Prospectus Supplement No. 2
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-179952
AGCO CORPORATION
SUPPLEMENT NO. 2 TO
PROSPECTUS DATED APRIL 4, 2012
THE DATE OF THIS SUPPLEMENT IS AUGUST 29, 2012
On August 7, 2012, AGCO Corporation filed the attached
Form 10-Q for the quarterly period ended June 30, 2012
with the Securities and Exchange Commission.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
For the
quarter ended June 30,
2012
of
AGCO
CORPORATION
A Delaware
Corporation
IRS Employer Identification
No. 58-1960019
SEC File Number
1-12930
4205 River Green
Parkway
Duluth, GA 30096
(770)
813-9200
AGCO Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
AGCO Corporation has submitted electronically and
posted on its corporate website every Interactive Data File for the periods required to be submitted and posted pursuant to Rule 405 of
regulation
S-T.
As of July 31, 2012, AGCO Corporation had 97,221,724 shares of common stock outstanding. AGCO
Corporation is a large accelerated filer.
AGCO Corporation is a well-known seasoned issuer
and is not a shell company.
AGCO CORPORATION AND SUBSIDIARIES
INDEX
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Page
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 6. |
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EX-31.1 |
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EX-31.2 |
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EX-32.1 |
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EX-101 INSTANCE DOCUMENT |
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EX-101 SCHEMA DOCUMENT |
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EX-101 CALCULATION LINKBASE
DOCUMENT |
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EX-101 DEFINITION LINKBASE DOCUMENT |
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EX-101 LABELS LINKBASE DOCUMENT |
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EX-101 PRESENTATION LINKBASE
DOCUMENT |
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PART I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(unaudited and in millions, except share
amounts)
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June 30,
2012 |
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December 31,
2011 |
ASSETS |
Current Assets: |
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Cash and cash
equivalents |
$ |
393.4 |
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$ |
724.4 |
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Accounts and notes receivable,
net |
1,196.3 |
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|
994.2 |
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Inventories,
net |
2,023.2 |
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1,559.6 |
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Deferred tax assets |
138.2 |
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|
142.7 |
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Other current
assets |
271.1
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241.9
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Total current assets |
4,022.2 |
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3,662.8 |
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Property, plant and
equipment, net |
1,243.1 |
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1,222.6 |
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Investment in affiliates |
363.8 |
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346.3 |
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Deferred tax
assets |
46.0 |
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37.6 |
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Other assets |
125.8 |
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126.9 |
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Intangible assets,
net |
640.2 |
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|
666.5 |
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Goodwill |
1,190.2 |
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1,194.5 |
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Total
assets |
$
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7,631.3 |
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$
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7,257.2 |
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LIABILITIES AND
STOCKHOLDERS’ EQUITY |
Current
Liabilities: |
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Current portion of long-term
debt |
$ |
56.2 |
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$ |
60.1 |
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Accounts
payable |
989.0 |
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|
937.0 |
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Accrued expenses |
1,083.0 |
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|
1,080.6 |
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Other current
liabilities |
134.4
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127.8
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Total current liabilities |
2,262.6 |
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2,205.5 |
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Long-term debt, less
current portion |
1,471.4 |
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1,409.7 |
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Pensions and postretirement health care
benefits |
289.4 |
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298.6 |
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Deferred tax
liabilities |
193.5 |
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192.3 |
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Other noncurrent liabilities |
146.0 |
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119.9 |
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Total
liabilities |
4,362.9
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4,226.0
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Commitments and contingencies
(Note 15) |
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Temporary
equity |
12.4 |
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— |
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Stockholders’ Equity: |
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AGCO Corporation
stockholders’ equity: |
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Preferred stock; $0.01 par value,
1,000,000 shares authorized, no shares issued or outstanding in 2012 and 2011 |
— |
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— |
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Common stock;
$0.01 par value, 150,000,000 shares authorized, 97,221,724 and 97,194,732 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively |
1.0 |
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1.0 |
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Additional paid-in capital |
1,092.2 |
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|
1,073.2 |
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Retained
earnings |
2,646.7 |
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|
2,321.6 |
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Accumulated other comprehensive
loss |
(520.9 |
) |
|
(400.6 |
) |
Total AGCO Corporation
stockholders’ equity |
3,219.0
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2,995.2
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Noncontrolling interests |
37.0 |
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36.0 |
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Total
stockholders’ equity |
3,256.0
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3,031.2
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Total liabilities, temporary equity and
stockholders’ equity |
$ |
7,631.3 |
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$ |
7,257.2 |
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See accompanying notes to condensed consolidated financial
statements.
AGCO CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited and in millions, except per share
data)
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Three Months
Ended June 30, |
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2012 |
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2011 |
Net
sales |
$
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2,690.1 |
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$
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2,358.6 |
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Cost of goods sold |
2,078.7 |
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1,870.3 |
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Gross
profit |
611.4 |
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488.3 |
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Selling, general and administrative
expenses |
255.1 |
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216.5 |
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Engineering
expenses |
79.0 |
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66.2 |
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Restructuring and other infrequent
income |
(0.1 |
) |
|
(0.9 |
) |
Amortization of
intangibles |
12.5
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4.9
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Income from operations |
264.9 |
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|
201.6 |
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Interest expense,
net |
14.7 |
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12.5 |
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Other expense, net |
6.1 |
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7.9 |
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Income before income
taxes and equity in net earnings of affiliates |
244.1 |
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181.2 |
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Income tax provision |
57.3 |
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61.1 |
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Income before equity in
net earnings of affiliates |
186.8 |
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120.1 |
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Equity in net earnings of
affiliates |
15.3 |
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13.8 |
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Net
income |
202.1 |
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|
133.9 |
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Net loss (income) attributable to noncontrolling
interests |
2.8 |
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(0.2 |
) |
Net income attributable
to AGCO Corporation and subsidiaries |
$
|
204.9 |
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$
|
133.7 |
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Net income per common share attributable to AGCO
Corporation and subsidiaries: |
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Basic |
$
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2.11 |
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$
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1.41 |
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Diluted |
$ |
2.08 |
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$ |
1.36 |
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Weighted average number
of common and common equivalent shares outstanding: |
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Basic |
97.2 |
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94.7 |
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Diluted |
98.4 |
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98.6 |
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See accompanying notes to condensed consolidated
financial
statements.
AGCO CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(unaudited and in millions, except per share
data)
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Six
Months Ended June 30, |
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2012 |
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2011 |
Net
sales |
$
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4,963.8 |
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$
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4,156.3 |
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Cost of goods sold |
3,859.4 |
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3,312.1 |
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Gross
profit |
1,104.4 |
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844.2 |
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Selling, general and administrative
expenses |
494.0 |
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401.2 |
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Engineering
expenses |
151.1 |
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124.1 |
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Restructuring and other infrequent
income |
(0.1 |
) |
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(0.7 |
) |
Amortization of
intangibles |
24.7
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9.3
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Income from operations |
434.7 |
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310.3 |
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Interest expense,
net |
27.7 |
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18.0 |
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Other expense, net |
10.5 |
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10.2 |
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Income before income
taxes and equity in net earnings of affiliates |
396.5 |
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282.1 |
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Income tax provision |
100.5 |
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91.8 |
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Income before equity in
net earnings of affiliates |
296.0 |
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|
190.3 |
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Equity in net earnings of
affiliates |
27.3 |
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25.2 |
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Net
income |
323.3 |
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|
215.5 |
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Net loss (income) attributable to noncontrolling
interests |
1.8 |
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(1.8 |
) |
Net income attributable
to AGCO Corporation and subsidiaries |
$
|
325.1 |
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$
|
213.7 |
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Net income per common share attributable to AGCO
Corporation and subsidiaries: |
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Basic |
$
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3.35 |
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$
|
2.26 |
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Diluted |
$ |
3.29 |
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$ |
2.17 |
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Weighted average number
of common and common equivalent shares outstanding: |
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Basic |
97.1 |
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|
94.4 |
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Diluted |
98.8 |
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98.4 |
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See accompanying notes to condensed consolidated
financial statements.
