AGCO CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarter ended June 30, 2006
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.
As of August 4, 2006, AGCO Corporation had 91,013,353 shares of common stock outstanding.
AGCO Corporation is a large accelerated filer.
AGGO
Corporation is a well-known seasoned issuer and is not a shell
company.
AGCO CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions, except shares)
|
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June 30, |
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December 31, |
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2006 |
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2005 |
|
ASSETS |
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|
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Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
166.6 |
|
|
$ |
220.6 |
|
Accounts and notes receivable, net |
|
|
670.1 |
|
|
|
655.7 |
|
Inventories, net |
|
|
1,265.4 |
|
|
|
1,062.5 |
|
Deferred tax assets |
|
|
42.8 |
|
|
|
39.7 |
|
Other current assets |
|
|
118.0 |
|
|
|
107.7 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,262.9 |
|
|
|
2,086.2 |
|
Property, plant and equipment, net |
|
|
599.1 |
|
|
|
561.4 |
|
Investment in affiliates |
|
|
184.4 |
|
|
|
164.7 |
|
Deferred tax assets |
|
|
71.5 |
|
|
|
84.1 |
|
Other assets |
|
|
64.4 |
|
|
|
56.6 |
|
Intangible assets, net |
|
|
213.2 |
|
|
|
211.5 |
|
Goodwill |
|
|
759.5 |
|
|
|
696.7 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,155.0 |
|
|
$ |
3,861.2 |
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|
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|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
6.3 |
|
|
$ |
6.3 |
|
Accounts payable |
|
|
629.8 |
|
|
|
590.9 |
|
Accrued expenses |
|
|
589.5 |
|
|
|
561.8 |
|
Other current liabilities |
|
|
83.3 |
|
|
|
101.4 |
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|
|
|
|
|
|
|
Total current liabilities |
|
|
1,308.9 |
|
|
|
1,260.4 |
|
Long-term debt, less current portion |
|
|
878.2 |
|
|
|
841.8 |
|
Pensions and postretirement health care benefits |
|
|
257.9 |
|
|
|
241.7 |
|
Other noncurrent liabilities |
|
|
142.7 |
|
|
|
101.3 |
|
|
|
|
|
|
|
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Total liabilities |
|
|
2,587.7 |
|
|
|
2,445.2 |
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Stockholders Equity: |
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Preferred stock; $0.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding in 2006 and 2005 |
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|
Common stock; $0.01 par value, 150,000,000 shares authorized,
91,002,853 and 90,508,221 shares issued and outstanding
at June 30, 2006 and December 31, 2005, respectively |
|
|
0.9 |
|
|
|
0.9 |
|
Additional paid-in capital |
|
|
905.5 |
|
|
|
894.7 |
|
Retained earnings |
|
|
883.6 |
|
|
|
825.4 |
|
Unearned compensation |
|
|
|
|
|
|
(0.1 |
) |
Accumulated other comprehensive loss |
|
|
(222.7 |
) |
|
|
(304.9 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,567.3 |
|
|
|
1,416.0 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,155.0 |
|
|
$ |
3,861.2 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
1
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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|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
1,450.5 |
|
|
$ |
1,574.3 |
|
Cost of goods sold |
|
|
1,199.2 |
|
|
|
1,303.1 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
251.3 |
|
|
|
271.2 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
132.5 |
|
|
|
127.3 |
|
Engineering expenses |
|
|
32.0 |
|
|
|
31.4 |
|
Restructuring and other infrequent expenses (income) |
|
|
|
|
|
|
(0.8 |
) |
Amortization of intangibles |
|
|
4.2 |
|
|
|
4.1 |
|
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|
|
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Income from operations |
|
|
82.6 |
|
|
|
109.2 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
14.3 |
|
|
|
31.9 |
|
Other expense, net |
|
|
10.3 |
|
|
|
12.2 |
|
|
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|
|
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|
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Income before income taxes and equity in net earnings of affiliates |
|
|
58.0 |
|
|
|
65.1 |
|
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|
|
|
|
|
|
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Income tax provision |
|
|
22.1 |
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|
25.6 |
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Income before equity in net earnings of affiliates |
|
|
35.9 |
|
|
|
39.5 |
|
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|
|
|
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Equity in net earnings of affiliates |
|
|
5.0 |
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|
|
6.6 |
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|
|
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|
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|
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Net income |
|
$ |
40.9 |
|
|
$ |
46.1 |
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Net income per common share: |
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Basic |
|
$ |
0.45 |
|
|
$ |
0.51 |
|
|
|
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|
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|
Diluted |
|
$ |
0.45 |
|
|
$ |
0.47 |
|
|
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|
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|
Weighted average number of common and common equivalent shares
outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
90.8 |
|
|
|
90.4 |
|
|
|
|
|
|
|
|
Diluted |
|
|
91.6 |
|
|
|
99.6 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
2
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in millions, except per share data)
|
|
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|
|
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|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
2,620.3 |
|
|
$ |
2,831.2 |
|
Cost of goods sold |
|
|
2,162.7 |
|
|
|
2,340.5 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
457.6 |
|
|
|
490.7 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
259.1 |
|
|
|
257.9 |
|
Engineering expenses |
|
|
63.6 |
|
|
|
62.1 |
|
Restructuring and other infrequent expenses |
|
|
0.1 |
|
|
|
0.2 |
|
Amortization of intangibles |
|
|
8.3 |
|
|
|
8.3 |
|
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Income from operations |
|
|
126.5 |
|
|
|
162.2 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
27.9 |
|
|
|
48.9 |
|
Other expense, net |
|
|
16.8 |
|
|
|
19.0 |
|
|
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|
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|
|
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|
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Income before income taxes and equity in net earnings of affiliates |
|
|
81.8 |
|
|
|
94.3 |
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
34.7 |
|
|
|
37.9 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Income before equity in net earnings of affiliates |
|
|
47.1 |
|
|
|
56.4 |
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of affiliates |
|
|
11.1 |
|
|
|
11.2 |
|
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Net income |
|
$ |
58.2 |
|
|
$ |
67.6 |
|
|
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|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.64 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.64 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common equivalent shares
outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
90.6 |
|
|
|
90.4 |
|
|
|
|
|
|
|
|
Diluted |
|
|
91.1 |
|
|
|
99.7 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
|
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|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
58.2 |
|
|
$ |
67.6 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
47.3 |
|
|
|
45.2 |
|
Deferred debt issuance cost amortization |
|
|
2.2 |
|
|
|
5.1 |
|
Amortization of intangibles |
|
|
8.3 |
|
|
|
8.3 |
|
Stock compensation |
|
|
3.2 |
|
|
|
0.1 |
|
Equity in net earnings of affiliates, net of cash received |
|
|
(4.9 |
) |
|
|
(11.2 |
) |
Deferred income tax provision (benefit) |
|
|
8.2 |
|
|
|
(3.0 |
) |
Gain on sale of property, plant and equipment |
|
|
|
|
|
|
(1.6 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and notes receivable, net |
|
|
23.0 |
|
|
|
(49.7 |
) |
Inventories, net |
|
|
(154.4 |
) |
|
|
(262.6 |
) |
Other current and noncurrent assets |
|
|
(10.3 |
) |
|
|
(23.2 |
) |
Accounts payable |
|
|
0.7 |
|
|
|
122.9 |
|
Accrued expenses |
|
|
6.2 |
|
|
|
(15.2 |
) |
Other current and noncurrent liabilities |
|
|
1.6 |
|
|
|
(28.6 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
(68.9 |
) |
|
|
(213.5 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(10.7 |
) |
|
|
(145.9 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(47.8 |
) |
|
|
(25.8 |
) |
Proceeds from sales of property, plant and equipment |
|
|
1.2 |
|
|
|
8.8 |
|
Investments in unconsolidated affiliates |
|
|
(2.8 |
) |
|
|
(22.5 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(49.4 |
) |
|
|
(39.5 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payment of debt obligations, net |
|
|
(15.1 |
) |
|
|
(86.6 |
) |
Proceeds from issuance of common stock |
|
|
7.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(7.4 |
) |
|
|
(85.8 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
13.5 |
|
|
|
(7.5 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(54.0 |
) |
|
|
(278.7 |
) |
Cash and cash equivalents, beginning of period |
|
|
220.6 |
|
|
|
325.6 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
166.6 |
|
|
$ |
46.9 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
AGCO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of AGCO Corporation and subsidiaries (the
Company or AGCO) included herein have been prepared in accordance with U.S. generally accepted
accounting principles 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 Companys 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 Companys audited financial statements
and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2005. Results for interim periods are not necessarily indicative of the results for the year.
Stock Compensation Plans
During the first quarter of 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123R (Revised 2004), Share-Based Payment (SFAS No. 123R), which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). During the
second quarter and first six months of 2006, the Company recorded approximately $1.9 million and
$3.2 million, respectively, of stock compensation expense in accordance with SFAS No. 123R. The
stock compensation expense was recorded as follows (in millions):
|
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|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Cost of goods sold |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Selling, general and administrative expenses |
|
|
1.9 |
|
|
|
|
|
|
|
3.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense |
|
$ |
1.9 |
|
|
$ |
|
|
|
$ |
3.2 |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-employee Director Stock Incentive Plan and Long-Term Incentive Plan
In December 2005, the Companys Board of Directors elected to terminate the Companys
Long-Term Incentive Plan (the LTIP) and its Non-employee Director Incentive Plan (the Director
Plan), and the outstanding awards under those plans were cancelled. The decision to terminate the
plans and related cancellations was made primarily to avoid recognizing compensation cost in the
Companys future financial statements upon adoption of SFAS No. 123R for these awards and to
establish a new long-term incentive program. The new accounting provisions of SFAS No. 123R do not
allow for the reversal of previously recognized compensation expense if market-based performance
awards, such as stock price targets, are not met. The new long-term incentive program has
performance-based targets. As of December 31, 2005, 75,000 awarded but unearned shares under the
Director Plan were cancelled. The remaining 15,000 awarded but unearned shares under the Director
Plan were cancelled during January 2006. As of December 31, 2005, 857,000 awarded but unearned
shares under the LTIP were cancelled. The remaining 135,000 shares were cancelled in January 2006.
Awards cancelled prior to December 31, 2005 did not result in any compensation expense under the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). However, awards cancelled after January 1, 2006 are subject to the
provisions of SFAS No. 123R, and, therefore, the Company recorded approximately $1.3 million of
stock compensation expense during the first quarter of 2006 associated with those cancellations.
New Stock Incentive Plans
At the Companys April 2006 annual stockholders meeting, the Company obtained stockholder
approval
5
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
for the
2006 Long Term Incentive Plan (the 2006 Plan) under which up to 5,000,000 shares of
common stock may be issued. The 2006 Plan allows the Company, under the direction of the Board of
Directors Compensation Committee, to make grants of performance shares, stock appreciation rights,
stock options and stock awards to employees, officers and non-employee directors of the Company.
The Companys Board of Directors approved the grants of awards during 2006 effective under the
employee and director stock incentive plans described below.
Employee Plans
The Companys Board of Directors approved two new stock incentive plans to Company executives
and key managers. The primary long-term incentive plan is a performance share plan that provides
for awards of shares of common stock based on achieving financial targets, such as targets for
earnings per share and return on invested capital, as determined by the Companys Board of
Directors. The stock awards are earned over a performance period, and the number of shares earned
is determined based on the cumulative or average results for the period, depending on the
measurement. Performance periods are consecutive and overlapping three-year cycles and performance
targets are set at the beginning of each cycle. In order to transition to the new performance
share plan, the Company established award targets in 2006 for both a one-year and two-year
performance period in addition to the normal three-year period. The plan provides for participants
to earn from 33% to 200% of the target awards depending on the actual performance achieved with no
shares earned if performance is below the established minimum target. Awards earned under the
performance share plan will be paid in shares of common stock at the end of each performance
period. If the Company were to achieve its target levels of performance, employees would receive
awards totaling 710,500 shares under the performance share plan. The Company recorded stock
compensation expense of approximately $1.5 million associated with these awards during the second
quarter of 2006, which was based on the price of the Companys common stock on April 27, 2006, the
date of the Companys annual stockholders meeting. The compensation expense associated with these awards is being amortized
ratably over the vesting or target period. There were no cancellations or forfeitures of awards
during the second quarter of 2006.
