of 305,731 shares that were
withheld for taxes related to the earned awards.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2009, the Company granted 1,238,000 awards for the
three-year performance period commencing in 2009 and ending in
2011 assuming the maximum target level of performance is
achieved. Performance award transactions during 2009 were as
follows and are presented as if the Company were to achieve its
maximum levels of performance under the plan:
Shares awarded but not earned at January 1
1,446,168
Shares awarded
1,238,000
Shares forfeited or unearned
(58,112
)
Shares earned
(883,188
)
Shares awarded but not earned at December 31
1,742,868
As of December 31, 2009, the total compensation cost
related to unearned performance awards not yet recognized,
assuming the Company’s current projected assessment of the
level of performance that will be achieved and earned, was
approximately $1.6 million, and the weighted average period
over which it is expected to be recognized is approximately one
year.
On December 6, 2007, the Board of Directors of the Company
approved two retention-based restricted stock awards of
$2,000,000 each to the Company’s Chairman, President and
Chief Executive Officer. The first award was granted on
December 6, 2007, and totaled 28,839 shares that will
vest over a five-year period at the rate of 25% at the end of
the third year, 25% at the end of the fourth year, and 50% at
the end of the fifth year. The second award was granted on
December 5, 2008, and totaled 99,010 shares that will
vest over a four-year period at the rate of 25% at the end of
the second year, 25% at the end of the third year, and 50% at
the end of the fourth year. Vesting is subject to his continued
employment by the Company on the date of vesting, except under
certain circumstances such as a change in control. The Company
is recognizing stock compensation expense ratably over the
vesting period for each grant.
In addition to the performance share plan, certain executives
and key managers are eligible to receive grants of SSARs or
incentive stock options depending on the participant’s
country of employment. The SSARs provide a participant with the
right to receive the aggregate appreciation in stock price over
the market price of the Company’s common stock at the date
of grant, payable in shares of the Company’s common stock.
The participant may exercise his or her SSAR at any time after
the grant is vested but no later than seven years after the date
of grant. The SSARs vest ratably over a four-year period from
the date of grant. SSAR award grants made to certain executives
and key managers under the 2006 Plan are made with the base
price equal to the price of the Company’s common stock on
the date of grant. The Company recorded stock compensation
expense of approximately $2.3 million, $1.7 million
and $1.2 million associated with SSAR award grants during
2009, 2008 and 2007, respectively. The compensation expense
associated with these awards is being amortized ratably over the
vesting period. The Company estimated the fair value of the
grants using the Black-Scholes option pricing model. The Company
utilized the “simplified” method for estimating the
expected term of granted SSARs during the year ended
December 31, 2009 as afforded by SEC Staff Accounting
Bulletin (“SAB”) No. 107, “Share-Based
Payment (SAB Topic 14),” and SAB No. 110,
“Share-Based Payment (SAB Topic 14.D.2).” The
expected term used to value a grant under the simplified method
is the mid-point between the vesting date and the contractual
term of the option or SSAR. As the Company has only been
granting SSARs under the 2006 Plan since April 2006, it does not
believe it has sufficient relevant experience regarding employee
exercise behavior. The weighted average grant-date fair value of
SSARs granted under the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2006 Plan and the weighted average assumptions under the
Black-Scholes option model were as follows for the years ended
December 31, 2009, 2008 and 2007:
Weighted average assumptions under Black-Scholes option model:
Expected life of awards (years)
5.5
5.5
5.5
Risk-free interest rate
1.6
%
2.7
%
4.7
%
Expected volatility
45.3
%
38.0
%
41.4
%
Expected dividend yield
—
—
—
SSAR transactions during the year ended December 31, 2009
were as follows:
SSARs outstanding at January 1
415,791
SSARs granted
300,500
SSARs exercised
(1,500
)
SSARs canceled or forfeited
(6,750
)
SSARs outstanding at December 31
708,041
SSAR price ranges per share:
Granted
$
21.45-29.23
Exercised
23.80
Canceled or forfeited
23.80-56.98
Weighted average SSAR exercise prices per share:
Granted
$
21.59
Exercised
23.80
Canceled or forfeited
32.52
Outstanding at December 31
31.09
At December 31, 2009, the weighted average remaining
contractual life of SSARs outstanding was approximately five
years. As of December 31, 2009, the total compensation cost
related to unvested SSARs not yet recognized was approximately
$3.7 million and the weighted-average period over which it
is expected to be recognized is approximately two years.