AGCO CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(unaudited and in millions)
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Three Months
Ended June 30, |
|
2012 |
|
2011 |
Net
income |
$
|
202.1 |
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$
|
133.9 |
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Other comprehensive (loss) income, net of
reclassification adjustments: |
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Foreign
currency translation adjustments |
(200.4 |
) |
|
75.5 |
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Defined benefit pension plans,
net of tax |
2.8 |
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1.5 |
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Unrealized
(loss) gain on derivatives, net of tax |
(3.6
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)
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|
1.2
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Other comprehensive (loss) income, net of
reclassification adjustments |
(201.2 |
)
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|
78.2 |
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Comprehensive
income |
0.9 |
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|
212.1 |
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Comprehensive loss (income) attributable to
noncontrolling interests |
4.2 |
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(0.3 |
) |
Comprehensive income
attributable to AGCO Corporation and subsidiaries |
$
|
5.1 |
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$
|
211.8 |
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Six
Months Ended June 30, |
|
2012 |
|
2011 |
Net
income |
$
|
323.3 |
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$
|
215.5 |
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Other comprehensive (loss) income, net of
reclassification adjustments: |
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Foreign
currency translation adjustments |
(125.6 |
) |
|
168.1 |
|
Defined benefit pension plans,
net of tax |
5.0 |
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|
3.1 |
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Unrealized
(loss) gain on derivatives, net of tax |
(1.1
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)
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|
5.3
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Other comprehensive (loss) income, net of
reclassification adjustments |
(121.7 |
)
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|
176.5 |
|
Comprehensive
income |
201.6
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|
392.0 |
|
Comprehensive loss (income) attributable to
noncontrolling interests |
3.2 |
|
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(1.9 |
) |
Comprehensive income
attributable to AGCO Corporation and subsidiaries |
$
|
204.8 |
|
|
$
|
390.1 |
|
See accompanying notes to condensed consolidated
financial statements.
AGCO CORPORATION AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(unaudited and in millions)
|
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Six
Months Ended June 30, |
|
2012 |
|
2011 |
Cash flows from
operating activities: |
|
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|
|
|
Net income |
$ |
323.3 |
|
|
$ |
215.5 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
Depreciation |
85.7 |
|
|
73.6 |
|
Deferred debt issuance
cost amortization |
1.7 |
|
|
1.9 |
|
Amortization of intangibles |
24.7 |
|
|
9.3 |
|
Amortization of debt
discount |
4.3 |
|
|
4.1 |
|
Stock compensation |
19.2 |
|
|
11.4 |
|
Equity in net earnings
of affiliates, net of cash received |
(18.5 |
) |
|
(17.4 |
) |
Deferred income tax provision |
2.4 |
|
|
1.0 |
|
Other |
(0.2 |
) |
|
(1.5 |
) |
Changes in
operating assets and liabilities, net of effects from purchase of businesses: |
|
|
|
|
|
Accounts and notes
receivable, net |
(248.2 |
) |
|
(42.6 |
) |
Inventories, net |
(508.1 |
) |
|
(269.3 |
) |
Other current and
noncurrent assets |
(35.4 |
) |
|
(26.3 |
) |
Accounts payable |
91.7 |
|
|
74.4 |
|
Accrued
expenses |
42.2 |
|
|
69.8 |
|
Other current and noncurrent
liabilities |
27.0 |
|
|
(2.4 |
) |
Total
adjustments |
(511.5
|
)
|
|
(114.0
|
)
|
Net cash (used in) provided by operating
activities |
(188.2 |
) |
|
101.5 |
|
Cash flows from
investing activities: |
|
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|
|
|
Purchases of property, plant and
equipment |
(151.1 |
) |
|
(112.4 |
) |
Proceeds from sale of
property, plant and equipment |
0.2 |
|
|
0.8 |
|
Purchase of businesses, net of cash
acquired |
(2.4 |
) |
|
(88.3 |
) |
Investments in
consolidated affiliates, net of cash acquired |
(20.1 |
) |
|
(25.0 |
) |
Investments in unconsolidated affiliates,
net |
(7.9 |
) |
|
(6.0 |
) |
Restricted cash and
other |
(2.0
|
)
|
|
—
|
|
Net cash used in investing
activities |
(183.3 |
) |
|
(230.9 |
) |
Cash flows from
financing activities: |
|
|
|
|
|
Conversion of convertible senior subordinated
notes |
— |
|
|
(60.7 |
) |
Proceeds from debt
obligations, net |
42.8 |
|
|
18.3 |
|
Payment of debt issuance costs |
(0.1 |
) |
|
— |
|
Payment of minimum tax
withholdings on stock compensation |
— |
|
|
(2.5 |
) |
(Distribution to) investment by noncontrolling
interests |
(0.3 |
) |
|
(0.5 |
) |
Proceeds from issuance
of common stock |
—
|
|
|
0.1
|
|
Net cash provided by (used in) financing
activities |
42.4 |
|
|
(45.3 |
) |
Effects of exchange rate
changes on cash and cash equivalents |
(1.9 |
) |
|
27.9 |
|
Decrease in cash and cash
equivalents |
(331.0 |
) |
|
(146.8 |
) |
Cash and cash
equivalents, beginning of period |
724.4
|
|
|
719.9
|
|
Cash and cash equivalents, end of
period |
$ |
393.4 |
|
|
$ |
573.1 |
|
See accompanying notes to condensed consolidated financial
statements.
AGCO CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
1.
BASIS OF
PRESENTATION
The condensed consolidated financial statements of AGCO Corporation and its subsidiaries (the “Company” or “AGCO”) included herein have been prepared in accordance with United
States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations and cash flows at the dates and for the
periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2011. Results for interim periods are not necessarily indicative of the results for the year. Certain prior period amounts have been reclassified to conform to the current period
presentation.
Recent Accounting
Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for
Impairment” (“ASU 2012-02”). ASU 2012-02 permits an entity to make a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If an entity concludes it is more likely than
not that the fair value of such an asset exceeds its carrying amount, it need not calculate the fair value of the asset in that year. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after
September 15, 2012. Early adoption is permitted. The Company plans to adopt this standard in the third quarter of 2012. The Company does not expect the adoption of this ASU to have a material impact on the Company's results of operations or
financial condition.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 increases the prominence of other
comprehensive income in financial statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The standard initially required
that reclassification adjustments from other comprehensive income be measured and presented by income statement line item on the face of the statement of operations. In December 2011, however, the FASB issued Accounting Standard Codification
2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05.” This standard defers the
requirement to present components of reclassifications of other comprehensive income on the face of the statement of operations. The Company adopted these standards by consecutively presenting the Condensed Consolidated Statements of Operations and
the Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011.
In May 2011, the FASB issued ASU 2011-04,
“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 clarifies existing fair value measurement concepts and
continues the convergence towards a uniform framework for applying fair value measurement principles. This standard requires additional disclosures for fair value measurements, primarily Level 3 measurements. ASU 2011-04 is effective for fiscal
years and interim periods beginning after December 15, 2011 and is to be applied prospectively. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements or footnote disclosures.
2.
ACQUISITIONS
During 2012, the Company acquired 61% of Santal Equipamentos S.A. Comércio e Indústria (“Santal”) for approximately R$36.7
million, net of approximately R$11.9
million cash acquired (or approximately $20.1 million, net). Santal, headquartered in Ribeirão Preto, Brazil, manufactures and distributes sugar cane planting, harvesting, handling and transportation equipment as well as replacement parts across Brazil.
The acquisition of Santal will provide the Company’s customers in Brazil with a wider range of agricultural products and services. The acquisition was funded with available cash on hand. The Company recorded approximately $28.0 million of goodwill and approximately $2.6 million of tradename, trademark and patent identifiable intangible assets associated with the
acquisition. The goodwill is reported within the
Notes to Condensed Consolidated Financial
Statements - Continued
(unaudited)
Company’s South American geographical reportable segment. The Company and the seller each have a call option and put option, respectively, with varying dates with respect to the remaining 39% interest in Santal. Therefore, the fair value of the redeemable noncontrolling interest in Santal was
recorded within “Temporary equity” in the Company’s Condensed Consolidated Balance Sheet as of the acquisition date.
On November 30, 2011, the Company acquired GSI
Holdings Corp. (“GSI”) for $932.2 million, net of approximately $27.9 million cash acquired. GSI, headquartered in Assumption, Illinois, is a leading manufacturer of grain
storage and protein production systems. The acquisition was financed by the issuance of $300.0
million of 57/8% senior notes and the Company’s credit facility (Note 5).
On November 30, 2011, the Company acquired 80% of
Shandong Dafeng Machinery Co., Ltd. (“Dafeng”) for approximately 172.0 million yuan
(or approximately $27.0 million). The Company acquired approximately $17.1 million of cash and assumed approximately $41.1 million of current indebtedness associated with the transaction. Dafeng is located in Yanzhou, China
and manufactures a complete range of corn, grain, rice and soybean harvesting machines for Chinese domestic markets. The acquisition was funded with available cash on hand.