In addition to the performance share plan, certain executives and key managers will be
eligible to receive grants of stock settled stock appreciation rights (SSARs) or incentive stock
options depending on the participants country of employment. The SSARs provide a participant with
the right to receive the aggregate appreciation in stock price over the market price of the
Companys common stock at the date of grant, payable in shares of the Companys common stock. The
participant may exercise his or her SSAR at any time after the grant is vested but no later than
seven years after the date of grant. The SSARs vest ratably over a four-year period from the date
of grant. The Companys Board of Directors made initial grants of 217,250 SSARs for certain
executives and key managers with the base price equal to the price of the Companys common stock on
April 27, 2006, the date of the Companys annual stockholders meeting. The Company recorded stock compensation expense of approximately $0.1 million associated with
these grants during the second quarter of 2006. The compensation expense associated with these
awards is being amortized ratably over the vesting or target period. There were no cancellations
or forfeitures of awards during the second quarter of 2006, and no awards were currently
exercisable as of June 30, 2006. The Company estimated the fair value of the grants using the
Black-Scholes option pricing model. Based on this model, the weighted average fair value of SSAR
awards granted under the 2006 plan during the second quarter of 2006 was $8.74 per share. The
weighted average assumptions under the Black-Sholes option model were as follows:
|
|
|
|
|
Expected life of awards (years) |
|
|
5.5 |
|
Risk-free interest rate |
|
|
4.9 |
% |
Expected volatility |
|
|
41.4 |
% |
Expected dividend yield |
|
|
|
|
6
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
Director Restricted Stock Grants
The Companys Board of Directors approved a plan to provide $25,000 in annual restricted stock
grants to all non-employee directors effective on the first day of each calendar year. 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 Board of Directors, the non-transferability
period would expire immediately. The plan allows for the director to have the option of forfeiting
a portion of the shares awarded in lieu of a cash payment contributed to the participants tax
withholding to satisfy the participants statutory minimum federal, state, and employment taxes
which would be payable at the time of grant. Effective January 1, 2006, the 2006 grant equated to
11,550 shares of common stock, of which 8,832 shares of common stock were issued, after shares were
withheld for withholding taxes. The Company recorded stock compensation expense of approximately
$0.3 million during the second quarter of 2006 associated with these grants.
As of June 30, 2006, of the 5,000,000 shares reserved for issuance under the 2006 Plan,
3,352,918 shares were available for grant, assuming the maximum
number of shares are issued related to the initial grants discussed
above.
Prior to the adoption of SFAS No. 123R, the Company accounted for all stock-based compensation
awards under the Director Plan, the LTIP and Stock Option Plan (the Option Plan) as prescribed
under APB No. 25, and also provided the disclosures required under SFAS No. 123 and SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure (SFAS No. 148). APB No. 25
required no recognition of compensation expense for options granted under the Option Plan as long
as certain conditions were met. The Company has not recorded any compensation expense in previous
years under APB No. 25 related to the Option Plan. APB No. 25 required recognition of compensation
expense under the Director Plan and the LTIP at the time the award was earned.
There were no grants of options under the Option Plan or awards under the LTIP during the six
months ended June 30, 2005. For disclosure purposes only, under SFAS No. 123, the Company
estimated the fair value of grants under the Companys Option Plan using the Black-Scholes option
pricing model and the Barrier option model for awards granted under the Director Plan and the LTIP
for periods prior to the adoption of SFAS No. 123R. Based on these models, the weighted average
fair value of awards granted under the Director Plan were as follows for the three and six months
ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended |
|
Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2005 |
Director Plan |
|
$ |
13.61 |
|
|
$ |
13.61 |
|
|
Weighted average assumptions under
Black-Scholes and Barrier option
models: |
|
|
|
|
|
|
|
|
Expected life of awards (years) |
|
|
3.0 |
|
|
|
3.0 |
|
Risk-free interest rate |
|
|
3.7 |
% |
|
|
3.7 |
% |
Expected volatility |
|
|
41.0 |
% |
|
|
41.0 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
The fair value of the grants and awards are amortized over the vesting period for stock
options and awards earned under the Director Plan and LTIP and over the performance period for
unearned awards under the Director Plan and LTIP. The following table illustrates the effect on
net income and earnings per common share if the Company had applied the fair value recognition
provisions of SFAS No. 123 and SFAS No. 148 for the three and six months ended June 30, 2005 (in
millions, except per share data):
7
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net income, as reported |
|
$ |
46.1 |
|
|
$ |
67.6 |
|
Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects |
|
|
|
|
|
|
0.1 |
|
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects |
|
|
(2.1 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
44.0 |
|
|
$ |
63.5 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.51 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.49 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.47 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.45 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
Stock Option Plan
The Companys Option Plan provides for the granting of nonqualified and incentive stock
options to officers, employees, directors and others. The stock option exercise price is
determined by the Companys Board of Directors except in the case of an incentive stock option for
which the purchase price shall not be less than 100% of the fair market value at the date of grant.
Each recipient of stock options is entitled to immediately exercise up to 20% of the options
issued to such person, and the remaining 80% of such options vest ratably over a four-year period
and expire no later than ten years from the date of grant.
There were no grants under the Option Plan during the six months ended June 30, 2006. Stock
option transactions during the six months ended June 30, 2006 were as follows:
|
|
|
|
|
Options outstanding at January 1 |
|
|
1,249,058 |
|
Options granted |
|
|
|
|
Options exercised |
|
|
(485,800 |
) |
Options canceled or forfeited |
|
|
(85,038 |
) |
|
|
|
|
|
Options outstanding at June 30 |
|
|
678,220 |
|
|
|
|
|
|
Options available for grant at June 30 |
|
|
1,919,837 |
|
|
|
|
|
|
|
|
|
|
|
Option price ranges per share: |
|
|
|
|
Granted |
|
$ |
|
|
Exercised |
|
|
11.00-22.31 |
|
Canceled or forfeited |
|
|
22.31-25.50 |
|
|
|
|
|
|
Weighted average option exercise prices per share: |
|
|
|
|
Granted |
|
$ |
|
|
Exercised |
|
|
15.87 |
|
Canceled or forfeited |
|
|
25.46 |
|
Outstanding at June 30 |
|
|
18.58 |
|
At June 30, 2006, the outstanding options had a weighted average remaining contractual
life of approximately four years and there were 670,720 options currently exercisable with option
prices ranging from $8.50 to $31.25 with a weighted average exercise price of $18.56 and an
aggregate intrinsic value of $5.6 million.
The following table sets forth the exercise price range, number of shares, weighted average
exercise price, and remaining contractual lives by groups of similar price:
8
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Weighted |
|
Exercisable |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Average |
|
as of |
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Contractual Life |
|
Exercise |
|
June 30, |
|
Exercise |
Range of Exercise Prices |
|
Shares |
|
(Years) |
|
Price |
|
2006 |
|
Price |
|
|
$ |
8.50 |
|
|
|
|
|
|
$ |
11.88 |
|
|
|
180,850 |
|
|
|
4.1 |
|
|
$ |
11.11 |
|
|
|
180,850 |
|
|
$ |
11.11 |
|
|
|
$ |
15.12 |
|
|
|
|
|
|
$ |
22.31 |
|
|
|
396,400 |
|
|
|
4.0 |
|
|
$ |
19.08 |
|
|
|
388,900 |
|
|
$ |
19.05 |
|
|
|
$ |
23.00 |
|
|
|
|
|
|
$ |
31.25 |
|
|
|
100,970 |
|
|
|
1.5 |
|
|
$ |
30.01 |
|
|
|
100,970 |
|
|
$ |
30.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678,220 |
|
|
|
|
|
|
|
|
|
|
|
670,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the six months ended June 30, 2006
was $5.2 million and the total fair value of shares vested during the same period was less than
$0.1 million. There were 7,500 stock options that were not vested as of June 30, 2006. Cash
received from stock option exercises was $7.7 million for the six months ended June 30, 2006. The
Company did not realize a tax benefit from the exercise of these options.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, and disclosure. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is in the process of evaluating the impact FIN 48 will have on its consolidated
results of operations and financial position.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
an amendment of FASB Statement No. 140 (SFAS No. 156). SFAS No. 156 requires an entity to
recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specified situations. Such servicing
assets or liabilities would be initially measured at fair value, if practicable, and subsequently
measured at amortized value or fair value based upon an election of the reporting entity. SFAS No.
156 also specifies certain financial statement presentations and disclosures in connection with
servicing assets and liabilities. SFAS No. 156 is effective for fiscal years beginning after
September 15, 2006 and may be adopted earlier but only if the adoption is in the first quarter of
the fiscal year. The Company does not expect that the adoption of SFAS No. 156 will have a material
effect on its consolidated financial statements.
In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No.
06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (that is, Gross versus Net Presentation) (EITF 06-3), which
allows companies to adopt a policy of presenting taxes in the income statement on either a gross or
net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue
transaction between a seller and a customer; for example, sales taxes, use taxes, value-added
taxes, and some types of excise taxes. EITF 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording and
reporting these sales taxes in the Companys consolidated results of operations or financial
position as the Companys policy is to exclude all such taxes from net sales and present such taxes
in the consolidated statements of operations on a net basis.
In April 2005, the SEC adopted a new rule that changed the adoption date of SFAS No. 123R.
The Company adopted SFAS No. 123R effective January 1, 2006, and is using the modified prospective
method of adoption. The Company currently estimates that the application of the expensing
provisions of SFAS No. 123R will result in a pre-tax expense during 2006 of approximately $8.0
million, including the $1.3 million, discussed above, recorded in the first quarter of 2006
associated with the cancellations of awards.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4,
9
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
Inventory Pricing (ARB No. 43), to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage). Among other
provisions, the new rule requires that items such as idle facility expense, excessive spoilage,
double freight and rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS 151 requires
that the allocation of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June
15, 2005. The Companys adoption of SFAS 151 in the first quarter of 2006 did not have a material
impact on the Companys consolidated results of operations or financial position.
2. RESTRUCTURING AND OTHER INFREQUENT EXPENSES
During the second quarter of 2005, the Company announced that it was changing its distribution
arrangements for its Valtra and Fendt products in Scandinavia by entering into a distribution
agreement with a third-party distributor to distribute Valtra and Fendt equipment in Sweden and
Valtra equipment in Norway and Denmark. As a result of this agreement and the decision to close
other Valtra European sales offices, the Company initiated the restructuring and closure of its
Valtra sales offices located in the United Kingdom, Spain, Denmark and Norway, resulting in the
termination of approximately 24 employees. The Danish and Norwegian sales offices were transferred
to the third-party Scandinavian equipment distributor in October 2005, which included the transfer
of certain employees, assets and lease and supplier contracts. The Company recorded severance
costs, asset write-downs and other facility closure costs of approximately $0.4 million, $0.1
million and $0.1 million, respectively, related to these closures during 2005, $0.4 million of
which were recorded during the first six months of 2005. During the fourth quarter of 2005, the
Company completed the sale of property, plant and equipment associated with the sales offices in
the United Kingdom and Norway, and recorded a gain of approximately $0.2 million, which was
reflected within Restructuring and other infrequent expenses within the Companys Consolidated
Statements of Operations. During the first quarter of 2006, the Company recorded an additional
$0.1 million of severance costs related to these closures. Approximately $0.5 million of severance
and other facility closure costs had been paid as of June 30, 2006, and 23 of the 24 employees had
been terminated. The remaining $0.1 million of severance and other facility closure costs as of
June 30, 2006 will be paid during 2006.
During the fourth quarter of 2004, the Company initiated the restructuring of certain
administrative functions within its Finnish tractor manufacturing operations, resulting in the
termination of approximately 58 employees. During 2004, the Company recorded severance costs of
approximately $1.4 million associated with this rationalization. The Company recorded an
additional $0.1 million associated with this rationalization during the first quarter of 2005, and,
during the fourth quarter of 2005, reversed $0.1 million of previously established provisions
related to severance costs as severance claims were finalized during the quarter. During 2005,
the Company paid approximately $0.8 million of severance costs. As of March 31, 2006, all of the
58 employees had been terminated. The $0.6 million of severance payments accrued at June 30, 2006
are expected to be paid through 2009. In addition, during the first quarter of 2005, the Company
incurred and expensed approximately $0.3 million of contract termination costs associated with the
rationalization of its Valtra European parts distribution operations.