The following table sets forth the exercise price range, number
of shares, weighted average exercise price, and remaining
contractual lives by groups of similar price:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The total fair value of SSARs vested during 2009 was
$1.6 million. There were 514,691 SSARs that were not vested
as of December 31, 2009. The total intrinsic value of
outstanding and exercisable SSARs as of December 31, 2009
was $4.3 million and $0.8 million, respectively.
On January 20, 2010, the Company granted 374,250
performance award shares (subject to the Company achieving
future target levels of performance) and 180,000 SSARs under the
2006 Plan.
Director
Restricted Stock Grants
The 2006 Plan provides for annual restricted stock grants of the
Company’s common stock to all non-employee directors. The
shares are restricted as to transferability for a period of
three years, but are not subject to forfeiture. In the event a
director departs from the Company’s Board of Directors, the
non-transferability period would expire immediately. The plan
allows for the director to have the option of forfeiting a
portion of the shares awarded in lieu of a cash payment
contributed to the participant’s tax withholding to satisfy
the statutory minimum federal, state and employment taxes which
would be payable at the time of grant. The April 23, 2009
grant equated to 38,130 shares of common stock, of which
26,388 shares of common stock were issued, after shares
were withheld for withholding taxes. The Company recorded stock
compensation expense of approximately $0.9 million during
2009 associated with these grants. The 2010 annual restricted
stock grant will be made on the date of the Company’s 2010
annual stockholders’ meeting, which is April 22, 2010.
The April 24, 2008 grant equated to 11,320 shares of
common stock, of which 8,608 shares of common stock were
issued, after shares were withheld for withholding taxes. The
Company recorded stock compensation expense of approximately
$0.8 million during 2008 associated with these grants. The
January 1, 2007 grant equated to 8,080 shares of
common stock, of which 6,346 shares of common stock were
issued, after shares were withheld for withholding taxes. The
Company recorded stock compensation expense of approximately
$0.3 million during 2007 associated with these grants.
As of December 31, 2009, of the 5.0 million shares
reserved for issuance under the 2006 Plan, approximately
0.8 million shares were available for grant, assuming the
maximum number of shares are earned related to the performance
award grants discussed above.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock
Option Plan
There have been no grants under the Company’s Option Plan
since 2002, and the Company does not intend to make any grants
under the Option Plan in the future. All grants made expire no
later than ten years from the date of grant. All of the
Company’s outstanding stock options are fully vested. Stock
option transactions during the year ended December 31, 2009
were as follows:
Options outstanding at January 1
53,600
Options granted
—
Options exercised
(1,425
)
Options canceled
—
Options outstanding at December 31
52,175
Options available for grant at December 31
1,935,437
Option price ranges per share:
Granted
$
—
Exercised
11.00-15.12
Canceled
—
Weighted average option prices per share:
Outstanding at January 1
$
14.75
Granted
—
Exercised
12.23
Canceled
—
Outstanding at December 31
14.82
At December 31, 2009, the outstanding and exercisable
options had a weighted average remaining contractual life of
approximately two years and an aggregate intrinsic value of
approximately $0.9 million.
The following table sets forth the exercise price range, number
of shares, weighted average exercise price, and remaining
contractual lives by groups of similar price:
The total intrinsic value of options exercised during the years
ended December 31, 2009, 2008 and 2007 was approximately
$0.0 million, $0.8 million and $8.3 million,
respectively. Cash proceeds received from stock option exercises
during 2009, 2008 and 2007 was approximately $0.0 million,
$0.3 million and $8.2 million, respectively. The
Company realized an insignificant tax benefit from the exercise
of these options.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
11.