On March 3, 2011, the Company acquired the
remaining 50% interest of Laverda SpA (“Laverda”) for approximately €63.8 million, net of approximately €1.2 million cash acquired (or approximately $88.3 million, net). Laverda, previously 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 the Company’s Massey Ferguson, Fendt and Challenger brands
for distribution in Europe, Africa and the Middle East. The Company’s 100% ownership of
Laverda includes ownership in Fella-Werke GMBH, a German manufacturer of grass and hay machinery. The acquisition was funded with available cash on hand.
The results of operations for the Santal, GSI, Dafeng and
Laverda acquisitions have been included in the Company’s Condensed Consolidated Financial Statements as of and from the dates of the respective acquisitions. The Company allocated the purchase price of each acquisition to the assets acquired
and liabilities assumed based on preliminary estimates of their fair values as of the respective acquisition dates. In general, the acquired assets of the Santal, GSI, Dafeng and Laverda acquisitions consisted primarily of accounts receivable,
property, plant and equipment, inventories, other identifiable intangible assets and goodwill. The liabilities assumed generally consisted of accounts payable, current indebtedness and noncurrent deferred tax
liabilities.
The following unaudited pro forma data summarizes the results of operations for the three and six months ended June 30, 2011 as if the current year acquisition and prior year acquisitions had occurred as
of January 1, 2011 and 2010, respectively. The unaudited pro forma information does not reflect the impact of future events that may occur after the acquisition, including, but not limited to, anticipated cost savings from operating synergies.
The unaudited pro forma financial information has been adjusted to give effect to adjustments that are directly related to the business combination, factually supportable, and expected to have a continuing impact. The adjustments include the
application of the Company’s accounting policies, depreciation and amortization related to fair value adjustments to property, plant and equipment, intangible assets and inventory, tax-related adjustments and the impact of the Company’s
issuance of $300.0 million of 57/8%
senior notes and the credit facility, which were used to finance the acquisition of GSI. This unaudited pro forma information has been prepared for comparative purposes only and does not purport to represent what the results of operations of the
Company actually would have been had the transactions occurred on the date indicated or what the results of operations may be in any future period (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
Six Months Ended
June 30, |
|
2011 |
|
2011 |
Net sales |
$
|
2,587.9 |
|
|
$
|
4,568.8 |
|
Net income attributable to AGCO Corporation and
subsidiaries |
159.0 |
|
|
246.1 |
|
Net income per common share
attributable to AGCO Corporation and subsidiaries: |
|
|
|
Basic |
$ |
1.68 |
|
|
$ |
2.61 |
|
Diluted |
$ |
1.61 |
|
|
$ |
2.50 |
|
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
3. STOCK COMPENSATION
PLANS
The Company recorded stock compensation expense as follows for the three and six months ended June 30, 2012 and 2011 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, |
|
Six
Months Ended June 30, |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
Cost of goods
sold |
$
|
0.6 |
|
|
$
|
0.4 |
|
|
$
|
1.2 |
|
|
$
|
0.7 |
|
Selling, general and administrative
expenses |
10.4 |
|
|
6.6 |
|
|
18.2 |
|
|
11.0 |
|
Total stock compensation
expense |
$
|
11.0 |
|
|
$
|
7.0 |
|
|
$
|
19.4 |
|
|
$
|
11.7 |
|
Stock Incentive Plan
Under the Company’s 2006 Long Term Incentive Plan (the “2006 Plan”), up to 10.0 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 and restricted stock awards to employees, officers and non-employee directors of the Company.
Employee
Plans
The weighted average grant-date fair value of performance awards granted under the 2006 Plan during the
six months ended June 30, 2012 and 2011 was
$52.14 and $53.18, respectively.
During the six months ended
June 30, 2012, the Company granted 1,056,758 awards primarily related to the three-year performance period commencing in 2012 and ending in
2014, assuming the maximum target level of performance is achieved. During the six months ended
June 30, 2012, the Company also granted 141,585 awards related to a three- to five-year performance period that commenced in 2011 and ending in 2015,
assuming the maximum target level of performance is achieved for operating margin improvement. The compensation expense associated with all awards granted under the 2006 Plan 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. Performance award transactions during the six months ended June 30, 2012 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 |
2,207,981 |
|
Shares awarded |
1,198,343 |
|
Shares forfeited or
unearned |
(47,386 |
) |
Shares earned |
— |
|
Shares awarded but not
earned at June 30 |
3,358,938 |
|
As of June 30, 2012, 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 $61.5 million, and the weighted average period over which it is expected to be recognized is approximately
two years.
During the three and six months ended June 30, 2012, the Company recorded stock compensation expense of approximately $0.9 million and
$1.8 million, respectively, associated with stock-settled appreciation rights (“SSAR”)
awards. During the three and six months ended June 30, 2011, the Company recorded stock compensation expense of approximately $0.6 million and
$1.3 million, respectively, associated with SSAR awards. 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 six months ended
June 30, 2012 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 SSAR. As the Company has only been granting SSARs 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 2006
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
Plan and the weighted average assumptions under the Black-Scholes option model were as follows for the six months ended June 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, |
|
2012 |
|
2011 |
Weighted average
grant-date fair value |
$
|
22.50 |
|
|
$
|
22.58 |
|
Weighted average assumptions under Black-Scholes
option model: |
|
|
|
|
|
Expected life of awards
(years) |
5.5 |
|
|
5.5 |
|
Risk-free interest rate |
0.8 |
% |
|
2.0 |
% |
Expected
volatility |
51.0 |
% |
|
49.5 |
% |
Expected dividend yield |
— |
|
|
— |
|
SSAR transactions during the six months ended
June 30, 2012 were as
follows:
|
|
|
|
|
SSARs outstanding at
January 1 |
832,060 |
|
SSARs granted |
305,900 |
|
SSARs
exercised |
(31,360 |
) |
SSARs canceled or forfeited |
— |
|
SSARs outstanding at
June 30 |
1,106,600 |
|
SSAR price ranges per share: |
|
|
Granted |
$
51.37-52.94 |
|
Exercised |
21.45-37.38 |
|
Canceled or
forfeited |
— |
|
Weighted average SSAR exercise prices per
share: |
|
|
Granted |
$ |
52.89 |
|
Exercised |
26.22 |
|
Canceled or
forfeited |
— |
|
Outstanding at June 30 |
41.53 |
|
At June 30, 2012, the weighted average remaining contractual life of SSARs outstanding was approximately
five years. As of June 30, 2012, the total compensation cost related to unvested SSARs not yet recognized was approximately
$10.0 million and the weighted-average period over which it is expected to be recognized is
approximately
three 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs Outstanding
|
|
SSARs Exercisable
|
Range
of Exercise Prices |
|
Number of Shares |
|
Weighted
Average Remaining Contractual Life (Years) |
|
Weighted Average Exercise Price |
|
Exercisable as of June 30, 2012 |
|
Weighted Average Exercise Price |
$21.45 – $32.01 |
|
250,938
|
|
|
3.4 |
|
$
|
22.17 |
|
|
173,688
|
|
|
$
|
21.98 |
|
$33.65 – $44.55 |
|
296,375 |
|
|
3.5 |
|
$ |
35.55 |
|
|
194,000 |
|
|
$ |
35.93 |
|
$47.89 –
$56.98 |
|
559,287
|
|
|
5.6 |
|
$ |
53.39 |
|
|
137,337
|
|
|
$ |
55.60 |
|
|
|
1,106,600 |
|
|
|
|
|
|
505,025 |
|
|
$ |
36.48 |
|
The total fair value of SSARs vested during the six months ended
June 30, 2012 was approximately $2.4 million. There were 601,575 SSARs that were not vested as of June 30, 2012. The total intrinsic value of outstanding and exercisable SSARs as of June 30, 2012 was $8.9 million and
$6.0 million, respectively. The total intrinsic value of SSARs exercised during the six months ended
June 30, 2012 was approximately $0.8 million. The Company realized an insignificant tax benefit from the exercise of these
SSARs.
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
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 expires immediately. The plan allows each 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 that would be payable at the time of grant. The 2012 grant was made on April 26, 2012 and equated to 19,251 shares of common stock, of which
13,986 shares of common stock were issued after shares were withheld for taxes. The Company
recorded stock compensation expense of approximately $0.9 million during the three months ended
June 30, 2012 associated with these
grants.
As of June 30, 2012, of the 10.0 million shares reserved for issuance under the 2006 Plan, approximately 4.0 million shares were available for grant, assuming the maximum number of shares are earned related to the
performance award grants discussed
above.
Stock Option
Plan
During the six months ended June 30, 2012,
2,000 stock options outstanding as of December 31, 2011 were exercised with an exercise price of
$20.85. There were no stock options outstanding as of June 30, 2012 under the stock option plan. The total intrinsic value of options exercised during the
six months ended June 30, 2012 was approximately $0.1 million. Cash proceeds received from stock option exercises was less than $0.1 million for the six months ended
June 30, 2012. The Company did not realize a tax benefit from the exercise of these
options.