In July 2004, the Company announced and initiated a plan related to the restructuring of its
European combine manufacturing operations located in Randers, Denmark, to include the elimination
of the facilitys component manufacturing operations, as well as the rationalization of the combine
model range to be assembled in Randers. The restructuring plan is intended to reduce the cost and
complexity of the Randers manufacturing operations by simplifying the model range. The Company now
outsources manufacturing of the majority of parts and components to suppliers and has retained
critical key assembly operations at the Randers facility. Component manufacturing operations
ceased in February 2005. The Company recorded $11.5 million of restructuring and other infrequent
expenses during 2004 associated with the rationalization and $0.9 million of restructuring charges
during 2005, all of which were recorded during the first six months of 2005. During the second
quarter of 2005, the Company completed auctions of machinery and equipment and recorded a gain of
approximately $1.5 million associated with such actions. The gain was reflected within
Restructuring and other infrequent expenses within the Companys Condensed Consolidated Statement
of Operations. As of December 31, 2005, all of the 298 employees associated with the
rationalization had been terminated and all
10
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
severance and other facility closure costs had been
paid.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of acquired intangible assets during the six months ended June
30, 2006 are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Customer |
|
|
Patents and |
|
|
|
|
|
|
Tradenames |
|
|
Relationships |
|
|
Technology |
|
|
Total |
|
Gross carrying amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
32.7 |
|
|
$ |
81.5 |
|
|
$ |
45.1 |
|
|
$ |
159.3 |
|
Foreign currency translation |
|
|
0.1 |
|
|
|
6.3 |
|
|
|
3.5 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
32.8 |
|
|
$ |
87.8 |
|
|
$ |
48.6 |
|
|
$ |
169.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Customer |
|
|
Patents and |
|
|
|
|
|
|
Tradenames |
|
|
Relationships |
|
|
Technology |
|
|
Total |
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
4.8 |
|
|
$ |
17.7 |
|
|
$ |
13.5 |
|
|
$ |
36.0 |
|
Amortization expense |
|
|
0.6 |
|
|
|
4.2 |
|
|
|
3.5 |
|
|
|
8.3 |
|
Foreign currency translation |
|
|
|
|
|
|
1.4 |
|
|
|
1.2 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
5.4 |
|
|
$ |
23.3 |
|
|
$ |
18.2 |
|
|
$ |
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
and |
|
|
|
Tradenames |
|
Unamortized intangible assets: |
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
88.2 |
|
Foreign currency translation |
|
|
2.7 |
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
90.9 |
|
|
|
|
|
Changes in the carrying amount of goodwill during the six months ended June 30, 2006 are
summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
South |
|
|
Europe/Africa/ |
|
|
|
|
|
|
America |
|
|
America |
|
|
Middle East |
|
|
Consolidated |
|
Balance as of December 31,
2005 |
|
$ |
174.0 |
|
|
$ |
137.0 |
|
|
$ |
385.7 |
|
|
$ |
696.7 |
|
Adjustment related to
income taxes |
|
|
|
|
|
|
|
|
|
|
22.0 |
|
|
|
22.0 |
|
Foreign currency translation |
|
|
|
|
|
|
10.8 |
|
|
|
30.0 |
|
|
|
40.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
174.0 |
|
|
$ |
147.8 |
|
|
$ |
437.7 |
|
|
$ |
759.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 142, Goodwill and Other Intangible Assets, establishes a method of testing
goodwill and other indefinite-lived intangible assets for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. The Companys annual assessments involve determining an
estimate of the fair value of the Companys reporting units in order to evaluate whether an
impairment of the current carrying amount of goodwill and other indefinite-lived intangible assets
exists. Fair values are derived based on an evaluation of past and expected future performance of
the Companys reporting units. A reporting unit is an operating segment or one level below an
operating segment (e.g., a component). A component of an operating segment is a reporting unit if
the component constitutes a business for which discrete financial information is available and the
Companys executive management team regularly reviews the operating results of that component. In
addition, the Company combines and aggregates two or more components of an operating segment as a
single reporting unit if the components have similar economic characteristics. The Companys
reportable segments reported under the guidance of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, are not its reporting units, with the exception of its
Asia/Pacific geographical segment.
11
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
The Company utilized a combination of valuation techniques, including a discounted cash flow
approach, a market multiple approach and a comparable transaction approach, when making its initial
and subsequent annual and interim assessments. As stated above, goodwill is tested for impairment
on an annual basis and more often if indications of impairment exist. The results of the Companys most recent analyses, conducted
as of October 1, 2005, indicated that no reduction in the carrying amount of goodwill was required
in 2005.
The Company amortizes certain acquired intangible assets primarily on a straight-line basis
over their estimated useful lives, which range from 3 to 30 years.
4. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2006 and December 31, 2005 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Credit facility |
|
$ |
419.4 |
|
|
$ |
401.5 |
|
13/4% Convertible senior subordinated notes due 2033 |
|
|
201.3 |
|
|
|
201.3 |
|
67/8 % Senior subordinated notes due 2014 |
|
|
255.8 |
|
|
|
237.0 |
|
Other long-term debt |
|
|
8.0 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
884.5 |
|
|
|
848.1 |
|
Less: Current portion of long-term debt |
|
|
(6.3 |
) |
|
|
(6.3 |
) |
|
|
|
|
|
|
|
Total long-term debt, less current portion |
|
$ |
878.2 |
|
|
$ |
841.8 |
|
|
|
|
|
|
|
|
5. INVENTORIES
Inventories are valued at the lower of cost or market using the first-in, first-out method.
Market is net realizable value for finished goods and repair and replacement parts. For work in
process, production parts and raw materials, market is replacement cost. Cash flows related to the
sale of inventories are reported within Cash flows from operating activities within the Companys
Condensed Consolidated Statements of Cash Flows.
Inventories at June 30, 2006 and December 31, 2005 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Finished goods |
|
$ |
631.5 |
|
|
$ |
477.3 |
|
Repair and replacement parts |
|
|
338.6 |
|
|
|
307.5 |
|
Work in process |
|
|
75.9 |
|
|
|
63.3 |
|
Raw materials |
|
|
219.4 |
|
|
|
214.4 |
|
|
|
|
|
|
|
|
Inventories, net |
|
$ |
1,265.4 |
|
|
$ |
1,062.5 |
|
|
|
|
|
|
|
|
6. PRODUCT WARRANTY
The warranty reserve activity for the three months ended June 30, 2006 and 2005 consisted of
the following (in millions):
12
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of quarter |
|
$ |
124.7 |
|
|
$ |
132.3 |
|
Accruals for warranties issued during the period |
|
|
30.5 |
|
|
|
29.6 |
|
Settlements made (in cash or in kind) during the period |
|
|
(30.3 |
) |
|
|
(27.2 |
) |
Foreign currency translation |
|
|
3.6 |
|
|
|
(5.9 |
) |
|
|
|
|
|
|
|
Balance at June 30 |
|
$ |
128.5 |
|
|
$ |
128.8 |
|
|
|
|
|
|
|
|
The warranty reserve activity for the six months ended June 30, 2006 and 2005 consisted
of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of the year |
|
$ |
122.8 |
|
|
$ |
135.0 |
|
Accruals for warranties issued during the period |
|
|
57.9 |
|
|
|
58.4 |
|
Settlements made (in cash or in kind) during the period |
|
|
(57.0 |
) |
|
|
(55.1 |
) |
Foreign currency translation |
|
|
4.8 |
|
|
|
(9.5 |
) |
|
|
|
|
|
|
|
Balance at June 30 |
|
$ |
128.5 |
|
|
$ |
128.8 |
|
|
|
|
|
|
|
|
The Companys 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.
7. NET INCOME PER COMMON SHARE
The computation, presentation and disclosure requirements for earnings per share are presented
in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed
by dividing net income by the weighted average number of common shares outstanding during each
period. Diluted earnings per common share assumes exercise of outstanding stock options and
vesting of restricted stock when the effects of such assumptions are dilutive.
During the fourth quarter of 2004, the EITF reached a consensus on EITF Issue No. 04-08,
Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on
Diluted Earnings per Share, which requires that contingently convertible debt should be included
in the calculation of diluted earnings per share using the if-converted method regardless of
whether a market price trigger has been met. The Company adopted the statement during the fourth
quarter of 2004 and included approximately 9.0 million additional shares of common stock that could
have been issued upon conversion of the Companys former $201.3 million aggregate principal amount
of 1 3/4% convertible senior subordinated notes in its diluted earnings per share
calculation for the three and six months ended June 30, 2005. In addition, diluted earnings per
share for periods prior to the fourth quarter of 2004 was required to be restated for each period
that the former convertible notes were outstanding. The convertible notes were issued on December
23, 2003. Since the Company is not recording a tax benefit for losses in the United States for tax
purposes, the interest expense associated with the convertible notes included in the diluted
earnings per share calculation does not reflect a tax benefit. On June 29, 2005, the Company
completed an exchange of its former notes for new notes that provide for (i) the settlement upon
conversion in cash up to the principal amount of the converted new notes with any excess conversion
value settled in shares of the Companys common stock, and (ii) the conversion rate to be increased
under certain circumstances if the new notes are converted in connection with certain change of
control transactions occurring prior to December 10, 2010, but otherwise are substantially the same
as the old notes. The impact of the exchange resulted in a reduction in the diluted weighted
average shares outstanding of approximately 9.0 million shares on a prospective basis. Dilution
of weighted shares outstanding subsequent to the exchange depends on the Companys stock price once
the market price trigger or other specified conversion circumstances are met. A reconciliation of
net income 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, 2006 and 2005 is as follows (in millions, except per share data):
13
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
40.9 |
|
|
$ |
46.1 |
|
|
$ |
58.2 |
|
|
$ |
67.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common
shares outstanding |
|
|
90.8 |
|
|
|
90.4 |
|
|
|
90.6 |
|
|
|
90.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.45 |
|
|
$ |
0.51 |
|
|
$ |
0.64 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
40.9 |
|
|
$ |
46.1 |
|
|
$ |
58.2 |
|
|
$ |
67.6 |
|
After-tax interest
expense on
contingently
convertible senior
subordinated notes |
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for
purposes of computing
diluted net income per
share |
|
$ |
40.9 |
|
|
$ |
47.2 |
|
|
$ |
58.2 |
|
|
$ |
69.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common
shares outstanding |
|
|
90.8 |
|
|
|
90.4 |
|
|
|
90.6 |
|
|
|
90.4 |
|
Dilutive stock options
and restricted stock
awards |
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
Weighted average
assumed conversion of
contingently
convertible senior
subordinated notes |
|
|
0.5 |
|
|
|
9.0 |
|
|
|
0.3 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
number of common and
common equivalent
shares outstanding for
purposes of computing
diluted earnings per
share |
|
|
91.6 |
|
|
|
99.6 |
|
|
|
91.1 |
|
|
|
99.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.45 |
|
|
$ |
0.47 |
|
|
$ |
0.64 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were SSARs and stock options to purchase 0.3 million and 0.5 million shares for the
three and six months ended June 30, 2006, respectively, and stock options to purchase 0.6 million
shares for both the three and six months ended June 30, 2005, respectively, that were excluded from
the calculation of diluted earnings per share because the option exercise prices were
higher than the average market price of the Companys common stock during the related
period.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company applies the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities An Amendment of FASB Statement No. 133. All derivatives are
recognized on the consolidated balance sheets at fair value. On the date the derivative contract
is entered into, the Company designates the derivative as either (1) a fair value hedge of a
recognized liability, (2) a cash flow hedge of a forecasted transaction, (3) a hedge of a net
investment in a foreign operation, or (4) a non-designated derivative instrument.
The Company formally documents all relationships between hedging instruments and hedged items,
as well as the risk management objectives and strategy for undertaking various hedge transactions.
The Company formally assesses, both at the hedges 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.