Derivative
Instruments and Hedging Activities
All derivatives are recognized on the Company’s
Consolidated Balance Sheets at fair value. On the date the
derivative contract is entered into, the Company designates the
derivative as either (1) a fair value hedge of a recognized
liability, (2) a cash flow hedge of a forecasted
transaction, (3) a hedge of a net investment in a foreign
operation, or (4) a non-designated derivative instrument.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as the risk management
objectives and strategy for undertaking various hedge
transactions. The Company formally assesses, both at the
hedge’s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flow of
hedged items. When it is determined that a derivative is no
longer highly effective as a hedge, hedge accounting is
discontinued on a prospective basis.
Foreign
Currency Risk
The Company has significant manufacturing operations in the
United States, France, Germany, Finland 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 Euro, Brazilian real and the Canadian dollar in relation to
the United States dollar, and the Euro in relation to the
British pound.
The Company attempts to manage its transactional foreign
currency exposure by hedging foreign currency cash flow
forecasts and commitments arising from the anticipated
settlement of receivables and payables and from future purchases
and sales. Where naturally offsetting currency positions do not
occur, the Company hedges certain, but not all, of its exposures
through the use of foreign currency contracts. The
Company’s translation exposure resulting from translating
the financial statements of foreign subsidiaries into
United States dollars is not hedged. When practical, the
translation impact is reduced by financing local operations with
local borrowings.
The foreign currency contracts are primarily forward and options
contracts. These contracts’ fair value measurements fall
within the Level 2 fair value hierarchy under ASC 820.
Level 2 fair value measurements are generally based upon
quoted market prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets
that are not active, and model-derived valuations in which all
significant inputs or significant value-drivers are observable
in active markets. The fair value of foreign currency forward
contracts is based on a valuation model that discounts cash
flows resulting from the differential between the contract price
and the market-based forward rate. The fair value of foreign
currency option contracts is based on a valuation model that
utilizes spot and forward currency rates, interest rates and
currency pair volatility.
The Company’s senior management establishes the
Company’s foreign currency and interest rate risk
management policies. These policies are reviewed periodically by
the Audit Committee of the Company’s Board of Directors.
The policy allows for the use of derivative instruments to hedge
exposures to movements in foreign currency and interest rates.
The Company’s policy prohibits the use of derivative
instruments for speculative purposes.
Cash
Flow Hedges
During 2009, 2008 and 2007, the Company designated certain
foreign currency contracts as cash flow hedges of expected
future sales and purchases. The effective portion of the fair
value gains or losses on these cash flow hedges were recorded in
other comprehensive income (loss) and subsequently reclassified
into cost of goods sold during the period the sales and
purchases are recognized. These amounts offset the effect of the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
changes in foreign currency rates on the related sale and
purchase transactions. The amount of the (loss) gain recorded in
other comprehensive income (loss) that was reclassified to cost
of goods sold during the years ended December 31, 2009,
2008 and 2007 was approximately $(14.5) million,
$14.1 million and $4.1 million, respectively, on an
after-tax basis. The amount of the (loss) gain recorded to other
comprehensive income (loss) related to the outstanding cash flow
hedges as of December 31, 2009, 2008 and 2007 was
approximately $(1.3) million, $(36.7) million and
$7.7 million, respectively, on an after-tax basis. The
outstanding contracts as of December 31, 2009 range in
maturity through December 2010.
The following table summarizes the activity in accumulated other
comprehensive (loss) income related to the derivatives held by
the Company during the years ended December 31, 2009, 2008
and 2007 (in millions):
As of December 31, 2009, the Company had outstanding
foreign currency contracts with a notional amount of
approximately $139.3 million that were entered into to
hedge forecasted sale and purchase transactions.