4. GOODWILL AND OTHER INTANGIBLE
ASSETS
Changes in the carrying amount of acquired intangible assets during the six months ended June 30, 2012 are summarized
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and Tradenames |
|
Customer Relationships |
|
Patents and Technology |
|
Land Use
Rights |
|
Total |
Gross carrying
amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011 |
$ |
118.1 |
|
|
$ |
511.4 |
|
|
$ |
85.7 |
|
|
$ |
8.6 |
|
|
$ |
723.8 |
|
Acquisitions
|
1.5 |
|
|
— |
|
|
1.1 |
|
|
— |
|
|
2.6 |
|
Foreign currency translation |
(1.1 |
) |
|
(6.2 |
) |
|
(1.3 |
) |
|
(0.1 |
) |
|
(8.7 |
) |
Balance as of June 30,
2012 |
$
|
118.5 |
|
|
$
|
505.2 |
|
|
$
|
85.5 |
|
|
$
|
8.5 |
|
|
$
|
717.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and Tradenames |
|
Customer Relationships |
|
Patents and Technology |
|
Land Use
Rights |
|
Total |
Accumulated
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011 |
$ |
13.1 |
|
|
$ |
85.3 |
|
|
$ |
50.3 |
|
|
$ |
— |
|
|
$ |
148.7 |
|
Amortization
expense |
3.4 |
|
|
19.7 |
|
|
1.5 |
|
|
0.1 |
|
|
24.7 |
|
Foreign currency translation |
(0.1 |
) |
|
(4.1 |
) |
|
(1.1 |
) |
|
— |
|
|
(5.3 |
) |
Balance as of June 30,
2012 |
$
|
16.4 |
|
|
$
|
100.9 |
|
|
$
|
50.7 |
|
|
$
|
0.1 |
|
|
$
|
168.1 |
|
|
|
|
|
|
|
Trademarks and Tradenames |
Indefinite-lived
intangible assets: |
|
|
Balance as of December 31, 2011 |
$ |
91.4 |
|
Foreign currency
translation |
(0.8
|
)
|
Balance as of June 30, 2012 |
$
|
90.6 |
|
Notes to Condensed Consolidated Financial
Statements -
Continued
(unaudited)
Changes in the carrying amount of goodwill during the
six months ended June 30, 2012 are summarized as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
South America |
|
Europe/Africa/ Middle East |
|
Asia/ Pacific |
|
Consolidated
|
Balance as of December
31, 2011 |
$ |
415.9 |
|
|
$
|
212.2 |
|
|
$
|
496.8 |
|
|
$
|
69.6 |
|
|
$
|
1,194.5 |
|
Acquisitions |
— |
|
|
28.0 |
|
|
— |
|
|
— |
|
|
28.0 |
|
Adjustments related to
income taxes |
— |
|
|
— |
|
|
(4.3 |
) |
|
— |
|
|
(4.3 |
) |
Foreign currency translation |
— |
|
|
(19.4 |
) |
|
(8.6 |
) |
|
— |
|
|
(28.0 |
) |
Balance as of June 30,
2012 |
$
|
415.9 |
|
|
$
|
220.8 |
|
|
$
|
483.9 |
|
|
$
|
69.6 |
|
|
$
|
1,190.2 |
|
Goodwill is tested for impairment on an annual basis and more often
if indications of impairment exist. The Company conducts its annual impairment analyses as of October
1 each fiscal year.
The Company currently
amortizes certain acquired intangible assets, primarily on a straight-line basis, over their estimated useful lives, which range from five to
45 years.
During the six months ended June 30, 2012, the Company reduced goodwill by approximately $4.3 million related to the realization of tax benefits associated with excess tax basis deductible goodwill
resulting from its acquisition of Valtra in
Finland.
5.
INDEBTEDNESS
Indebtedness consisted of the following at June 30, 2012 and December 31, 2011 (in
millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2012 |
|
December 31, 2011 |
11/4% Convertible senior subordinated notes due 2036 |
$
|
187.7 |
|
|
$
|
183.4 |
|
4½% Senior term loan due
2016 |
253.7 |
|
|
259.4 |
|
57/8% Senior notes due 2021 |
300.0 |
|
|
300.0 |
|
Credit facility expires 2016 |
725.0 |
|
|
665.0 |
|
Other long-term
debt |
61.2
|
|
|
62.0
|
|
|
1,527.6 |
|
|
1,469.8 |
|
Less: Current portion of
long-term debt |
(56.2 |
) |
|
(60.1 |
) |
Total indebtedness, less current
portion |
$
|
1,471.4 |
|
|
$
|
1,409.7 |
|
Convertible Senior Subordinated
Notes
The following table sets forth as of June 30,
2012 and December 31, 2011 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 $201.3 million 11/4%
convertible senior subordinated notes due 2036 (in millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2012 |
|
December 31, 2011 |
Carrying amount of the
equity component |
$
|
54.3 |
|
|
$
|
54.3 |
|
|
|
|
|
Principal amount of the liability
component |
$ |
201.3 |
|
|
$ |
201.3 |
|
Less: unamortized
discount |
(13.6
|
)
|
|
(17.9
|
)
|
Net carrying amount |
$
|
187.7 |
|
|
$ |
183.4 |
|
The interest expense recognized relating to the
contractual interest coupon and the amortization of the discount on the liability component for the 11/4% convertible senior subordinated notes was approximately $2.8 million and
$5.6 million for the three and six months ended June 30, 2012, respectively, and $2.7 million and
$5.4 million for the three and six months ended
Notes to Condensed Consolidated Financial
Statements - Continued
(unaudited)
June 30, 2011, respectively. The effective interest rate on the liability component for the 11/4% convertible senior subordinated notes for the
six months ended June 30, 2012 and 2011 was
6.1%. The unamortized discount for the 11/4%
convertible senior subordinated notes will be amortized through December 2013, as this is the
earliest date that the notes’ holders can require the Company to repurchase the
notes.
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. The notes are unsecured
obligations and are convertible into cash and shares of the Company’s common stock upon satisfaction of certain conditions. 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.
Holders of
the Company’s 11/4% convertible senior subordinated notes may convert the notes, if, during any fiscal quarter, the closing sales price of the Company’s common
stock exceeds 120% of the conversion price of
$40.73 per share 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 June 30, 2012 and December 31, 2011, the closing sales price of the Company’s common stock had not exceeded 120% of the conversion price of the 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending
June 30, 2012 and December 31, 2011, and, therefore, the Company classified the notes as
long-term debt. Future classification of the 11/4% convertible senior subordinated notes between current and long-term debt is dependent on the closing sales price of the Company’s common
stock during future quarters.
4
1/2% Senior Term Loan
The
Company’s €200.0 million (or approximately $253.7 million as of June 30, 2012) 41/2% senior
term loan with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.(“Rabobank”) is due May 2, 2016. The Company has the ability to prepay the term loan before its maturity date. Interest is payable on the notes at 4 1/2% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The term loan 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 default. The Company also has to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage
ratio.
5
7/8% Senior Notes
The Company’s $300.0 million of 57/8% senior notes due December 1, 2021 constitute senior unsecured and unsubordinated indebtedness. Interest is payable on the notes semi-annually in arrears on June 1 and December 1 of each year. At any
time prior to September 1, 2021, the Company may redeem the notes, in whole or in part from time to time, at its option, at a redemption price equal to the greater of: (i) 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any, to, but
excluding, the redemption date; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date at the treasury rate plus
0.5%, plus accrued and unpaid interest, including additional interest, if any. Beginning September
1, 2021, the Company may redeem the notes, in whole or in part from time to time, at its option, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any.
Credit
Facility
The Company’s revolving credit and term loan facility consists of a $600.0 million multi-currency revolving credit facility and a $390.0 million term loan facility. The maturity date of the Company’s credit facility is December 1, 2016. The Company is required to make quarterly payments towards the term loan of $5.0 million commencing March 2012 increasing to $10.0 million commencing March 2015. Interest accrues on amounts outstanding under the credit facility, at
the Company’s option, at either (1) LIBOR plus a margin ranging from 1.0% to 2.0% based on the Company’s leverage ratio, or (2) the base rate, which is equal to the higher of (i)
the administrative agent’s base lending rate for the applicable currency, (ii) the federal funds rate plus 0.5%, and (iii) one-month LIBOR for loans denominated in US dollars plus 1.0% plus a margin ranging from 0.0% to 0.5% based on the Company’s leverage ratio. The credit facility contains covenants restricting, among
other things, the
Notes to Condensed Consolidated Financial
Statements - Continued
(unaudited)
incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of a default. The Company also has to fulfill financial covenants with
respect to a total debt to EBITDA ratio and an interest coverage ratio. As of June 30, 2012,
the Company had $725.0 million of outstanding borrowings under the credit facility and
availability to borrow approximately $265.0 million. As of December 31, 2011, the Company had
$665.0 million of outstanding borrowings under the credit facility and availability to borrow
approximately $335.0 million.