14
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
Foreign Currency Risk
The Company has significant manufacturing operations in the United States, France, Germany,
Finland, Brazil and Denmark, 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 Companys most
significant transactional foreign currency exposures are the Euro, Brazilian Real and the Canadian
dollar in relation to the United States dollar.
The Company attempts to manage its transactional foreign exchange exposure by hedging foreign
currency cash flow forecasts and commitments arising from the 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 forward contracts. The Companys hedging policy prohibits foreign currency forward
contracts for speculative trading purposes.
The Company uses foreign currency forward contracts to economically hedge receivables and
payables on the Company and its subsidiaries balance sheets that are denominated in foreign
currencies other than the functional currency. These forward contracts are classified as
non-designated derivatives instruments. Gains and losses on such contracts are historically
substantially offset by losses and gains on the remeasurement of the underlying asset or liability
being hedged. Changes in the fair value of non-designated derivative contracts are reported in
current earnings.
During the second quarter of 2006, the Company designated certain foreign currency option
contracts as cash flow hedges of expected sales. The effective portion of the fair value gains or
losses on these cash flow hedges are recorded in other comprehensive income and subsequently
reclassified into net sales as the sales are recognized. These amounts offset the effect of the
changes in foreign exchange rates on the related sale transactions. The amount of the gain
recorded in other comprehensive income that is expected to be reclassified to net sales during the
year ended December 31, 2006 is approximately $3.1 million after-tax based on the exchange rate as
of June 30, 2006. These contracts all expire prior to December 31, 2006.
The following table summarizes activity in accumulated other comprehensive gain related to
derivatives held by the Company during the three months ended June 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before-Tax |
|
|
Income |
|
|
After-Tax |
|
|
|
Amount |
|
|
Tax |
|
|
Amount |
|
Accumulated derivative net gains as of March 31, 2006 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net changes in fair value of derivatives |
|
|
3.1 |
|
|
|
|
|
|
|
3.1 |
|
Net gains reclassified from accumulated other
comprehensive gain into earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated derivative net gains as of June 30, 2006 |
|
$ |
3.1 |
|
|
$ |
|
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
The Companys senior management establishes the Companys foreign currency and interest
rate risk management policies. These policies are reviewed periodically by the Audit Committee of
the Companys Board of Directors. The policy allows for the use of derivative instruments to hedge
exposures to movements in foreign currency and interest rates. The Companys policy prohibits the
use of derivative instruments for speculative purposes.
15
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
9. COMPREHENSIVE INCOME
Total comprehensive income for the three and six months ended June 30, 2006 and 2005 was as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
40.9 |
|
|
$ |
46.1 |
|
|
$ |
58.2 |
|
|
$ |
67.6 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
28.3 |
|
|
|
19.6 |
|
|
|
77.2 |
|
|
|
(3.4 |
) |
Unrealized gain on derivatives |
|
|
3.1 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
Unrealized gain (loss) on derivatives held by affiliates |
|
|
0.1 |
|
|
|
(2.1 |
) |
|
|
1.9 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
72.4 |
|
|
$ |
63.6 |
|
|
$ |
140.4 |
|
|
$ |
64.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. ACCOUNTS RECEIVABLE SECURITIZATION
At June 30, 2006, the Company had accounts receivable securitization facilities in the United
States, Canada and Europe totaling approximately $490.7 million. Under the securitization
facilities, wholesale accounts receivable are sold on a revolving basis to commercial paper
conduits either on a direct basis or through a wholly-owned special purpose U.S. subsidiary. The
Company accounts for its securitization facilities and its wholly-owned special purpose U.S.
subsidiary in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities a Replacement of FASB Statement No. 125 (SFAS No.
140), and FIN No. 46R, Consolidation of Variable Interest Entities An Interpretation of ARB No.
51 (FIN 46R). Due to the fact that the receivables sold to the commercial paper conduits are an
insignificant portion of the conduits total asset portfolios and such receivables are not siloed,
consolidation is not appropriate under FIN 46R, as the Company does not absorb a majority of losses
under such transactions. In addition, these facilities are accounted for as off-balance sheet
transactions in accordance with SFAS No. 140.
Outstanding funding under these facilities totaled approximately $440.2 million at June 30,
2006 and $462.7 million at December 31, 2005. The funded balance has the effect of reducing
accounts receivable and short-term liabilities by the same amount. Losses on sales of receivables
primarily from securitization facilities included in other expense, net were $7.3 million and $5.6
million for the three months ended June 30, 2006 and 2005, respectively, and $13.8 million and
$10.6 million for the six months ended June 30, 2006 and 2005, respectively. The losses
are determined by calculating the estimated present value of receivables sold compared to their
carrying amount. The present value is based on historical collection experience and a discount
rate representing the spread over LIBOR as prescribed under the terms of the agreements.
During the second quarter of 2005, the Company completed an agreement to permit transferring,
on an ongoing basis, the majority of its wholesale interest-bearing receivables in North America to
AGCO Finance LLC and AGCO Finance Canada, Ltd., its U.S. and Canadian retail finance joint
ventures. The Company has a 49% ownership interest in these joint ventures. The transfer of the
receivables is without recourse to the Company and the Company continues to service the
receivables. As of June 30, 2006, the balance of interest-bearing receivables transferred to AGCO
Finance LLC and AGCO Finance Canada, Ltd. under this agreement was approximately $129.7 million.
11. EMPLOYEE BENEFIT PLANS
The Company has defined benefit pension plans covering certain employees, principally in the
United States, the United Kingdom, Germany, Finland, Norway, France, Australia and Argentina. The
Company also provides certain postretirement health care and life insurance benefits for certain
employees, principally in the United States, as well as a supplemental executive retirement plan
which is an unfunded plan that provides Company executives with retirement income for a period of
ten years after retirement.
16
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
Net pension and postretirement cost for the plans for the three months ended June 30, 2006 and
2005 are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Pension
benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1.4 |
|
|
$ |
1.5 |
|
Interest cost |
|
|
9.6 |
|
|
|
10.2 |
|
Expected return on plan assets |
|
|
(9.1 |
) |
|
|
(8.6 |
) |
Amortization of net actuarial
loss and prior service cost |
|
|
4.6 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
6.5 |
|
|
$ |
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Postretirement benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
0.2 |
|
Interest cost |
|
|
0.4 |
|
|
|
0.6 |
|
Amortization of unrecognized net loss |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Net postretirement cost |
|
$ |
0.5 |
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
Net pension and postretirement cost for the plans for the six months ended June 30, 2006
and 2005 are set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
Pension
benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
2.8 |
|
|
$ |
3.0 |
|
Interest cost |
|
|
19.2 |
|
|
|
20.5 |
|
Expected return on plan assets |
|
|
(18.2 |
) |
|
|
(17.3 |
) |
Amortization of net actuarial
loss and prior service cost |
|
|
9.3 |
|
|
|
9.1 |
|
|
|
|
|
|
|
|
Net pension cost |
|
$ |
13.1 |
|
|
$ |
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Postretirement
benefits |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.1 |
|
|
$ |
0.4 |
|
Interest cost |
|
|
0.9 |
|
|
|
1.2 |
|
Amortization of prior service cost |
|
|
(0.1 |
) |
|
|
0.1 |
|
Amortization of unrecognized net loss |
|
|
0.3 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Net postretirement cost |
|
$ |
1.2 |
|
|
$ |
2.4 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2006, approximately $10.5 million of contributions
had been made to the Companys defined benefit pension plans. The Company currently estimates its
minimum contributions for 2006 to its defined benefit pension plans will aggregate approximately
$23.1 million. During the six months ended June 30, 2006, the Company made approximately $1.3
million of contributions to its U.S.-based postretirement health care and life insurance benefit
plans.
12. SEGMENT REPORTING
The Company has four reportable segments: North America; South America; Europe/Africa/Middle
East; and Asia/Pacific. Each regional segment distributes a full range of agricultural equipment
and related replacement parts. The Company evaluates segment performance primarily based on income
from operations. Sales for each regional segment are based on the location of the third-party
customer. The Companys 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, 2006 and 2005 and assets as
of June 30, 2006 and December 31, 2005 are as follows (in millions):
17
Notes To Condensed Consolidated Financial Statements Continued
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
South |
|
Europe/Africa/ |
|
Asia/ |
|
|
Three
Months Ended June 30, |
|
America |
|
America |
|
Middle East |
|
Pacific |
|
Consolidated |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
343.2 |
|
|
$ |
160.6 |
|
|
$ |
911.0 |
|
|
$ |
35.7 |
|
|
$ |
1,450.5 |
|
Income from operations |
|
|
2.3 |
|
|
|
8.9 |
|
|
|
86.3 |
|
|
|
3.6 |
|
|
|
101.1 |
|
Depreciation |
|
|
5.8 |
|
|
|
4.1 |
|
|
|
13.6 |
|
|
|
0.6 |
|
|
|
24.1 |
|
Capital expenditures |
|
|
2.9 |
|
|
|
1.1 |
|
|
|
20.3 |
|
|
|
0.1 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
465.2 |
|
|
$ |
185.3 |
|
|
$ |
876.1 |
|
|
$ |
47.7 |
|
|
$ |
1,574.3 |
|
Income from operations |
|
|
19.9 |
|
|
|
10.8 |
|
|
|
83.3 |
|
|
|
7.7 |
|
|
|
121.7 |
|
Depreciation |
|
|
7.3 |
|
|
|
3.4 |
|
|
|
11.6 |
|
|
|
0.4 |
|
|
|
22.7 |
|
Capital expenditures |
|
|
2.9 |
|
|
|
1.1 |
|
|
|
7.3 |
|
|
|
0.3 |
|
|
|
11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
South |
|
Europe/Africa/ |
|
Asia/ |
|
|
Six Months Ended June 30, |
|
America |
|
America |
|
Middle East |
|
Pacific |
|
Consolidated |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
664.0 |
|
|
$ |
301.8 |
|
|
$ |
1,586.2 |
|
|
$ |
68.3 |
|
|
$ |
2,620.3 |
|
Income
(loss) from operations |
|
|
(3.1 |
) |
|
|
20.1 |
|
|
|
137.6 |
|
|
|
7.3 |
|
|
|
161.9 |
|
Depreciation |
|
|
12.2 |
|
|
|
8.1 |
|
|
|
25.9 |
|
|
|
1.1 |
|
|
|
47.3 |
|
Capital expenditures |
|
|
6.4 |
|
|
|
2.6 |
|
|
|
38.6 |
|
|
|
0.2 |
|
|
|
47.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
858.0 |
|
|
$ |
337.6 |
|
|
$ |
1,542.4 |
|
|
$ |
93.2 |
|
|
$ |
2,831.2 |
|
Income from operations |
|
|
22.5 |
|
|
|
23.3 |
|
|
|
128.7 |
|
|
|
15.2 |
|
|
|
189.7 |
|
Depreciation |
|
|
13.6 |
|
|
|
6.6 |
|
|
|
23.5 |
|
|
|
1.5 |
|
|
|
45.2 |
|
Capital expenditures |
|
|
6.8 |
|
|
|
1.9 |
|
|
|
16.8 |
|
|
|
0.3 |
|
|
|
25.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006 |
|
$ |
717.7 |
|
|
$ |
405.4 |
|
|
$ |
1,324.9 |
|
|
$ |
84.2 |
|
|
$ |
2,532.2 |
|
As of December 31, 2005 |
|
|
760.3 |
|
|
|
346.1 |
|
|
|
1,091.4 |
|
|
|
79.8 |
|
|
|
2,277.6 |
|
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 |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Segment income from operations |
|
$ |
101.1 |
|
|
$ |
121.7 |
|
|
$ |
161.9 |
|
|
$ |
189.7 |
|
Corporate expenses |
|
|
(12.4 |
) |
|
|
(9.2 |
) |
|
|
(23.8 |
) |
|
|
(18.9 |
) |
Stock compensation expense |
|
|
(1.9 |
) |
|
|
|
|
|
|
(3.2 |
) |
|
|
(0.1 |
) |
Restructuring and other infrequent
income (expenses) |
|
|
|
|
|
|
0.8 |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Amortization of intangibles |
|
|
(4.2 |
) |
|
|
(4.1 |
) |
|
|
(8.3 |
) |
|
|
(8.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from operations |
|
$ |
82.6 |
|
|
$ |
109.2 |
|
|
$ |
126.5 |
|
|
$ |
162.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Segment assets |
|
$ |
2,532.2 |
|
|
$ |
2,277.6 |
|
Cash and cash equivalents |
|
|
166.6 |
|
|
|
220.6 |
|
Receivables from affiliates |
|
|
2.4 |
|
|
|
2.0 |
|
Investments in affiliates |
|
|
184.4 |
|
|
|
164.7 |
|
Deferred tax assets |
|
|
114.3 |
|
|
|
123.8 |
|
Other current and noncurrent assets |
|
|
182.4 |
|
|
|
164.3 |
|
Intangible assets, net |
|
|
213.2 |
|
|
|
211.5 |
|
Goodwill |
|
|
759.5 |
|
|
|
696.7 |
|
|
|
|
|
|
|
|
Consolidated total assets |
|
$ |
4,155.0 |
|
|
$ |
3,861.2 |
|
|
|
|
|
|
|
|
18
ITEM 2. MANAGEMENTS 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, 2006, we generated net income of $40.9 million, or $0.45
per share, compared to net income of $46.1 million, or $0.47 per share, for the same period in
2005. For the first six months of 2006, we generated net income of $58.2 million, or $0.64 per
share, compared to net income of $67.6 million, or $0.70 per share, for the same period in 2005.