Derivative
Transactions Not Designated as Hedging Instruments
During 2009, 2008 and 2007, the Company entered into foreign
currency contracts to hedge receivables and payables on the
Company and its subsidiaries’ balance sheets that are
denominated in foreign currencies other than the functional
currency. These contracts were classified as non-designated
derivative instruments.
As of December 31, 2009, the Company had outstanding
foreign currency contracts with a notional amount of
approximately $1,107.0 million that were entered into to
hedge receivables and payables that are denominated in foreign
currencies other than the functional currency. These contracts
were classified as non-designated derivative instruments and
changes in the fair value of these contracts are reported in
other expense, net. For the years ended December 31, 2009,
2008 and 2007, the Company recorded a net gain of approximately
$51.0 million, a net loss of approximately
$85.2 million and a net gain of approximately
$1.5 million, respectively, under the caption of other
expense, net related to these contracts. Gains and losses on
such contracts are historically substantially offset by losses
and gains on the remeasurement of the underlying asset or
liability being hedged.
The Company generally has not required collateral from
counterparties, nor has the Company historically been asked to
post collateral with respect to hedging transactions except that
during 2009 and 2008, the Company deposited cash with a
financial institution as security against outstanding foreign
currency contracts that matured throughout 2009. As of
December 31, 2008, the amount deposited was approximately
$33.8 million, and was classified as “Restricted
cash” in the Company’s Consolidated Balance Sheets.
This amount was recovered during 2009 as the contracts matured.
As of December 31, 2009, there were no collateral
requirements on any hedge transactions. The Company does not
have any agreements with contingent features that require the
Company to post collateral if there is a change in the credit
rating of the Company by the credit rating agencies.
The Company monitors the counterparty risk and credit ratings of
all the counterparties regularly. The Company believes that its
exposures are appropriately diversified across counterparties
and that these counterparties are creditworthy financial
institutions. If the Company perceives any risk with a
counterparty, then the Company would cease to do business with
that counterparty. There have been no negative impacts to the
Company from any non-performance of any counterparties.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
12.
Commitments
and Contingencies
The future payments required under the Company’s
significant commitments as of December 31, 2009 are as
follows (in millions):
Payments Due By Period
2010
2011
2012
2013
2014
Thereafter
Total
Interest payments related to
indebtedness(1)
$
25.7
$
22.2
$
22.2
$
22.2
$
6.6
$
—
$
98.9
Capital lease obligations
2.1
1.3
0.5
0.1
0.1
—
4.1
Operating lease obligations
41.5
30.3
20.7
13.1
8.1
40.5
154.2
Unconditional purchase
obligations(2)
58.6
16.2
7.5
—
—
—
82.3
Other short-term and long-term
obligations(3)
41.8
29.3
29.3
24.1
24.2
120.4
269.1
Total contractual cash obligations
$
169.7
$
99.3
$
80.2
$
59.5
$
39.0
$
160.9
$
608.6
(1)
Estimated interest payments are
calculated assuming current interest rates over minimum maturity
periods specified in debt agreements. Debt may be repaid sooner
or later than such minimum maturity periods.
(2)
Unconditional purchase obligations
exclude routine purchase orders entered into in the normal
course of business.
(3)
Other short-term and long-term
obligations include estimates of future minimum contribution
requirements under the Company’s U.S. and
non-U.S.
defined benefit pension and postretirement plans. These
estimates are based on current legislation in the countries the
Company operates within and are subject to change. Other
short-term and long-term obligations also include income tax
liabilities related to uncertain income tax positions connected
with ongoing income tax audits in various jurisdictions. In
addition, short-term obligations include amounts due to
financial institutions related to sales of certain receivables
that did not meet the off-balance sheet criteria under ASC 860.