The carrying amounts of long-term debt under the
Company’s 41/2% senior term loan and credit facility approximate their fair values based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities. At June 30, 2012, the estimated fair values of the
Company’s 57/8% senior notes and
11/4
% convertible senior subordinated notes, based on their listed market values, were $315.8 million and $241.2 million, respectively, compared to their
carrying values of $300.0 million and $187.7 million, respectively. At December 31, 2011, the estimated fair values of the Company’s 57/8% senior notes and 11/4% convertible senior subordinated notes, based on their listed market values, were $298.9 million and
$252.4 million, respectively, compared to their carrying values of $300.0 million and
$183.4 million, respectively.
Standby Letters of Credit and Similar
Instruments
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 June 30, 2012 and December 31, 2011, outstanding letters of credit totaled $16.9 million and
$15.6 million,
respectively.
6.
INVENTORIES
Inventories at June 30, 2012 and December 31, 2011 were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
June 30, 2012 |
|
December 31, 2011 |
Finished
goods |
$
|
729.2 |
|
|
$
|
500.0 |
|
Repair and replacement parts |
538.4 |
|
|
450.7 |
|
Work in
process |
261.0 |
|
|
127.6 |
|
Raw materials |
494.6 |
|
|
481.3 |
|
Inventories,
net |
$
|
2,023.2 |
|
|
$
|
1,559.6 |
|
7.
PRODUCT WARRANTY
The warranty reserve activity for the three and
six months ended June 30,
2012 and 2011 consisted of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
Six Months Ended June
30, |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
Balance at beginning of period |
$ |
257.1 |
|
|
$ |
218.2 |
|
|
$ |
240.5 |
|
|
$ |
199.5 |
|
Acquisitions
|
— |
|
|
— |
|
|
0.1 |
|
|
2.6 |
|
Accruals for warranties issued during the
period |
45.7 |
|
|
55.3 |
|
|
91.3 |
|
|
93.6 |
|
Settlements made (in
cash or in kind) during the period |
(37.3 |
) |
|
(39.4 |
) |
|
(74.0 |
) |
|
(69.4 |
) |
Foreign currency translation |
(10.3 |
) |
|
3.4 |
|
|
(2.7 |
) |
|
11.2 |
|
Balance at June
30 |
$ |
255.2 |
|
|
$ |
237.5 |
|
|
$ |
255.2 |
|
|
$ |
237.5 |
|
The Company’s agricultural equipment products are generally warranted 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 $224.5 million and $212.7 million of warranty reserves are included in “Accrued expenses” in the Company’s
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011, respectively. Approximately $30.7 million and
$27.8 million of warranty reserves are included in “Other noncurrent liabilities” in
the Company’s Condensed
Notes to Condensed Consolidated Financial
Statements - Continued
(unaudited)
Consolidated Balance Sheets as of June 30,
2012 and December 31, 2011,
respectively.
8. NET INCOME PER COMMON
SHARE
Basic earnings per common share is computed by dividing net income attributable to AGCO Corporation and its subsidiaries by the
weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes exercise of outstanding SSARs, vesting of performance share awards, vesting of restricted stock 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. Dilution of weighted shares outstanding will depend on the Company’s stock price for
the excess conversion value of the convertible senior subordinated notes using the treasury stock method. 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 earnings per share for the three and six months ended
June 30, 2012 and 2011 is as follows (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
Six Months Ended June
30, |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
Basic net income per
share: |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AGCO Corporation and
subsidiaries |
$ |
204.9 |
|
|
$ |
133.7 |
|
|
$ |
325.1 |
|
|
$ |
213.7 |
|
Weighted average number
of common shares outstanding |
97.2 |
|
|
94.7 |
|
|
97.1 |
|
|
94.4 |
|
Basic net income per share attributable to AGCO
Corporation and subsidiaries |
$
|
2.11 |
|
|
$
|
1.41 |
|
|
$
|
3.35 |
|
|
$
|
2.26 |
|
Diluted net income per
share: |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to AGCO Corporation and
subsidiaries |
$ |
204.9 |
|
|
$ |
133.7 |
|
|
$ |
325.1 |
|
|
$ |
213.7 |
|
Weighted average number
of common shares outstanding |
97.2
|
|
|
94.7
|
|
|
97.1
|
|
|
94.4
|
|
Dilutive SSARs, performance share awards and
restricted stock awards |
1.0 |
|
|
0.3 |
|
|
1.1 |
|
|
0.4 |
|
Weighted average assumed conversion of contingently convertible senior subordinated notes |
0.2
|
|
|
3.6
|
|
|
0.6
|
|
|
3.6
|
|
Weighted
average number of common shares and common share equivalents outstanding for purposes of computing diluted income per share |
98.4 |
|
|
98.6 |
|
|
98.8 |
|
|
98.4 |
|
Diluted net income per
share attributable to AGCO Corporation and subsidiaries |
$
|
2.08 |
|
|
$
|
1.36 |
|
|
$
|
3.29 |
|
|
$
|
2.17 |
|
SSARs to purchase approximately 0.6 million shares of the Company’s common stock for the three and six months ended June 30, 2012 and approximately 0.3 million shares of the Company’s common stock for the three and six months ended June 30, 2011 were outstanding but not included in the calculation of weighted average common and common
equivalent shares outstanding because they had an antidilutive
impact.
9. INCOME
TAXES
At June 30, 2012 and December 31, 2011, the Company had
approximately $87.8 million and $71.1 million, respectively, of unrecognized tax benefits, all of which would affect the Company’s
effective tax rate if recognized. As of June 30, 2012 and December 31, 2011, the Company had approximately $27.0 million and
$23.0 million, respectively, of accrued or deferred taxes related to uncertain income tax positions
connected with ongoing 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. As of June 30, 2012 and December 31, 2011, the Company had accrued
interest and penalties related to unrecognized tax benefits of $10.5 million and $7.6 million,
respectively.
Generally, the tax years 2006 through
2011 remain open to examination by taxing authorities in the United States and certain other
foreign taxing
jurisdictions.
10. DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
All derivatives are recognized on the Company’s Condensed 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.
Notes to Condensed Consolidated Financial
Statements -
Continued
(unaudited)
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 exchange 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 ASU 2010-06, “Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” 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 exchange 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 policies allow for the use of derivative instruments to hedge exposures to movements in foreign currency and interest rates. The Company’s policies prohibit the use of derivative instruments for
speculative purposes.
Cash Flow
Hedges
During 2012 and 2011, 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 (loss) 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 (loss) income that was reclassified to cost of goods
sold during the six months ended June 30, 2012 and 2011 was approximately $(2.6) million and
$2.7 million, respectively, on an after-tax basis. The outstanding contracts as of June 30, 2012 range in maturity through May 2013.
The following table summarizes the activity in accumulated
other comprehensive loss related to the derivatives held by the Company during the six months
ended June 30, 2012 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax Amount |
|
Income Tax |
|
After-Tax Amount |
Accumulated derivative
net losses as of December 31, 2011 |
|
$ |
(5.4 |
) |
|
$ |
(1.1 |
) |
|
$ |
(4.3 |
) |
Net changes in fair value of
derivatives |
|
(3.6 |
) |
|
0.1 |
|
|
(3.7 |
) |
Net loss reclassified
from accumulated other comprehensive loss into income |
|
2.7 |
|
|
0.1 |
|
|
2.6 |
|
Accumulated derivative net losses as of June 30,
2012 |
|
$
|
(6.3 |
)
|
|
$
|
(0.9 |
)
|
|
$
|
(5.4 |
)
|
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
The Company had outstanding foreign currency contracts with a notional amount of approximately $162.4
million and $275.9 million as of
June 30, 2012 and December 31, 2011, respectively, that were entered into to hedge forecasted sale and purchase
transactions.
Derivative Transactions Not Designated as Hedging Instruments
During 2012 and
2011, 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 June 30, 2012 and December 31, 2011, the Company had outstanding foreign currency contracts with a notional amount of
approximately $1,007.2 million and $956.8 million, respectively, that were entered into to hedge receivables and payables that are denominated in
foreign currencies other than the functional currency. Changes in the fair value of these contracts are reported in “Other expense, net.” For the
three and six months ended June 30, 2012, the Company recorded a net (loss) gain of approximately $(6.3) million and
$0.9 million, respectively, under the caption of “Other expense, net” related to these
contracts. For the three and six months ended June 30, 2011, the Company recorded a net (loss) gain of approximately $(0.4) million and
$1.8 million, respectively, under the caption of “Other expense, net” related to these
contracts. Gains and losses on such contracts are substantially offset by losses and gains on the remeasurement of the underlying asset or liability being
hedged.