Net sales during the second quarter and first six months of 2006 were $1,450.5 million and
$2,260.3 million, respectively, which were 7.9% and 7.5% lower than the second quarter and first
six months of 2005, respectively, primarily due to sales declines in the North America, South
America and Asia/Pacific regions, partially offset by sales increases in the Europe/Africa/Middle
East region, particularly in Europe.
Second quarter income from operations was $82.6 million in 2006 compared to $109.2 million in
the second quarter of 2005. Income from operations was $126.5 million for the first six months of
2006 compared to $162.2 million for the same period in 2005. The decrease in income from
operations was primarily due to the decrease in net sales.
Income from operations increased in our Europe/Africa/Middle East region in the second quarter
and first six months of 2006 primarily due to the increase in net sales as a result of strong
market conditions in key regions of Europe. The improved operating results were also due to
stronger operating margins resulting from productivity gains and a favorable sales mix. In the
South America region, income from operations decreased in the second quarter and first six months
of 2006 due to sales declines resulting from the continued deterioration in market conditions.
Income from operations in North America was lower in the second quarter and first six months of
2006 primarily due to a reduction in net sales resulting from our actions to reduce seasonal
increases in working capital by leveling production and lowering dealer deliveries in the first
half of 2006. Income from operations in our Asia/Pacific region was lower in the second quarter
and first six months of 2006 due to lower sales in Asia and negative currency impacts.
Retail Sales
In North America, industry unit retail sales of tractors for the first six months of 2006 were
relatively flat compared to the first six months of the prior year resulting from increases in the
utility and compact tractor segments, largely offset by a decline in the high horsepower tractor
segment. Fuel and fertilizer costs have increased in North America, and the continued dry weather
conditions are causing concerns for yields and pressuring farm income. Industry unit retail sales
of combines for the first six months of 2006 were approximately 4% higher than the prior year
period. Our unit retail sales of tractors and combines were lower in the first six months of 2006
compared to 2005.
19
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
In Europe, industry unit retail sales of tractors for the first six months of 2006
decreased approximately 1% compared to the prior year period. Retail demand declined in France,
Italy, Finland and Spain, but improved in Germany, the United Kingdom, Scandinavia and Central and Eastern Europe. Industry demand in the
first six months of 2006 in France and Spain was impacted by the continuing effect of the drought
in Southern Europe in the second half of 2005. Our unit retail sales were higher in the first six
months of 2006 compared to 2005.
South American industry unit retail sales of tractors in the first six months of 2006
decreased approximately 11% over the prior year period. Retail sales of tractors in the major
market of Brazil were relatively flat during the first six months of 2006 compared to the same
period in 2005. Industry unit retail sales of combines for the first six months of 2006 were
approximately 39% lower than the prior year period, with a decline in Brazil of approximately 48%
compared to the prior year period. Market demand in South America has continued to decline in
2006, particularly for combines, due to reduced farm profits in 2005, especially in Brazil where
strengthening of the Brazilian Real put pressure on commodity exports. Our South American unit
retail sales of tractors and combines also decreased in the first six months of 2006 compared to
2005.
Outside of North America, Europe and South America, net sales for the first six months of 2006
were lower than the prior year period due to lower sales in Asia and the Middle East.
STATEMENTS OF OPERATIONS
Net sales for the second quarter of 2006 were $1,450.5 million compared to $1,574.3 million
for the same period in 2005. Net sales for the first six months of 2006 were $2,620.3 million
compared to $2,831.2 million for the prior year period. The decrease in net sales was primarily
due to sales declines in the North America, South America and Asia/Pacific regions, partially
offset by sales increases in the Europe/Africa/Middle East region, particularly in Europe. Foreign
currency translation positively impacted net sales by $17.6 million, or 1.1%, in the second quarter
of 2006 and negatively impacted net sales by $22.2 million, or 0.8%, in the first six months of
2006. The following table sets forth, for the three and six months ended June 30, 2006 and 2005,
the impact to net sales of currency translation by geographical segment (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
Change Due to Currency |
|
|
|
June 30, |
|
|
Change |
|
|
Translation |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
North America |
|
$ |
343.2 |
|
|
$ |
465.2 |
|
|
$ |
(122.0 |
) |
|
|
(26.2 |
)% |
|
$ |
5.3 |
|
|
|
1.1 |
% |
South America |
|
|
160.6 |
|
|
|
185.3 |
|
|
|
(24.7 |
) |
|
|
(13.4 |
)% |
|
|
12.8 |
|
|
|
6.9 |
% |
Europe/Africa/Middle
East |
|
|
911.0 |
|
|
|
876.1 |
|
|
|
34.9 |
|
|
|
4.0 |
% |
|
|
0.1 |
|
|
|
|
|
Asia/Pacific |
|
|
35.7 |
|
|
|
47.7 |
|
|
|
(12.0 |
) |
|
|
(25.2 |
)% |
|
|
(0.6 |
) |
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,450.5 |
|
|
$ |
1,574.3 |
|
|
$ |
(123.8 |
) |
|
|
(7.9 |
)% |
|
$ |
17.6 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
Change Due to Currency |
|
|
|
June 30, |
|
|
Change |
|
|
Translation |
|
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
North America |
|
$ |
664.0 |
|
|
$ |
858.0 |
|
|
$ |
(194.0 |
) |
|
|
(22.6 |
)% |
|
$ |
7.8 |
|
|
|
0.9 |
% |
South America |
|
|
301.8 |
|
|
|
337.6 |
|
|
|
(35.8 |
) |
|
|
(10.6 |
)% |
|
|
32.3 |
|
|
|
9.6 |
% |
Europe/Africa/Middle
East |
|
|
1,586.2 |
|
|
|
1,542.4 |
|
|
|
43.8 |
|
|
|
2.8 |
% |
|
|
(60.0 |
) |
|
|
(3.9 |
)% |
Asia/Pacific |
|
|
68.3 |
|
|
|
93.2 |
|
|
|
(24.9 |
) |
|
|
(26.7 |
)% |
|
|
(2.3 |
) |
|
|
(2.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,620.3 |
|
|
$ |
2,831.2 |
|
|
$ |
(210.9 |
) |
|
|
(7.5 |
)% |
|
$ |
(22.2 |
) |
|
|
(0.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Regionally, net sales in North America decreased during the second quarter and first six
months of 2006, primarily due to lower seasonal increases in dealer inventories in 2006 compared to
2005. This was as a result of lower dealer deliveries implemented in the first half of 2006 to
achieve a reduction in dealer floorplan inventories compared to the prior year period. In the
Europe/Africa/Middle East region, net sales increased in the second quarter and first six months of
2006 primarily due to sales growth in Germany and Eastern Europe. Net sales in South America
decreased during the second quarter and first six months of 2006 primarily as a result of weak
market conditions in the region. In the Asia/Pacific region, net sales decreased in the second
quarter and first six months of 2006 compared to the same periods in 2005 due to decreases in
industry demand in the region. We estimate that consolidated price increases during both the
second quarter and the first six months of 2006 contributed approximately 2% as an offset to the
decrease in sales. Consolidated net sales of tractors and combines, which comprised approximately
70% and 68% of our net sales in the second quarter and first six months of 2006, respectively,
decreased approximately 10% and 9% in the second quarter and first six months of 2006,
respectively, compared to the same periods in 2005. Unit sales of tractors and combines decreased
approximately 20% and 15% during the second quarter and first six months of 2006, respectively,
compared to 2005. The difference between the unit sales decrease and the decrease in net sales was
the result of foreign currency translation, pricing and sales mix changes.
The following table sets forth, for the periods indicated, the percentage relationship to net
sales of certain items in our consolidated statements of operations (in millions, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
$ |
|
|
Net Sales |
|
|
$ |
|
|
Net Sales |
|
Gross profit |
|
$ |
251.3 |
|
|
|
17.3 |
% |
|
$ |
271.2 |
|
|
|
17.2 |
% |
Selling, general and administrative expenses |
|
|
132.5 |
|
|
|
9.1 |
% |
|
|
127.3 |
|
|
|
8.1 |
% |
Engineering expenses |
|
|
32.0 |
|
|
|
2.2 |
% |
|
|
31.4 |
|
|
|
2.0 |
% |
Restructuring and other infrequent expenses (income) |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
|
|
(0.1 |
)% |
Amortization of intangibles |
|
|
4.2 |
|
|
|
0.3 |
% |
|
|
4.1 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
82.6 |
|
|
|
5.7 |
% |
|
$ |
109.2 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
$ |
|
|
Net Sales(1) |
|
|
$ |
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
457.6 |
|
|
|
17.5 |
% |
|
$ |
490.7 |
|
|
|
17.3 |
% |
Selling, general and administrative expenses |
|
|
259.1 |
|
|
|
9.9 |
% |
|
|
257.9 |
|
|
|
9.1 |
% |
Engineering expenses |
|
|
63.6 |
|
|
|
2.4 |
% |
|
|
62.1 |
|
|
|
2.2 |
% |
Restructuring and other infrequent expenses |
|
|
0.1 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
Amortization of intangibles |
|
|
8.3 |
|
|
|
0.3 |
% |
|
|
8.3 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
126.5 |
|
|
|
4.8 |
% |
|
$ |
162.2 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Rounding may impact summation of percentages. |
Gross profit as a percentage of net sales increased slightly during the second quarter
and first six months of 2006 versus the prior year period, despite lower production levels,
primarily due to productivity gains, cost reduction initiatives and a favorable sales mix.
Selling, general and administrative (SG&A) expenses as a percentage of net sales increased
during the second quarter and first six months of 2006 compared to the prior year. Engineering
expenses also increased during the second quarter and first six months of 2006 compared to 2005, as
a result of our increase in spending to fund product improvements and cost reduction projects. We
recorded approximately $3.2 million of stock compensation expense, within SG&A, during the first
six months of 2006 associated with the adoption of
Statement of Financial Accounting Standards (SFAS) No. 123R (Revised 2004), Share-Based
Payment
21
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
(SFAS No. 123R) , as is more fully explained in Note 1 to our condensed consolidated
financial statements.
We recorded restructuring and other infrequent expenses of less than $0.1 million and $0.1
million, respectively, during the second quarter and first six months of 2006, primarily related to
severance costs associated with the rationalization of certain Valtra European sales offices
located in Denmark, Norway and the United Kingdom. During the second quarter and first six months
of 2005, we recorded restructuring and other infrequent (income) expenses of $(0.8) million and
$0.2 million, respectively, primarily related to the rationalization of our Randers, Denmark
combine manufacturing operations. We also incurred restructuring costs during the second quarter
and first six months of 2005 associated with severance costs, retention payments and contract
termination costs related to the rationalization of our Finnish tractor manufacturing, parts
distribution and sales operations. See Restructuring and Other Infrequent Expenses.