Amount of Commitment Expiration Per Period
2010
2011
2012
2013
2014
Thereafter
Total
Guarantees
$
64.3
$
5.0
$
4.0
$
0.7
$
0.1
$
—
$
74.1
Off-Balance
Sheet Arrangements
Guarantees
The Company maintains a remarketing agreement with its
U.S. retail finance joint venture, AGCO Finance LLC,
whereby the Company is obligated to repurchase repossessed
inventory at market values. The Company has an agreement with
AGCO Finance LLC which limits the Company’s purchase
obligations under this arrangement to $6.0 million in the
aggregate per calendar year. The Company believes that any
losses that might be incurred on the resale of this equipment
will not materially impact the Company’s financial position
or results of operations, due to the fair value of the
underlying equipment.
At December 31, 2009, the Company guaranteed indebtedness
owed to third parties of approximately $74.1 million,
primarily related to dealer and end user financing of equipment.
Such guarantees generally obligate the Company to repay
outstanding finance obligations owed to financial institutions
if dealers or end users default on such loans through 2012. The
Company believes the credit risk associated with these
guarantees is not material to its financial position. Losses
under such guarantees have historically been insignificant. In
addition, the Company would be able to recover any amounts paid
under such guarantees from the sale of the underlying financed
farm equipment, as the fair value of such equipment would be
sufficient to offset a substantial portion of the amounts paid.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other
At December 31, 2009, the Company had foreign currency
contracts to buy an aggregate of approximately
$145.8 million of United States dollar equivalents and
foreign currency contracts to sell an aggregate of approximately
$935.5 million United States dollar equivalents. The
outstanding contracts as of December 31, 2009 range in
maturity through December 2010 (Note 11).
The Company sells substantially all of its wholesale accounts
receivable in North America to the Company’s U.S. and
Canadian retail finance joint ventures. The Company also sells
certain accounts receivable under its European securitization
facility and, from time to time, certain accounts receivable
under factoring arrangements to financial institutions around
the world. The Company evaluates the sale of such receivables
pursuant to the guidelines of ASC 860 and has determined that
these facilities should be accounted for as off-balance sheet
transactions.
Total lease expense under noncancelable operating leases was
$48.5 million, $45.3 million and $38.9 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Contingencies
As a result of Brazilian tax legislative changes impacting value
added taxes (“VAT”), the Company recorded a reserve of
approximately $11.6 million and $13.9 million against
its outstanding balance of Brazilian VAT taxes receivable as of
December 31, 2009 and 2008, respectively, due to the
uncertainty as to the Company’s ability to collect the
amounts outstanding.
In September 2009, the Company resolved inquiries by the
Securities and Exchange Commission (“SEC”) and the
Department Of Justice (“DOJ”) relating to the
Company’s sales of equipment to the Iraq government between
2000 and 2002 under the United Nations Oil for Food Program. As
part of this resolution, the Company entered into a consent
agreement with the SEC and a deferred prosecution agreement with
the DOJ and paid approximately $19.9 million to the
government consisting of disgorgement of profits arising from
the sales together with related fines, penalties and interest.
The Company also paid $0.6 million to the Danish
authorities to resolve a related inquiry. No further
governmental inquiries are pending relating to the United
Nations Oil for Food Program.
On June 27, 2008, the Republic of Iraq filed a civil action
in a federal court in New York, Case No. 08 CIV 59617,
naming as defendants three of the Company’s foreign
subsidiaries that participated in the United Nations Oil for
Food Program. Ninety-one other entities or companies were also
named as defendants in the civil action due to their
participation in the United Nations Oil for Food Program. The
complaint purports to assert claims against each of the
defendants seeking damages in an unspecified amount. Although
the Company’s subsidiaries intend to vigorously defend
against this action, it is not possible at this time to predict
the outcome of this action or its impact, if any, on the
Company, although if the outcomes were adverse, the Company
could be required to pay damages.