The table below sets forth the fair value of derivative instruments as of June 30, 2012 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives As of June 30, 2012 |
|
|
Liability Derivatives As of June 30,
2012 |
|
Balance
Sheet Location |
|
Fair Value |
|
|
Balance
Sheet Location |
|
Fair Value |
Derivative instruments
designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
Other current assets |
|
$ |
— |
|
|
|
Other current liabilities |
|
$ |
6.1 |
|
Derivative instruments
not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Foreign currency contracts |
Other current assets |
|
5.3 |
|
|
|
Other current liabilities |
|
7.6 |
|
Total derivative
instruments |
|
|
$
|
5.3 |
|
|
|
|
|
$
|
13.7 |
|
The table below sets forth the fair value of
derivative instruments as of December 31, 2011 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives As of December 31, 2011 |
|
|
Liability Derivatives As of December 31, 2011 |
|
Balance
Sheet Location |
|
Fair Value |
|
|
Balance
Sheet Location |
|
Fair Value |
Derivative instruments
designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
Other current assets |
|
$ |
— |
|
|
|
Other current liabilities |
|
$ |
4.3 |
|
Derivative instruments
not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Foreign currency contracts |
Other current assets |
|
7.3 |
|
|
|
Other current liabilities |
|
7.9 |
|
Total derivative
instruments |
|
|
$
|
7.3 |
|
|
|
|
|
$
|
12.2 |
|
Counterparty
Risk
The Company regularly monitors the counterparty risk and credit ratings of all the counterparties to the derivative instruments. 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 Condensed Consolidated Financial Statements -
Continued
(unaudited)
11. CHANGES IN STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY
The following table sets forth changes in stockholders’ equity and temporary equity attributed to AGCO Corporation and its subsidiaries and to noncontrolling interests for the six months ended
June 30, 2012 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional Paid-in
Capital |
|
Retained Earnings |
|
Accumulated Other
Comprehensive Loss |
|
Noncontrolling Interests |
|
Total Stockholders’ Equity |
|
Temporary Equity |
Balance, December 31,
2011 |
$
|
1.0 |
|
|
$
|
1,073.2 |
|
|
$
|
2,321.6 |
|
|
$
|
(400.6 |
)
|
|
$
|
36.0 |
|
|
$
|
3,031.2 |
|
|
$
|
— |
|
Stock compensation |
— |
|
|
19.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
19.2 |
|
|
|
Stock options and SSARs exercised |
— |
|
|
(0.2 |
) |
|
— |
|
|
— |
|
|
— |
|
|
(0.2 |
) |
|
|
Distribution to
noncontrolling interest |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1.0 |
) |
|
(1.0 |
) |
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
— |
|
|
— |
|
|
325.1 |
|
|
— |
|
|
2.0 |
|
|
327.1 |
|
|
(3.8 |
) |
Other comprehensive (loss) income, net of reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments |
— |
|
|
— |
|
|
— |
|
|
(124.2 |
) |
|
— |
|
|
(124.2 |
) |
|
(1.4 |
) |
Defined benefit pension plans, net of tax |
— |
|
|
— |
|
|
— |
|
|
5.0 |
|
|
— |
|
|
5.0 |
|
|
|
Unrealized loss
on derivatives, net of tax |
— |
|
|
— |
|
|
— |
|
|
(1.1 |
) |
|
— |
|
|
(1.1 |
) |
|
|
Investment by redeemable noncontrolling interest |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
17.6 |
|
Balance, June 30, 2012 |
$
|
1.0 |
|
|
$
|
1,092.2 |
|
|
$
|
2,646.7 |
|
|
$
|
(520.9 |
)
|
|
$
|
37.0 |
|
|
$
|
3,256.0 |
|
|
$
|
12.4 |
|
Total comprehensive (loss) income attributable to noncontrolling
interests and redeemable noncontrolling interest for the three and six months ended June 30, 2012 and 2011 was as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, |
|
Six
Months Ended June 30, |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
Net (loss) income |
$ |
(2.8 |
) |
|
$ |
0.2 |
|
|
$ |
(1.8 |
) |
|
$ |
1.8 |
|
Other comprehensive (loss)
income: |
|
|
|
|
|
|
|
Foreign currency translation
adjustments |
(1.4 |
) |
|
0.1 |
|
|
(1.4 |
) |
|
0.1 |
|
Defined benefit pension
plans, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
Unrealized gain on derivatives, net of
tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
Total comprehensive (loss)
income |
$ |
(4.2 |
) |
|
$ |
0.3 |
|
|
$ |
(3.2 |
) |
|
$ |
1.9 |
|
12. ACCOUNTS RECEIVABLE SALES AGREEMENTS
At June 30, 2012 and December 31, 2011, the Company had accounts receivable sales agreements that permit the sale, on an ongoing
basis, of a majority of its wholesale receivables in North America and Europe to its 49% owned
U.S., Canadian and European retail finance joint ventures. As of June 30, 2012 and December 31, 2011, the cash received from receivables sold under the U.S., Canadian and European accounts
receivable sales agreements was approximately $931.9 million and $827.5 million, respectively.
Under the terms of the accounts receivable agreements in
North America and Europe, the Company pays an annual servicing fee related to the servicing of the receivables sold. The Company also pays the respective AGCO Finance entities a subsidized interest payment with respect to the sales agreements,
calculated based upon LIBOR plus a margin on any non-interest bearing accounts receivable outstanding and sold under the sales agreements. These fees were reflected within losses on
Notes to Condensed Consolidated Financial
Statements - Continued
(unaudited)
the sales of receivables included within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations. The receivables associated with these arrangements are
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 reviewed its accounting for the accounts receivable sales
agreements and determined that these facilities should be accounted for as off-balance sheet
transactions.
Losses on sales of receivables associated with the accounts
receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $5.4 million and
$10.6 million during the three and six months ended June 30, 2012, respectively. Losses on sales of receivables associated with the Company’s accounts
receivable financing facilities reflected within “Other expense, net” and “Interest expense, net” in the Company’s Condensed Consolidated Statements of Operations were approximately $5.2 million and
$8.8 million during the three and six months ended June 30, 2011,
respectively.
The Company’s retail finance joint ventures in Brazil and Australia also provide wholesale financing to the Company’s dealers. The receivables associated with these arrangements are
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 June 30, 2012 and December 31, 2011, these retail finance joint ventures had approximately $64.3 million and
$62.0 million, respectively, of outstanding accounts receivable associated with these arrangements.
The Company 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 reviewed the sale of such receivables and determined that these arrangements should be accounted for as off-balance sheet
transactions.
13. EMPLOYEE BENEFIT
PLANS
Net pension and postretirement cost for the Company’s defined pension and postretirement benefit plans for the three months ended June 30, 2012 and 2011 are set forth below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, |
Pension benefits
|
|
2012 |
|
2011 |
Service
cost |
|
$
|
4.3 |
|
|
$
|
3.9 |
|
Interest cost |
|
9.7 |
|
|
10.1 |
|
Expected return on plan
assets |
|
(8.9 |
) |
|
(9.1 |
) |
Amortization of net actuarial loss and prior
service cost |
|
2.7 |
|
|
1.8 |
|
Net annual pension
cost |
|
$ |
7.8 |
|
|
$ |
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, |
Postretirement
benefits |
|
2012 |
|
2011 |
Interest
cost |
|
$
|
0.4 |
|
|
$
|
0.4 |
|
Amortization of net actuarial
loss |
|
0.1 |
|
|
— |
|
Net annual
postretirement benefit cost |
|
$ |
0.5 |
|
|
$ |
0.4 |
|
Notes to Condensed Consolidated Financial
Statements -
Continued
(unaudited)
Net pension and postretirement cost for the Company’s defined pension and postretirement benefit plans for the six months ended
June 30, 2012 and 2011 are set forth below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, |
Pension benefits
|
|
2012 |
|
2011 |
Service
cost |
|
$
|
8.6 |
|
|
$
|
7.9 |
|
Interest cost |
|
19.5 |
|
|
20.2 |
|
Expected return on plan
assets |
|
(17.8 |
) |
|
(18.2 |
) |
Amortization of net actuarial loss and prior
service cost |
|
5.3 |
|
|
3.5 |
|
Net annual pension
cost |
|
$ |
15.6 |
|
|
$ |
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, |
Postretirement
benefits |
|
2012 |
|
2011 |
Service
cost |
|
$
|
0.1 |
|
|
$
|
0.1 |
|
Interest cost |
|
0.8 |
|
|
0.8 |
|
Amortization of prior
service credit |
|
(0.1 |
) |
|
(0.1 |
) |
Amortization of net actuarial
loss |
|
0.2 |
|
|
0.1 |
|
Net annual
postretirement benefit cost |
|
$ |
1.0 |
|
|
$ |
0.9 |
|
During the six months ended June 30, 2012, approximately $19.8 million of contributions had been made to the Company’s defined benefit pension plans. The
Company currently estimates its minimum contributions for 2012 to its defined benefit pension plans will aggregate approximately $38.5 million.