Interest expense, net was $14.3 million and $27.9 million for the second quarter and first six
months of 2006, respectively, compared to $31.9 million and $48.9 million, respectively, for the
comparable periods in 2005. The decrease in interest expense during the first six months of 2006
is primarily due to the redemption of our $250 million 91/2% senior notes during the second quarter
of 2005. We redeemed the notes at a price of approximately $261.9 million, which included a
premium of 4.75% over the face amount of the notes. The premium of approximately $11.9 million and
the write-off of the remaining balance of deferred debt issuance costs associated with the senior
notes of approximately $2.2 million were recognized in interest expense, net in the second quarter
of 2005.
Other expense, net was $10.3 million and $16.8 million during the second quarter and first six
months of 2006, respectively, compared to $12.2 million and $19.0 million for the same periods in
2005. Losses on sales of receivables, primarily under our securitization facilities, were $7.3
million and $13.8 million in the second quarter and first six months of 2006, respectively,
compared to $5.6 million and $10.6 million, respectively, for the same periods in 2005. The
increase is due to higher interest rates in 2006 compared to 2005.
We recorded an income tax provision of $22.1 million and $34.7 million for the second quarter
and first six months of 2006, respectively, compared to $25.6 million and $37.9 million,
respectively, for the comparable periods in 2005. The effective tax rate was 38.1% and 42.4% for
the second quarter and first six months of 2006, respectively, compared to 39.3% and 40.2%,
respectively, in the comparable prior year periods. Our effective tax rate was negatively impacted
in both periods by losses in the United States, where we recorded no tax benefit.
RESTRUCTURING AND OTHER INFREQUENT EXPENSES
During the second quarter of 2005, we announced that we were changing our distribution
arrangements for our Valtra and Fendt products in Scandinavia by entering into a distribution
agreement with a third-party distributor to distribute Valtra and Fendt equipment in Sweden and
Valtra equipment in Norway and Denmark. As a result of this agreement and the decision to close
other Valtra European sales offices, we initiated the restructuring and closure of our Valtra sales
offices located in the United Kingdom, Spain, Denmark and Norway, resulting in the termination of
approximately 24 employees. The Danish and Norwegian sales offices were transferred to the
third-party Scandinavian equipment distributor in October 2005, which included the transfer of
certain employees, assets and lease and supplier contracts. We recorded severance costs, asset
write-downs and other facility closure costs of approximately $0.4 million, $0.1 million and $0.1
million, respectively, related to these closures during 2005, $0.4 million of which were recorded
during the first six months of 2005. During the fourth quarter of 2005, we completed the sale of
property, plant and equipment associated with the sales offices in the United Kingdom and Norway
and recorded a gain of approximately $0.2 million, which was reflected within Restructuring and
other infrequent expenses within our consolidated statements of operations. During the first
quarter of 2006, we recorded an additional $0.1 million of severance costs related to these
closures. Approximately $0.5 million of severance and other facility closure costs had been paid
as of June 30, 2006, and 23 of the 24 employees had been terminated. The remaining $0.1 million of
severance costs as of June 30, 2006 will be paid during 2006. These closures were completed to
improve our ongoing cost structure and to reduce SG&A expenses.
22
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
During the fourth quarter of 2004, we initiated the restructuring of certain administrative
functions within our Finnish tractor manufacturing operations, resulting in the termination of
approximately 58 employees. During 2004, we recorded severance costs of approximately $1.4 million
associated with this rationalization. We recorded $0.1 million associated with this
rationalization during the first quarter of 2005, and, during the fourth quarter of 2005, reversed
$0.1 million of previously established provisions related to severance costs as severance claims
were finalized during the quarter. As of March 31, 2006, all of the 58 employees had been
terminated. The $0.6 million of severance payments accrued at June 30, 2006 are expected to be
paid through 2009. In addition, during the first quarter of 2005, we incurred and expensed
approximately $0.3 million of contract termination costs associated with the rationalization of our
Valtra European parts distribution operations. These rationalizations were completed to improve
our ongoing cost structure and to reduce cost of goods sold as well as SG&A expenses.
In July 2004, we announced and initiated a plan related to the restructuring of our European
combine manufacturing operations located in Randers, Denmark to include the elimination of the
facilitys component manufacturing operations, as well as the rationalization of the combine model
range to be assembled in Randers. Component manufacturing operations ceased in February 2005. The
restructuring plan was intended to reduce the cost and complexity of the Randers manufacturing operations
by simplifying the model range. We now outsource manufacturing of the majority of parts and
components to suppliers and have retained critical key assembly operations at the Randers facility.
By retaining only the facility assembly operations, we reduced the Randers workforce by 298
employees and permanently eliminated 70% of the square footage utilized. Our plans also include a
rationalization of the combine model range to be assembled in Randers, retaining the production of
the high specification, high value combines. As a result of the restructuring plan, we estimate
that it will generate annual savings of approximately $7 million to $8 million during 2006. We
recorded $11.5 million of restructuring and other infrequent expenses during 2004 associated with
the rationalization and $0.9 million of restructuring charges during 2005, all of which were
recorded during the first six months of 2005. During the second quarter of 2005, we completed
auctions of machinery and equipment and recorded a gain of approximately $1.5 million associated
with such actions. The gain was reflected within Restructuring and other infrequent expenses
within our condensed consolidated statement of operations. As of December 31, 2005, all of the
298 employees associated with the rationalization had been terminated and all severance and other
facility closure costs had been paid.
LIQUIDITY AND CAPITAL RESOURCES
Our financing requirements are subject to variations due to seasonal changes in inventory and
receivable levels. Internally generated funds are supplemented when necessary from external
sources, primarily our revolving credit facility and accounts receivable securitization facilities.
Our current financing and funding sources, with balances outstanding as of June 30, 2006, are
our $201.3 million principal amount 13/4% convertible senior subordinated notes due 2033, 200.0
million (or approximately $255.8 million) principal amount
67/8% senior subordinated notes due 2014,
approximately $490.7 million of accounts receivable securitization facilities (with $440.2 million
in outstanding funding as of June 30, 2006), a $300.0 million multi-currency revolving credit
facility (with $9.9 million outstanding as of June 30, 2006), a $271.0 million term loan facility
and a 108.3 million (or approximately $138.5 million) term loan facility.
On June 29, 2005, we exchanged our $201.3 million of 13/4% convertible senior subordinated notes
due for new notes which provide for (i) the settlement upon conversion in cash up to the principal
amount of the converted new notes with any excess conversion value settled in shares of our common
stock, and (ii) the conversion rate to be increased under certain circumstances if the new notes
are converted in connection with certain change of control transactions occurring prior to December
10, 2010, but otherwise are substantially the same as the old notes. The notes are unsecured
obligations and are convertible into cash and shares of our common stock upon satisfaction of
certain conditions, as discussed below. Interest is payable on the notes at 13/4% per annum,
payable semi-annually in arrears in cash on June 30 and December 31 of each year. The notes
are convertible into shares of our common stock at an effective price of $22.36 per share, subject
to adjustment. Holders may convert the notes only under the following circumstances: (1) during
any fiscal quarter, if the
23
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
closing sales price of our common stock exceeds 120% of the conversion
price for at least 20 trading days in the 30 consecutive trading days ending on the last trading
day of the preceding fiscal quarter; (2) during the five
business day period after a five consecutive trading day period in which the trading price per note for
each day of that period was less than 98% of the product of the closing sale price of our common
stock and the conversion rate; (3) if the notes have been called for redemption; or (4) upon the
occurrence of certain corporate transactions. Beginning January 1, 2011, we may redeem any of the
notes at a redemption price of 100% of their principal amount, plus accrued interest. Holders of
the notes may require us to repurchase the notes at a repurchase price of 100% of their principal
amount, plus accrued interest, on December 31, 2010, 2013, 2018, 2023 and 2028.
The impact of the exchange completed in June 2005, as discussed above, reduces the diluted
weighted average shares outstanding in future periods. The initial reduction in the diluted shares
was approximately 9.0 million shares but varies based on our stock price, once the market price
trigger or other specified conversion circumstances have been met. Although we do not currently
have in place a financial facility to repay the cash amount due upon maturity or conversion of
the new notes, we believe our financial position currently is sufficiently strong enough that we
would expect to have ready access to a bank loan facility or the broader debt and equity markets to
the extent needed. Typically, convertible securities are not converted prior to expiration unless
called for redemption, which we would not do if sufficient funds were not available to us. As a
result, we do not expect the new notes to be converted in the foreseeable future.
On January 5, 2004, we entered into a new credit facility that provides for a $300.0 million
multi-currency revolving credit facility, a $300.0 million United States dollar denominated term
loan and a 120.0 million Euro denominated term loan. The maturity date of the revolving credit
facility is December 2008 and the maturity date for the term loan facility is June 2009. We are
required to make quarterly payments towards the United States dollar denominated term loan and Euro
denominated term loan of $0.75 million and 0.3 million, respectively (or an amortization of one
percent per annum until the maturity date of each term loan). The revolving credit and term loan
facilities are secured by a majority of our U.S., Canadian, Finnish and U.K. based assets and a
pledge of a portion of the stock of our domestic and material foreign subsidiaries. Interest
accrues on amounts outstanding under the revolving credit facility, at our option, at either (1)
LIBOR plus a margin ranging between 1.25% and 2.0% based upon our senior debt ratio or (2) the
higher of the administrative agents base lending rate or one-half of one percent over the federal
funds rate plus a margin ranging between 0.0% and 0.75% based on our senior debt ratio. Interest
accrues on amounts outstanding under the term loans at LIBOR plus 1.75%. The credit facility
contains covenants restricting, among other things, the incurrence of indebtedness and the making
of certain payments, including dividends. We also must fulfill financial covenants including,
among others, a total debt to EBITDA ratio, a senior debt to EBITDA ratio and a fixed charge
coverage ratio, as defined in the facility. As of June 30, 2006, we had total borrowings of $419.4
million under the credit facility, which included $271.0 million under the United States dollar
denominated term loan facility, 108.3 million (approximately $138.5 million) under the Euro
denominated term loan facility and $9.9 million outstanding under the multi-currency revolving
credit facility. As of June 30, 2006, we had availability to borrow $282.3 million under the
revolving credit facility. As of June 30, 2005, we had total borrowings of $534.0 million under
the credit facility, which included $274.0 million under the United States dollar denominated term
loan facility and 109.5 million (approximately $132.5 million) under the Euro denominated term
loan facility. As of June 30, 2005, we had availability to borrow $163.7 million under the
revolving credit facility.
Our 200.0 million 67/8% senior subordinated notes due 2014 are unsecured obligations and are
subordinated in right of payment to any existing or future senior indebtedness. Interest is
payable on the notes semi-annually on April 15 and October 15 of each year. Beginning April 15,
2009, we may redeem the notes, in whole or in part, initially at 103.438% of their principal
amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest,
at any time on or after April 15, 2012. In addition, before April 15, 2009, we may redeem the
notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus
accrued interest and a make-whole premium. Before April 15, 2007, we also may redeem up to 35% of
the notes at 106.875% of their principal amount using the proceeds from sales of certain kinds of capital
stock. The notes include covenants restricting the incurrence of indebtedness and the making of
certain restricted payments, including dividends.
24
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
We redeemed our $250 million 91/2% senior notes on June 23, 2005 at a price of approximately
$261.9 million, which represented a premium of 4.75% over the senior notes face amount. The
premium of approximately $11.9 million was reflected in interest expense, net during the second
quarter of 2005. In connection with the redemption, we also wrote off the remaining balance of
deferred debt issuance costs of approximately $2.2 million. The funding sources for the redemption
was a combination of cash generated from the transfer of wholesale interest-bearing receivables to
our United States and Canadian retail finance joint ventures, AGCO Finance LLC and AGCO Finance
Canada, Ltd., as discussed further below, revolving credit facility borrowings and available cash
on hand.
Under our securitization facilities, we sell accounts receivable in the United States, Canada
and Europe on a revolving basis to commercial paper conduits either on a direct basis or through a
wholly-owned special purpose entity. The United States and Canadian securitization facilities
expire in April 2009 and the European facility expires in September 2006, but each is subject to
annual renewal. As of June 30, 2006, the aggregate amount of these facilities was $490.7 million.