In August 2008, as part of a routine audit, the Brazilian taxing
authorities disallowed deductions relating to the amortization
of certain goodwill recognized in connection with a
reorganization of the Company’s Brazilian operations and
the related transfer of certain assets to the Company’s
Brazilian subsidiaries. The amount of the tax disallowance
through December 31, 2009, not including interest and
penalties, was approximately 90.6 million Brazilian reais
(or approximately $51.9 million). The amount ultimately in
dispute will be greater because of interest and penalties. The
Company has been advised by its legal and tax advisors that its
position with respect to the deductions is allowable under the
tax laws of Brazil. The Company is contesting the disallowance
and believes that it is not likely that the assessment, interest
or penalties will be required to be paid. However, the ultimate
outcome will not be determined until the Brazilian tax appeal
process is complete, which could take several years.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company is a party to various other legal claims and actions
incidental to its business. The Company believes that none of
these claims or actions, either individually or in the
aggregate, is material to its business or financial condition.
13.
Related
Party Transactions
Rabobank, a AAA rated financial institution based in The
Netherlands, is a 51% owner in the Company’s retail finance
joint ventures, which are located in the United States, Canada,
Brazil, Germany, France, the United Kingdom, Australia, Ireland
and Austria. Rabobank is also the principal agent and
participant in the Company’s revolving credit facility and
its securitization facility in Europe (Notes 4 and 7). The
majority of the assets of the Company’s retail finance
joint ventures represent finance receivables. The majority of
the liabilities represent notes payable and accrued interest.
Under the various joint venture agreements, Rabobank or its
affiliates provide financing to the joint venture companies,
primarily through lines of credit. The Company does not
guarantee the debt obligations of the retail finance joint
ventures other than a portion of the retail portfolio in Brazil
that is held outside the joint venture by Rabobank Brazil
(Note 12). Prior to 2005, the Company’s joint venture
in Brazil had an agency relationship with Rabobank whereby
Rabobank provided the funding. In February 2005, the Company
made a $21.3 million investment in its retail finance joint
venture with Rabobank Brazil. With the additional investment,
the joint venture’s organizational structure is now more
comparable to the Company’s other retail finance joint
ventures and will result in the gradual elimination of the
Company’s solvency guarantee to Rabobank for the portfolio
that was originally funded by Rabobank Brazil. As of
December 31, 2009, the solvency requirement for the
portfolio held by Rabobank was approximately $3.7 million.
The Company’s retail finance joint ventures provide retail
financing and wholesale financing to its dealers. The terms of
the financing arrangements offered to the Company’s dealers
are similar to arrangements the retail finance joint ventures
provide to unaffiliated third parties. In addition, the Company
transfers, on an ongoing basis, substantially all of its
wholesale interest-bearing and non-interest bearing accounts
receivable in North America to AGCO Finance LLC and AGCO Finance
Canada, Ltd., our retail finance joint ventures in North America
(Note 4). The Company maintains a remarketing agreement
with its U.S. retail finance joint ventures, AGCO Finance
LLC (Note 12). In addition, as part of sales incentives
provided to end users, the Company may from time to time
subsidize interest rates of retail financing provided by its
retail finance joint ventures. The cost of those programs is
recognized at the time of sale to the Company’s dealers.
14.