During the six months ended
June 30, 2012, the Company made approximately $1.0 million of contributions to its postretirement health care and life insurance benefit plans. The Company
currently estimates that it will make approximately $1.9 million of contributions to its
postretirement health care and life insurance benefit plans during 2012.
14. SEGMENT REPORTING
Effective January 1, 2012, the Company modified its system
of reporting, resulting from changes to its internal management and organizational structure, which changed its reportable segments from North America; South America; Europe/Africa/Middle East; and Rest of World, to North America; South America;
Europe/Africa/Middle East; and Asia/Pacific. The Asia/Pacific reportable segment includes the regions of Asia, Australia and New Zealand, and the Europe/Africa/Middle East segment will now include certain markets in Eastern Europe. Effective
January 1, 2012, these reportable segments are reflective of how the Company’s chief operating decision maker reviews operating results for the purposes of allocating resources and assessing performance. Disclosures for the three and six months ended June 30, 2011 have been adjusted to reflect the change in reportable
segments.
The Company’s four reportable segments
distribute a full range of agricultural equipment and related replacement parts. The Company evaluates segment performance primarily based on income from operations. Sales for each segment are based on the location of the third-party customer. The
Company’s selling, general and administrative expenses and engineering expenses are charged to each segment based on the region and division where the expenses are incurred. As a result, the components of income from operations for one segment
may not be comparable to another segment. Segment results for the three and six months ended
June 30, 2012 and 2011 and assets as of June 30, 2012 and December 31, 2011 based on the Company’s reportable segments are as follows (in
millions):
Notes to Condensed Consolidated Financial
Statements -
Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, |
|
North America |
|
South America |
|
Europe/Africa/ Middle East |
|
Asia/ Pacific |
|
Consolidated |
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
733.4 |
|
|
$ |
448.5 |
|
|
$ |
1,406.9 |
|
|
$ |
101.3 |
|
|
$ |
2,690.1 |
|
Income from
operations |
|
95.7 |
|
|
41.7 |
|
|
170.0 |
|
|
5.1 |
|
|
312.5 |
|
Depreciation |
|
9.6 |
|
|
5.7 |
|
|
25.5 |
|
|
1.5 |
|
|
42.3 |
|
Capital
expenditures |
|
16.6 |
|
|
7.4 |
|
|
35.7 |
|
|
4.3 |
|
|
64.0 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
394.8 |
|
|
$ |
496.8 |
|
|
$ |
1,400.2 |
|
|
$ |
66.8 |
|
|
$ |
2,358.6 |
|
Income from operations |
|
20.0 |
|
|
37.9 |
|
|
170.9 |
|
|
4.3 |
|
|
233.1 |
|
Depreciation
|
|
6.4 |
|
|
4.9 |
|
|
25.1 |
|
|
0.8 |
|
|
37.2 |
|
Capital expenditures |
|
8.8 |
|
|
10.1 |
|
|
55.1 |
|
|
1.6 |
|
|
75.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, |
|
North America |
|
South America |
|
Europe/Africa/ Middle East |
|
Asia/ Pacific |
|
Consolidated |
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
1,299.9 |
|
|
$ |
863.9 |
|
|
$ |
2,606.7 |
|
|
$ |
193.3 |
|
|
$ |
4,963.8 |
|
Income from
operations |
|
145.9 |
|
|
65.6 |
|
|
305.8 |
|
|
6.0 |
|
|
523.3 |
|
Depreciation |
|
19.5 |
|
|
11.5 |
|
|
51.3 |
|
|
3.4 |
|
|
85.7 |
|
Capital
expenditures |
|
27.5 |
|
|
18.5 |
|
|
100.0 |
|
|
5.1 |
|
|
151.1 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales |
|
$ |
754.2 |
|
|
$ |
907.3 |
|
|
$ |
2,373.2 |
|
|
$ |
121.6 |
|
|
$ |
4,156.3 |
|
Income from operations |
|
32.7 |
|
|
71.3 |
|
|
254.8 |
|
|
9.4 |
|
|
368.2 |
|
Depreciation
|
|
12.7 |
|
|
10.0 |
|
|
49.4 |
|
|
1.5 |
|
|
73.6 |
|
Capital expenditures |
|
14.2 |
|
|
12.7 |
|
|
83.5 |
|
|
2.0 |
|
|
112.4 |
|
Assets
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012 |
|
$ |
983.8 |
|
|
$ |
737.6 |
|
|
$ |
2,307.0 |
|
|
$ |
292.0 |
|
|
$ |
4,320.4 |
|
As of December 31,
2011 |
|
861.4 |
|
|
585.5 |
|
|
1,990.9 |
|
|
215.7 |
|
|
3,653.5 |
|
A reconciliation from the segment information to the
consolidated balances for income from operations and total assets is set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
Six Months Ended June
30, |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
Segment income from
operations |
$
|
312.5 |
|
|
$
|
233.1 |
|
|
$
|
523.3 |
|
|
$
|
368.2 |
|
Corporate expenses |
(24.8 |
) |
|
(20.9 |
) |
|
(45.8 |
) |
|
(38.3 |
) |
Stock
compensation |
(10.4 |
) |
|
(6.6 |
) |
|
(18.2 |
) |
|
(11.0 |
) |
Restructuring and other infrequent
income |
0.1 |
|
|
0.9 |
|
|
0.1 |
|
|
0.7 |
|
Amortization of
intangibles |
(12.5
|
)
|
|
(4.9
|
)
|
|
(24.7
|
)
|
|
(9.3
|
)
|
Consolidated income from
operations |
$ |
264.9 |
|
|
$ |
201.6 |
|
|
$ |
434.7 |
|
|
$ |
310.3 |
|
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012 |
|
As of December 31, 2011 |
Segment
assets |
$ |
4,320.4 |
|
|
$ |
3,653.5 |
|
Cash and cash equivalents |
393.4 |
|
|
724.4 |
|
Receivables from
affiliates |
142.2 |
|
|
122.9 |
|
Investments in affiliates |
363.8 |
|
|
346.3 |
|
Deferred tax assets,
other current and noncurrent assets |
581.1 |
|
|
549.1 |
|
Intangible assets, net |
640.2 |
|
|
666.5 |
|
Goodwill |
1,190.2
|
|
|
1,194.5
|
|
Consolidated total assets |
$ |
7,631.3 |
|
|
$ |
7,257.2 |
|
15.
COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet
Arrangements
Guarantees
The Company maintains a remarketing agreement with its U.S. retail finance joint venture, whereby the Company is obligated to repurchase repossessed inventory at market values. The Company has
an agreement with its U.S. retail finance joint venture 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 June 30, 2012, the Company guaranteed
indebtedness owed to third parties of approximately $127.9 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 2016. The Company believes the credit risk associated with these guarantees is not material to its financial
position or results of operations. Losses under such guarantees have historically been insignificant. In addition, the Company generally would expect to be able to recover a significant portion of the amounts paid under such guarantees from the sale
of the underlying financed farm equipment, as the fair value of such equipment is expected to be sufficient to offset a substantial portion of the amounts
paid.
Other
The Company sells a majority of its wholesale receivables in North America and Europe to its 49% owned U.S., Canadian and European retail finance joint ventures. The Company also sells certain accounts receivable under factoring arrangements to financial institutions around the world. The Company
reviewed the sale of such receivables and determined that these facilities should be accounted for as off-balance sheet transactions.
Legal Claims and Other
Matters
As a result of Brazilian tax legislative changes impacting value added taxes (“VAT”), the Company recorded a reserve of approximately $60.3 million and
$54.6 million against its outstanding balance of Brazilian VAT receivable as of June 30, 2012 and December 31, 2011, respectively, due to the uncertainty as to the Company’s ability to collect the
amounts
outstanding.