The outstanding funded balance of $440.2 million as of June 30, 2006 has the effect of reducing
accounts receivable and short-term liabilities by the same amount. Our risk of loss under the
securitization facilities is limited to a portion of the unfunded balance of receivables sold,
which is approximately 15% of the funded amount. We maintain reserves for doubtful accounts
associated with this risk. If the facilities were terminated, we would not be required to
repurchase previously sold receivables but would be prevented from selling additional receivables
to the commercial paper conduit. The European facility agreement provides that the agent,
Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank), has the right to terminate the
securitization facilities if our senior unsecured debt rating moves below B+ by Standard & Poors
or B1 by Moodys Investor Services. Based on our current ratings, a downgrade of two levels by
Standard & Poors or two levels by Moodys would need to occur. We are currently in discussions
with the conduit purchaser to eliminate the requirement to maintain certain debt rating levels from
Standard and Poors and Moodys Investors Service from the agreement and to extend the European
facility through June 2011.
These facilities allow us to sell accounts receivables through financing conduits which obtain
funding from commercial paper markets. Future funding under securitization facilities depends upon
the adequacy of receivables, a sufficient demand for the underlying commercial paper and the
maintenance of certain covenants concerning the quality of the receivables and our financial
condition. In the event commercial paper demand is not adequate, our securitization facilities
provide for liquidity backing from various financial institutions, including Rabobank. These
liquidity commitments would provide us with interim funding to allow us to find alternative sources
of working capital financing, if necessary.
In May 2005, we completed an agreement to permit transferring, on an ongoing basis, the
majority of our wholesale interest-bearing receivables in North America to our United States and
Canadian retail finance joint ventures, AGCO Finance LLC and AGCO Finance Canada, Ltd. We have a
49% ownership interest in these joint ventures. The transfer of the wholesale interest-bearing
receivables is without recourse to us and we continue to service the receivables. The initial
transfer of wholesale interest-bearing receivables resulted in net proceeds of approximately $94
million, which were used to redeem our $250 million 91/2% senior notes. As of June 30, 2006, the
balance of interest-bearing receivables transferred to AGCO Finance LLC and AGCO Finance Canada,
Ltd. under this agreement was approximately $129.7 million.
Our business is subject to substantial cyclical variations, which generally are difficult to
forecast. Our results of operations may also vary from time to time resulting from costs
associated with rationalization plans and acquisitions. As a result, we have had to request relief
from our lenders on occasion with respect to financial covenant compliance. While we do not
currently anticipate asking for any relief, it is possible that we would require relief in the
future. Based upon our historical working relationship with our lenders, we currently do not
anticipate any difficulty in obtaining that relief.
Cash flow used in operating activities was $10.7 million for the first six months of 2006
compared to $145.9 million for the first six months of 2005. The improvement between periods was
largely a result of our focus to reduce our investments in inventories and accounts receivable,
primarily in North America, where lower dealer
25
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
deliveries were implemented during the first half of
2006 to achieve a reduction in dealer floorplan inventories compared to the prior year.
Our working capital requirements are seasonal, with investments in working capital typically
building in the first half of the year and then reducing in the second half of the year. We had
$954.0 million in working capital at June 30, 2006, as compared with $825.8 million at December 31,
2005 and $982.5 million at June 30, 2005. Accounts receivable and inventories, combined, at June
30, 2006 were $217.3 million higher than at December 31, 2005 and $191.3 million lower than at June
30, 2005. Production levels during the first six months of 2006 were approximately 19% below
comparable 2005 levels. The timing of production has been reduced in the first half of 2006, which
is expected to reduce our seasonal increase in working capital during 2006.
Capital expenditures for the first six months of 2006 were $47.8 million compared to $25.8
million for the first six months of 2005. We anticipate that capital expenditures for the full
year of 2006 will range from approximately $110 million to $120 million and will primarily be used
to support the development and enhancement of new and existing products, as well as to expand our
engine manufacturing facility.
In February 2005, we made a $21.3 million investment in our retail finance joint venture with
Rabobank in Brazil, as more fully described in Related Parties below.
Our debt to capitalization ratio, which is total long-term debt divided by the sum of total
long-term debt and stockholders equity, was 36.1% at June 30, 2006 compared to 37.5% at December
31, 2005.
From time to time we review and will continue to review acquisition and joint venture
opportunities as well as changes in the capital markets. If we were to consummate a significant
acquisition or elect to take advantage of favorable opportunities in the capital markets, we may
supplement availability or revise the terms under our credit facilities or complete public or
private offerings of equity or debt securities.
We believe that available borrowings under the revolving credit facility, funding under the
accounts receivable securitization facilities, available cash and internally generated funds will
be sufficient to support our working capital, capital expenditures and debt service requirements
for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The future payments required under our significant contractual obligations, excluding foreign
currency forward contracts, as of June 30, 2006 are as follows (in millions):
26
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
2006 to |
|
|
2007 to |
|
|
2009 to |
|
|
2011 and |
|
|
|
Total |
|
|
2007 |
|
|
2009 |
|
|
2011 |
|
|
Beyond |
|
Long-term debt |
|
$ |
884.5 |
|
|
$ |
6.3 |
|
|
$ |
417.2 |
|
|
$ |
1.6 |
|
|
$ |
459.4 |
|
Interest payments related
to long-term debt
(1) |
|
|
234.4 |
|
|
|
54.2 |
|
|
|
106.0 |
|
|
|
40.8 |
|
|
|
33.4 |
|
Capital lease obligations |
|
|
0.8 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
Operating lease obligations |
|
|
139.7 |
|
|
|
27.5 |
|
|
|
34.5 |
|
|
|
18.0 |
|
|
|
59.7 |
|
Unconditional purchase
obligations (2) |
|
|
151.5 |
|
|
|
48.0 |
|
|
|
75.4 |
|
|
|
20.8 |
|
|
|
7.3 |
|
Other short-term and
long-term obligations
(3) |
|
|
336.4 |
|
|
|
74.4 |
|
|
|
44.9 |
|
|
|
44.4 |
|
|
|
172.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations |
|
$ |
1,747.3 |
|
|
$ |
210.8 |
|
|
$ |
678.3 |
|
|
$ |
125.7 |
|
|
$ |
732.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
|
|
|
|
2006 to |
|
|
2007 to |
|
|
2009 to |
|
|
2011 and |
|
|
|
Total |
|
|
2007 |
|
|
2009 |
|
|
2011 |
|
|
Beyond |
|
Standby letters of credit
and similar instruments |
|
$ |
7.8 |
|
|
$ |
7.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Guarantees |
|
|
87.7 |
|
|
|
72.2 |
|
|
|
11.5 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
commitments and lines of
credit |
|
$ |
95.5 |
|
|
$ |
80.0 |
|
|
$ |
11.5 |
|
|
$ |
4.0 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimated interest payments are calculated assuming current interest rates over
minimum maturity periods specified in debt agreements. Debt may be repaid sooner or later
than such minimum maturity periods. |
|
(2) |
|
Unconditional purchase obligations exclude routine purchase orders entered into in
the normal course of business. As a result of the rationalization of our European combine
manufacturing operations during 2004, we entered into an agreement with a third-party
manufacturer to produce certain combine model ranges over a five-year period. The agreement
provides that we will purchase a minimum quantity of 200 combines per year, at a cost of
approximately 16.2 million per year (or approximately $20.7 million), through May 2009. |
|
(3) |
|
Other short-term and long-term obligations include estimates of future minimum
contribution requirements under our U.S. and non-U.S. defined benefit pension and
postretirement plans. These estimates are based on current legislation in the countries we
operate within and are subject to change. |
OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
At June 30, 2006, we were obligated under certain circumstances to purchase, through the year
2010, up to $8.9 million of equipment upon expiration of certain operating leases between AGCO
Finance LLC and AGCO Finance Canada, Ltd., our retail finance joint ventures in North America, and
end users. We also maintain a remarketing agreement with these joint ventures whereby we are
obligated to repurchase repossessed inventory at market values, limited to $6.0 million in the
aggregate per calendar year. We believe that any losses, which might be incurred on the resale of
this equipment, will not materially impact our consolidated financial position or results of
operations.
From time to time, we sell certain trade receivables under factoring arrangements to financial
institutions throughout the world. We evaluate the sale of such receivables pursuant to the
guidelines of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities a Replacement of FASB Statement No. 125, and have determined that
these facilities should be accounted for as off-balance sheet transactions in accordance with SFAS
No. 140.
At June 30, 2006, we guaranteed indebtedness owed to third parties of approximately $78.8
million, primarily
related to dealer and end-user financing of equipment. We believe the credit risk associated
with these guarantees is not material to our financial position.
27
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Other
At June 30, 2006, we had foreign currency forward contracts to buy an aggregate of
approximately $186.4 million United States dollar equivalents and foreign currency forward
contracts to sell an aggregate of approximately $144.6 million United States dollar equivalents.
All contracts have a maturity of less than one year. See Item 3. Quantitative and Qualitative
Disclosures About Market Risk Foreign Currency Risk Management for further
information.
Contingencies
As a result of recent Brazilian tax legislative changes impacting value added taxes (VAT),
we have recorded a reserve of approximately $24.4 million against our outstanding balance of
Brazilian VAT taxes receivable as of June 30, 2006, due to the uncertainty as to our ability to
collect the amounts outstanding.
OUTLOOK
Industry demand for farm equipment in 2006 in all major markets is expected to be below 2005
levels. In North America, demand is expected to decline in the second half of 2006 due to a
projected decline in farm income. In Europe, 2006 equipment demand is expected to be slightly
below 2005 levels due to the continuing impact of last years drought in Southern Europe and
changes in subsidy programs. In South America, equipment demand is expected to decline due to the
impact of the strong Brazilian Real on exports of commodities and high farm debt levels.
Our net sales for the full year of 2006 are expected to be slightly below 2005 levels based on
lower industry demand, planned dealer inventory reductions and currency translation. Gross margins
are expected to improve despite lower production in 2006 compared to 2005 through improvements in
productivity, product mix changes and cost reduction initiatives. We are targeting an improvement
in full year earnings per share in 2006. In addition, improved working capital utilization in 2006
is expected to result in strong cash flow from operations.
We have identified several new productivity initiatives throughout our operations
designed to reduce product costs, overheads and inventories in the future. Our assembly operations
in both Marktoberdorf, Germany and Hesston, Kansas will be updated to improve manufacturing cycle
time, material flow, and labor productivity. In addition, we have identified opportunities to
streamline certain sales, marketing and administrative functions in North America and Europe, which
includes the consolidation of administrative and brand functions, in order to generate
efficiencies. We expect to complete these projects during the next three years with expected cost
improvement and inventory reduction impacts beginning in 2008. Beginning in the second half of 2006, we expect to incur project costs
related to these initiatives recorded in normal operating earnings and restructuring expenses, through 2008.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing
basis, management evaluates estimates, including those related to reserves, intangible assets,
income taxes, pension and other postretirement benefit obligations, derivative financial
instruments and contingencies. Management bases these estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or conditions. A description of
critical accounting policies and related judgment and estimates that affect the preparation of the
consolidated financial statements is set forth in our Annual Report on Form 10-K for the year ended
December 31, 2005.
ACCOUNTING CHANGES
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We are in the process of evaluating
the impact FIN 48 will have on our consolidated results of operations and financial position.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets
an
28
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
amendment of FASB Statement No. 140 (SFAS No. 156). SFAS No. 156 requires an entity to
recognize a servicing asset or liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specified situations. Such servicing
assets or liabilities would be initially measured at fair value, if practicable, and subsequently
measured at amortized value or fair value based upon an election of the reporting entity. SFAS No.
156 also specifies certain financial statement presentations and disclosures in connection with
servicing assets and liabilities. SFAS No. 156 is effective for fiscal years beginning after
September 15, 2006 and may be adopted earlier but only if the adoption is in the first quarter of
the fiscal year. We do not expect that the adoption of SFAS No. 156 will have a material effect on
our consolidated financial statements.
In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No.