Segment
Reporting
The Company has four reportable segments: North America; South
America; Europe/Africa/Middle East; and Asia/Pacific. Each
regional 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 regional 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,
excluding corporate expense, are charged to each segment based
on the region and division where the expenses are incurred. As a
result, the components of operating income for one
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
segment may not be comparable to another segment. Segment
results for the years ended December 31, 2009, 2008 and
2007 are as follows (in millions):
North
South
Europe/Africa/
Asia/
Years Ended December 31,
America
America
Middle East
Pacific
Consolidated
2009
Net sales
$
1,442.7
$
1,167.1
$
3,782.1
$
238.5
$
6,630.4
Income from operations
21.9
64.6
222.3
21.2
330.0
Depreciation
24.1
15.7
86.9
2.9
129.6
Assets
583.9
515.1
1,566.6
140.8
2,806.4
Capital expenditures
33.3
29.4
152.3
0.3
215.3
2008
Net sales
$
1,794.3
$
1,496.5
$
4,905.4
$
228.4
$
8,424.6
Income from operations
8.6
134.2
517.1
28.3
688.2
Depreciation
26.8
20.0
77.8
2.8
127.4
Assets
685.0
489.2
1,751.0
86.6
3,011.8
Capital expenditures
31.4
25.1
194.7
0.1
251.3
2007
Net sales
$
1,488.1
$
1,090.6
$
4,067.1
$
182.3
$
6,828.1
(Loss) income from operations
(35.7
)
101.3
398.0
19.9
483.5
Depreciation
25.2
18.7
68.9
2.8
115.6
Assets
662.6
443.1
1,470.4
75.8
2,651.9
Capital expenditures
22.2
11.3
107.7
0.2
141.4
A reconciliation from the segment information to the
consolidated balances for income from operations and total
assets is set forth below (in millions):
2009
2008
2007
Segment income from operations
$
330.0
$
688.2
$
483.5
Corporate expenses
(71.3
)
(71.9
)
(48.1
)
Stock compensation
(8.2
)
(32.0
)
(25.0
)
Restructuring and other infrequent (expenses) income
(13.2
)
(0.2
)
2.3
Amortization of intangibles
(18.0
)
(19.1
)
(17.9
)
Consolidated income from operations
$
219.3
$
565.0
$
394.8
Segment assets
$
2,806.4
$
3,011.8
$
2,651.9
Cash and cash equivalents
652.7
512.2
582.4
Restricted cash
—
33.8
—
Receivables from affiliates
55.6
4.8
1.7
Investments in affiliates
347.5
275.1
284.6
Deferred tax assets, other current and noncurrent assets
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls
and Procedures
The Company’s management, including the Chief Executive
Officer and the Chief Financial Officer, does not expect that
the Company’s disclosure controls or the Company’s
internal controls will prevent all errors and all fraud.
However, our principal executive officer and principal financial
officer have concluded the Company’s disclosure controls
and procedures are effective at the reasonable assurance level.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further the design of
a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, have been detected. Because of the inherent
limitations in a cost effective control system, misstatements
due to error or fraud may occur and not be detected. We will
conduct periodic evaluations of our internal controls to
enhance, where necessary, our procedures and controls.
Evaluation
of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and
procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended) as of
December 31, 2009, have concluded that, as of such date,
our disclosure controls and procedures were effective at the
reasonable assurance level. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in
the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer’s management,
including its principal executive and principal financial
officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
Management’s
Annual Report on Internal Control over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining effective internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Company’s
internal control over financial reporting is designed to provide
reasonable assurance to the Company’s management and board
of directors regarding the preparation and fair presentation of
published financial statements for external purposes in
accordance with generally accepted accounting principles. In
assessing the effectiveness of the Company’s internal
controls over financial reporting, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in “Internal
Control — Integrated Framework.”
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2009. Based on this assessment, management
believes that, as of December 31, 2009, the Company’s
internal control over financial reporting is effective based on
the criteria referred to above.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that has
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. However,
as a result of the Company’s processes to comply with the
Sarbanes-Oxley Act of 2002, enhancements to the Company’s
internal control over financial reporting were implemented as
management addressed and remediated deficiencies that had been
identified.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
AGCO Corporation:
We have audited AGCO Corporation’s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). AGCO Corporation’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, AGCO Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of AGCO Corporation as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the years in the three-year period ended
December 31, 2009, and our report dated February 26,2010 expressed an unqualified opinion on those consolidated
financial statements.
The information called for by Items 10, 11, 12, 13 and 14,
if any, will be contained in our Proxy Statement for the 2010
Annual Meeting of Stockholders which we intend to file in March
2010.
Item 10.