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 the Company’s French subsidiary and two of its
other foreign subsidiaries that participated in the United Nations Oil for Food Program (the “Program”). Ninety-one other entities or companies also were named as defendants in the civil action due to their participation in the 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 outcome was adverse, the Company could be required to pay damages. In addition, the French government also is investigating the Company’s French subsidiary in
connection with its participation in the
Program.
Notes to Condensed Consolidated Financial Statements -
Continued
(unaudited)
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 June 30, 2012, not including interest and penalties, was approximately R$90.6 million (or approximately $44.8 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.
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 statements as a whole, including its results of operations and financial condition.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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, demand for agricultural commodities, commodity prices and general economic conditions. We record sales when we sell equipment and replacement parts to our independent dealers, distributors or other customers. To the
extent possible, 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 manufacturing operations and to minimize our investment in inventory. Retail sales by
dealers to farmers are highly seasonal and are a function of the timing of the planting and harvesting seasons. As a result, our net sales have historically been the lowest in the first quarter and have increased in subsequent
quarters.
RESULTS OF OPERATIONS
For the
three months ended June 30, 2012, we generated net income of $204.9 million, or
$2.08 per share, compared to net income of $133.7 million, or
$1.36 per share, for the same period in 2011. For the first
six months of 2012, we generated net income of $325.1 million, or
$3.29 per share, compared to net income of $213.7 million, or
$2.17 per share, for the same period in 2011.
Net sales during the three and six months ended June 30,
2012 were $2,690.1 million and $4,963.8 million, respectively, which were approximately 14.1% and
19.4% higher than both the three and six months ended June 30, 2011, respectively, due to sales
growth in all of our geographical segments as well as the favorable impact of acquisitions, partially offset by the unfavorable impact of currency translation.
Income from operations for the three months ended June 30, 2012 was $264.9 million, compared to $201.6 million in the three months
ended June 30, 2011. Income from operations was $434.7 million for the first six months of 2012 compared to $310.3 million for the same period in 2011. The increase in income from operations during the three and six
months ended June 30, 2012 was a result of the benefits of acquisitions, an increase in net sales and improved gross margins resulting from price increases, higher production levels, a better sales mix and material cost control
initiatives.
Income from operations in our Europe/Africa/Middle East (“EAME”) region was relatively flat in the three months ended June 30, 2012 and increased in the first six months of 2012 compared
to the same periods in 2011. The increase in the first six months of 2012 was primarily due to higher sales and production volumes and a better product mix, partially offset by the negative impact of currency translation. In the South America
region, income from operations increased in the three months ended June 30, 2012 and decreased in the first six months of 2012 compared to the same periods in 2011. The decrease in income from operations in the first six months of 2012 was primarily
due to the negative impact of currency translation partially offset by improved margins. Income from operations in North America was higher in the three and six months ended June 30, 2012 compared to the same periods in 2011 primarily due to the
positive impact of acquisitions, increased net sales, a favorable sales mix and cost control initiatives. Income from operations in our Asia/Pacific region increased in the three months ended June 30, 2012 and decreased in the first six months of
2012 compared to the same periods in 2011. Income from operations in the Asia/Pacific region decreased in the first six months of 2012 compared to the same period in 2011 due to additional market development costs in China which were partially
offset by acquisition benefits.
Industry Unit Retail Sales
In
North America, industry unit retail sales of tractors for the first six months of 2012 increased by approximately 6% compared to the first six months of 2011, with increases in compact, utility and high horsepower tractors. Record farm income in
2011 and the expectation of continued favorable farm economics resulted in the strength in retail sales of high horsepower tractors. Improvement in the dairy and livestock sectors has contributed to higher industry unit retail sales of utility
tractors. North American farm economics remain healthy, but the current drought conditions across portions of the United States have added some uncertainty for farm equipment demand for the remainder of 2012 in the region. Industry unit retail sales
of combines for the first six months of 2012 decreased by approximately 23% compared to the first six months of 2011, primarily due to the timing of industry production and high levels of demand in
2011.
In Western Europe, industry unit retail sales of tractors decreased approximately 2% and industry unit retail sales of combines increased approximately 15% for the first six months of 2012 compared to the
first six months of 2011. Better crop fundamentals are sustaining demand in the key Western European markets of Germany, France and the United Kingdom while demand has weakened in Southern Europe.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
South American industry unit retail sales of tractors in the first six months of 2012 decreased approximately 7% compared to the elevated levels in the same period in 2011. Industry unit retail sales
of combines for the first six months of 2012 were approximately 12% lower than the first six months of 2011. Drought impacted the early harvests in southern Brazil and Argentina in the first half of 2012, resulting in weaker demand in these markets.
Despite the adverse weather conditions earlier in the year, overall industry demand in South America remains at a high level primarily due to attractive government financing programs, favorable crop prices and exchange rates, and improved
weather.
STATEMENTS OF OPERATIONS
Net sales for
the three months ended June 30, 2012 were $2,690.1 million compared to $2,358.6 million for the same period in 2011. Net sales for the first six months of 2012 were $4,963.8 million compared to $4,156.3 million for the same period in 2011. Acquisitions positively impacted net sales by approximately
$250.7 million, or 10.6%, in the three months ended June 30, 2012 and by $455.2 million, or 11.0%, in the first six months of 2012. Foreign currency translation negatively impacted net sales by approximately $264.5 million, or 11.2%, in the three
months ended June 30, 2012 and by $341.6 million, or 8.2%, in the first six months of 2012.
The following table sets forth, for the three and six months ended June 30, 2012, the impact to net sales of acquisitions by geographical segment
(in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, |
|
|
|
Change Due to
Acquisitions |
|
2012 |
|
2011 |
|
%
Change from 2011 |
|
$
|
|
%
|
North
America |
$ |
733.4 |
|
|
$ |
394.8 |
|
|
85.8
|
% |
|
$ |
170.0 |
|
|
43.1 |
% |
South America |
448.5 |
|
|
496.8 |
|
|
(9.7 |
)% |
|
27.7 |
|
|
5.6 |
% |
Europe/Africa/Middle
East |
1,406.9 |
|
|
1,400.2 |
|
|
0.5 |
% |
|
25.2 |
|
|
1.8 |
% |
Asia/Pacific |
101.3 |
|
|
66.8 |
|
|
51.7 |
% |
|
27.8 |
|
|
41.6 |
% |
|
$
|
2,690.1 |
|
|
$
|
2,358.6 |
|
|
14.1
|
% |
|
$
|
250.7 |
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30, |
|
|
|
Change Due to
Acquisitions |
|
2012 |
|
2011 |
|
%
Change from 2011 |
|
$
|
|
%
|
North
America |
$ |
1,299.9 |
|
|
$ |
754.2 |
|
|
72.4
|
% |
|
$ |
283.7 |
|
|
37.6 |
% |
South America |
863.9 |
|
|
907.3 |
|
|
(4.8 |
)% |
|
56.2 |
|
|
6.2 |
% |
Europe/Africa/Middle
East |
2,606.7 |
|
|
2,373.2 |
|
|
9.8 |
% |
|
64.2 |
|
|
2.7 |
% |
Asia/Pacific |
193.3 |
|
|
121.6 |
|
|
59.0 |
% |
|
51.1 |
|
|
42.0 |
% |
|
$
|
4,963.8 |
|
|
$
|
4,156.3 |
|
|
19.4
|
% |
|
$
|
455.2 |
|
|
11.0
|
%
|
The following table sets forth, for the three and
six months ended June 30, 2012,
the impact to net sales of currency translation by geographical segment, calculated as the difference in net sales for the three and six months ended June 30, 2012 at actual 2012
exchange rates versus 2011 exchange rates (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
Change |
|
Change Due to
Currency Translation |
|
2012
|
|
2011
|
|
$
|
|
%
|
|
$
|
|
%
|
North
America |
$
|
733.4 |
|
|
$
|
394.8 |
|
|
$ |
338.6 |
|
|
85.8 |
% |
|
$ |
(8.6 |
) |
|
(2.2 |
)% |
South America |
448.5 |
|
|
496.8 |
|
|
(48.3 |
) |
|
(9.7 |
)% |
|
(94.2 |
) |
|
(19.0 |
)% |
Europe/Africa/Middle
East |
1,406.9 |
|
|
1,400.2 |
|
|
6.7 |
|
|
0.5 |
% |
|
(157.1 |
) |
|
(11.2 |
)% |
Asia/Pacific |
101.3 |
|
|
66.8 |
|
|
34.5 |
|
|
51.7 |
% |
|
(4.6 |
) |
|
(6.9 |
)% |
|
$
|
2,690.1 |
|
|
$
|
2,358.6 |
|
|
$
|
331.5 |
|
|
14.1
|
% |
|
$
|
(264.5 |
)
|
|
(11.2
|
)%
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June
30, |
|