06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (that is, Gross versus Net Presentation) (EITF 06-3), which
allows companies to adopt a policy of presenting taxes in the income statement on either a gross or
net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue
transaction between a seller and a customer; for example, sales taxes, use taxes, value-added
taxes, and some types of excise taxes. EITF 06-3 is effective for interim and annual reporting
periods beginning after December 15, 2006. EITF 06-3 will not impact the method for recording and
reporting these sales taxes in our consolidated results of operations or financial position as our
policy is to exclude all such taxes from net sales and present such taxes in the consolidated
statements of operations on a net basis.
In April 2005, the SEC adopted a new rule that changed the adoption date of SFAS No. 123R. We
adopted SFAS No. 123R effective January 1, 2006, and are using the modified prospective method of
adoption. We currently estimate that the application of the expensing provisions of SFAS No. 123R
will result in a pre-tax expense during 2006 of approximately $8.0 million. Refer to Note 1 of our
condensed consolidated financial statements where our stock compensation plans are discussed.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs-An Amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, Inventory Pricing (ARB No. 43), to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage). Among other
provisions, the new rule requires that items such as idle facility expense, excessive spoilage,
double freight and rehandling costs be recognized as current-period charges regardless of whether
they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS 151 requires
that the allocation of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June
15, 2005. Our adoption of SFAS 151 in the first quarter of 2006 did not have a material impact on
our consolidated results of operations or financial position.
FORWARD LOOKING STATEMENTS
Certain statements in Managements Discussion and Analysis of Financial Condition and Results
of Operations and elsewhere in this Quarterly Report on Form 10-Q are forward looking, including
certain statements set forth under the headings Restructuring and Other Infrequent Expenses,
Liquidity and Capital Resources, Off-Balance Sheet Arrangements, Accounting Changes and
Outlook. Forward looking statements reflect assumptions, expectations, projections, intentions
or beliefs about future events. These statements, which may relate to such matters as industry
demand conditions, net sales and income, income from operations, accounting changes, restructuring
and other infrequent expenses, production and inventory levels, future capital expenditures and
debt service requirements, working capital needs, currency translation, and future
acquisition plans, are forward-looking statements within the meaning of the federal
securities laws. These statements do not relate strictly to historical or current facts, and you
can identify certain of these statements, but not necessarily all, by the use of the words
anticipate, assumed, indicate, estimate, believe, predict, forecast, rely,
expect, continue, grow and other words of similar meaning. Although we believe that the
expectations and assumptions reflected in these statements are reasonable in view of the
information currently available to us, there can be no assurance that these expectations will prove
to be correct. These forward-looking statements involve a number of risks and uncertainties, and
actual results may
29
Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
differ materially from the results discussed in or implied by the
forward-looking statements. The following are among the important factors that could cause actual
results to differ materially from the forward-looking statements:
|
|
|
general economic and capital market conditions; |
|
|
|
|
the worldwide demand for agricultural products; |
|
|
|
|
grain stock levels and the levels of new and used field inventories; |
|
|
|
|
cost of steel and other raw materials; |
|
|
|
|
government policies and subsidies; |
|
|
|
|
weather conditions; |
|
|
|
|
interest and foreign currency exchange rates; |
|
|
|
|
pricing and product actions taken by competitors; |
|
|
|
|
commodity prices, acreage planted and crop yields; |
|
|
|
|
farm income, land values, debt levels and access to credit; |
|
|
|
|
pervasive livestock diseases; |
|
|
|
|
production disruptions; |
|
|
|
|
supply and capacity constraints; |
|
|
|
|
our cost reduction and control initiatives; |
|
|
|
|
our research and development efforts; |
|
|
|
|
dealer and distributor actions; |
|
|
|
|
technological difficulties; and |
|
|
|
|
political and economic uncertainty in various areas of the world. |
Any forward-looking statement should be considered in light of such important factors.
New factors that could cause actual results to differ materially from those described above
emerge from time to time, and it is not possible for us to predict all of such factors or the
extent to which any such factor or combination of factors may cause actual results to differ from
those contained in any forward-looking statement. Any forward-looking statement speaks only as of
the date on which such statement is made, and we disclaim any obligation to update the information
contained in such statement to reflect subsequent developments or
information except as required by law.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK MANAGEMENT
We have significant manufacturing operations in France, Germany, Brazil, Finland and Denmark,
and we purchase a portion of our tractors, combines and components from third-party foreign
suppliers, primarily in various European countries and in Japan. We also sell products in over 140
countries throughout the world. The majority of our net sales outside the United States is
denominated in the currency of the customer location with the exception of sales in the Middle
East, Africa and Asia, where net sales are primarily denominated in British pounds, Euros or United
States dollars (See Segment Reporting in Note 15 to our consolidated financial statements for the
year ended December 31, 2005 for sales by customer location). Our most significant transactional
foreign currency exposures are the Euro, the Brazilian Real and the Canadian dollar in relation to
the United States dollar. Fluctuations in the value of foreign currencies create exposures, which
can adversely affect our results of operations.
We attempt to manage our transactional foreign exchange exposure by hedging foreign currency
cash flow forecasts and commitments arising from the settlement of receivables and payables and
from future purchases and sales. Where naturally offsetting currency positions do not occur, we
hedge certain, but not all, of our exposures through the use of foreign currency forward contracts.
Our hedging policy prohibits foreign currency forward contracts for speculative trading purposes.
Our translation exposure resulting from translating the financial statements of foreign
subsidiaries into United States dollars is not hedged. Our most significant translation exposures
are the Euro, the British pound and the Brazilian Real in relation to the United States dollar.
When practical, this translation impact is reduced by financing local operations with local
borrowings.
All derivatives are recognized on our condensed consolidated balance sheets at fair value. On
the date a derivative contract is entered into, we designate the derivative as either (1) a fair
value hedge of a recognized liability, (2) a cash flow hedge of a forecasted transaction, (3) a
hedge of a net investment in a foreign operation, or (4) a non-designated derivative instrument.
We currently engage in derivatives that are non-designated derivative instruments. Changes in fair
value of non-designated derivative contracts are reported in current earnings. During the second
quarter of 2006, we designated certain foreign currency option contracts as cash flow hedges of
expected sales. The effective portion of the fair value gains or losses on these cash flow hedges
are recorded in other comprehensive income and subsequently reclassified into net sales as the
sales are recognized. These amounts offset the effect of the changes in foreign exchange rates on
the related sale transactions. The amount of the gain recorded in other comprehensive income that
is expected to be reclassified to net sales during the year ended December 31, 2006 is
approximately $3.1 million after-tax, based on the exchange rate as of June 30, 2006. These
contracts all expire prior to December 31, 2006.
The following is a summary of foreign currency derivative contracts used to hedge currency
exposures. All contracts have a maturity of less than one year. The net notional amounts and fair
value gains or losses as of June 30, 2006 stated in United States dollars are as follows (in
millions, except average contract rate):
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
Notional |
|
|
Average |
|
|
Fair |
|
|
|
Amount |
|
|
Contract |
|
|
Value |
|
|
|
(Sell)/Buy |
|
|
Rate* |
|
|
Gain/(Loss) |
|
Australian dollar |
|
$ |
(37.6 |
) |
|
|
1.34 |
|
|
$ |
0.3 |
|
Brazilian Real |
|
|
153.0 |
|
|
|
2.24 |
|
|
|
5.3 |
|
British pound |
|
|
(11.6 |
) |
|
|
0.54 |
|
|
|
|
|
Canadian dollar |
|
|
(63.9 |
) |
|
|
1.11 |
|
|
|
0.5 |
|
Euro dollar |
|
|
16.3 |
|
|
|
0.78 |
|
|
|
|
|
Japanese yen |
|
|
17.1 |
|
|
|
112.50 |
|
|
|
(0.3 |
) |
Mexican peso |
|
|
(7.3 |
) |
|
|
11.39 |
|
|
|
(0.1 |
) |
New Zealand dollar |
|
|
(0.7 |
) |
|
|
1.65 |
|
|
|
|
|
Norwegian krone |
|
|
(16.4 |
) |
|
|
6.18 |
|
|
|
0.1 |
|
Polish zloty |
|
|
(2.3 |
) |
|
|
3.09 |
|
|
|
|
|
Swedish krona |
|
|
(4.8 |
) |
|
|
7.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
per United States dollar |
Because these contracts were entered into for hedging purposes, the gains and losses on the
contracts would largely be offset by gains and losses on the underlying firm commitment.
Interest Rates
We manage interest rate risk through the use of fixed rate debt and may in the future utilize
interest rate swap contracts. We have fixed rate debt from our senior subordinated notes and our
convertible senior subordinated notes. Our floating rate exposure is related to our credit
facility and our securitization facilities, which are tied to changes in United States and European
LIBOR rates. Assuming a 10% increase in interest rates, interest expense, net and the cost of our
securitization facilities for the six months ended June 30, 2006 would have increased by
approximately $2.7 million.
We had no interest rate swap contracts outstanding in the three months ended June 30, 2006.
32
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of June 30, 2006, have concluded that, as of such
date, our disclosure controls and procedures were effective to ensure that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms.
The Companys management, including the Chief Executive Officer and the Chief Financial
Officer, does not expect that the Companys disclosure controls or the Companys internal controls
will prevent all errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, have been detected.
Because of the inherent limitations in a cost effective control system, misstatements due to error
or fraud may occur and not be detected. We will conduct periodic evaluations of our internal
controls to enhance, where necessary, our procedures and controls.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in
connection with the evaluation described above that occurred during the six months ended June 30,
2006 that have materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
33
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to various legal claims and actions incidental to our business. We believe
that none of these claims or actions, either individually or in the aggregate, is material to our
business or financial condition.
As disclosed in Item 3 of our Form 10-K for the year ended December 31, 2005, in February 2006
we received a subpoena from the Securities and Exchange Commission in connection with a non-public,
fact-finding inquiry entitled In the Matter of Certain Participants in the Oil for Food Program.
(This subpoena requested documents concerning transactions under the United Nations Oil for Food
Program by AGCO Corporation and certain of our subsidiaries.) This subpoena does not imply there
have been any violations of the federal securities or other laws, and it is not possible to predict
the outcome of this inquiry or its impact, if any, on us. We are cooperating fully with the
investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Companys annual meeting of stockholders was held on April 27, 2006. The following
matters were voted upon and the results of the voting were as follows:
|
(1) |
|
To elect three directors to serve as Class II directors until the annual meeting in
2009 or until their successors have been duly elected and qualified. The nominees, Messrs.
Benson, Shaheen and Visser were elected to the Companys board of directors. The results
follow: |
|
|
|
|
|
|
|
|
|
Nominee |
|
Affirmative Votes |
|
Withheld Votes |
P. George Benson |
|
|
70,461,043 |
|
|
|
4,897,487 |
|
Gerald L. Shaheen |
|
|
66,578,560 |
|
|
|
8,779,970 |
|
Hendrikus Visser |
|
|
71,432,187 |
|
|
|
3,926,343 |
|
|
(2) |
|
To approve the AGCO Corporation 2006 Long Term Incentive Plan. The results follow: |
|
|
|
|
|
|
For |
|
Against |
|
Abstain |
|
54,313,144
|
|
5,862,288
|
|
1,749,653 |
|
ITEM 6. EXHIBITS
|
|
|
|
|
|
|
|
|
The filings |
|
|
|
|
referenced for |
|
|
|
|
incorporation by |
Exhibit |
|
|
|
reference are |
Number |
|
Description of Exhibit |
|
AGCO Corporation |
10.1
|
|
First Amendment to AGCO Corporation 2006 Long Term
Incentive Plan
|
|
Filed herewith |
31.1
|
|
Certification of Martin Richenhagen
|
|
Filed herewith |
31.2
|
|
Certification of Andrew H. Beck
|
|
Filed herewith |
32.0
|
|
Certification of Martin Richenhagen and Andrew H. Beck
|
|
Furnished herewith |
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
AGCO CORPORATION
|
|
|
|
|
Registrant |
|
|
|
|
|
|
|
Date: August 9, 2006
|
|
/s/ Andrew H. Beck |
|
|
|
|
|
|
|
|
|
Andrew H. Beck |
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
35