Directors,
Executive Officers and Corporate Governance
The information with respect to directors and committees
required by this Item set forth in our Proxy Statement for the
2010 Annual Meeting of Stockholders in the sections entitled
“Election of Directors,”“Directors Continuing in
Office” and “Board of Directors and Certain Committees
of the Board” is incorporated herein by reference. The
information with respect to executive officers required by this
Item set forth under the heading “Executive Officers of the
Registrant” in Part I of this
Form 10-K
and our Proxy Statement for the 2010 Annual Meeting of
Stockholders in the section entitled “Section 16(a)
Beneficial Ownership Reporting Compliance” is incorporated
herein by reference.
The information under the heading “Available
Information” set forth in Part I of this
Form 10-K
is incorporated herein by reference. The code of conduct
referenced therein applies to our principal executive officer,
principal financial officer, principal accounting officer and
controller and the persons performing similar functions.
Item 11.
Executive
Compensation
The information with respect to executive compensation and its
establishment required by this Item set forth in our Proxy
Statement for the 2010 Annual Meeting of Stockholders in the
sections entitled “Board of Directors and Certain
Committees of the Board,”“Compensation Committee
Interlocks and Insider Participation,”“Executive
Compensation” and “Compensation Committee Report”
is incorporated herein by reference.
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
(a)
Securities
Authorized for Issuance Under Equity Compensation
Plans
AGCO maintains its 2006 Plan and its Option Plan pursuant to
which we may grant equity awards to eligible persons. For
additional information, see Note 10, “Stock Incentive
Plans”, in the Notes to Consolidated Financial Statements
included in this filing. The following table gives information
about equity awards under our Plans.
(a)
(b)
(c)
Number of Securities
Number of Securities
Weighted-Average
Remaining Available for Future
to be Issued
Exercise Price
Issuance Under Equity
upon Exercise
of Outstanding
Compensation Plans
of Outstanding
Awards Under
(Excluding Securities Reflected
Plan Category
Awards Under the Plans
the Plans
in Column (a))
Equity compensation plans approved by security holders
2,503,084
$
32.93
2,749,780
Equity compensation plans not approved by security holders
—
—
—
Total
2,503,084
$
32.93
2,749,780
(b) Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item set forth in our Proxy
Statement for the 2010 Annual Meeting of Stockholders in the
section entitled “Principal Holders of Common Stock”
is incorporated herein by reference.
Certain
Relationships and Related Transactions, and Director
Independence
The information required by this Item set forth in our Proxy
Statement for the 2010 Annual Meeting of Stockholders in the
section entitled “Certain Relationships and Related
Transactions” is incorporated herein by reference.
Item 14.
Principal
Accountant Fees and Services
The information required by this Item set forth in our 2010
Proxy Statement for the Annual Meeting of Stockholders in the
sections entitled “Audit Committee Report” and
“Board of Directors and Certain Committees of the
Board” is incorporated herein by reference.
PART IV
Item 15.
Exhibits
and Financial Statement Schedules
(a) The following documents are filed as part of this
Form 10-K:
(1) The Consolidated Financial Statements, Notes to
Consolidated Financial Statements, Report of Independent
Registered Public Accounting Firm for AGCO Corporation and its
subsidiaries are presented under Item 8 of this
Form 10-K.
(2) Financial Statement Schedules:
The following Consolidated Financial Statement Schedule of AGCO
Corporation and its subsidiaries are included herein and follow
this report.
Schedule
Description
Schedule II
Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted because
the required information is contained in Notes to the
Consolidated Financial Statements or because such schedules are
not required or are not applicable.
(3) The following exhibits are filed or incorporated by
reference as part of this report. Each management contract or
compensation plan required to be filed as an exhibit is
identified by an asterisk (*).
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the date
indicated.
Amounts charged through other
comprehensive income (loss) during the years ended
December 31, 2009, 2008 and 2007 were $0.8 million,
$7.7 million and $(2.1) million, respectively.
(2)
As of December 31, 2009,
approximately $94.5 million of this balance was recorded
within “Accrued expenses” and approximately
$3.0 million was recorded within “accounts receivable
allowances” in the Company’s Consolidated Balance
Sheets.