AGCO CORP /DE - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarter ended June 30, 2004

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 July 31, 2004, AGCO Corporation had 90,248,592 shares of common stock outstanding. AGCO Corporation is an accelerated filer.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in millions, except share data)


	June 30,			December 31,
	2004			2003
ASSETS
Current Assets:
Cash and cash equivalents	$	74.3		$	147.0
Accounts and notes receivable, net		797.6			553.6
Inventories, net		1,077.7			803.6
Other current assets		195.1			180.3

Total current assets		2,144.7			1,684.5
Property, plant and equipment, net		536.6			434.2
Investment in affiliates		104.6			91.6
Deferred tax assets		143.0			147.5
Other assets		72.7			63.8
Intangible assets, net		229.2			86.1
Goodwill		670.7			331.7

Total assets	$	3,901.5		$	2,839.4

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	6.8		$	2.2
Accounts payable		579.0			393.2
Accrued expenses		563.8			490.2
Other current liabilities		38.9			43.5

Total current liabilities		1,188.5			929.1
Long-term debt, less current portion		1,130.1			711.1
Pensions and postretirement health care benefits		216.7			197.5
Other noncurrent liabilities		122.7			95.6

Total liabilities		2,658.0			1,933.3

Stockholders’ Equity:
Common stock; $0.01 par value, 150,000,000 shares authorized, 90,240,892 and 75,409,655 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		0.9			0.8
Additional paid-in capital		891.3			590.3
Retained earnings		708.3			635.0
Unearned compensation		(0.3	)		(0.5	)
Accumulated other comprehensive loss		(356.7	)		(319.5	)

Total stockholders’ equity		1,243.5			906.1

Total liabilities and stockholders’ equity	$	3,901.5		$	2,839.4

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in millions, except per share data)


	Three Months Ended June 30,
	2004		2003
Net sales	$	1,407.0	$	902.7
Cost of goods sold		1,153.2		744.7

Gross profit		253.8		158.0
Selling, general and administrative expenses		121.0		78.3
Engineering expenses		24.9		17.4
Restricted stock compensation expense		—		0.1
Restructuring and other infrequent expenses		6.0		19.2
Amortization of intangibles		3.8		0.4

Income from operations		98.1		42.6
Interest expense, net		22.6		15.1
Other expense, net		3.4		7.9

Income before income taxes and equity in net earnings of affiliates		72.1		19.6
Income tax provision		28.8		8.7

Income before equity in net earnings of affiliates		43.3		10.9
Equity in net earnings of affiliates		5.0		4.7

Net income	$	48.3	$	15.6

Net income per common share:
Basic	$	0.54	$	0.21

Diluted	$	0.54	$	0.21

Weighted average number of common and common equivalent shares outstanding:
Basic		89.0		75.1

Diluted		89.4		75.6

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in millions, except per share data)


	Six Months Ended June 30,
	2004			2003
Net sales	$	2,522.7		$	1,659.9
Cost of goods sold		2,061.2			1,361.9

Gross profit		461.5			298.0
Selling, general and administrative expenses		240.6			157.0
Engineering expenses		51.1			33.3
Restricted stock compensation expense		0.3			0.2
Restructuring and other infrequent (income) expenses		(0.6	)		26.2
Amortization of intangibles		7.8			0.8

Income from operations		162.3			80.5
Interest expense, net		45.4			30.1
Other expense, net		8.5			14.6

Income before income taxes and equity in net earnings of affiliates		108.4			35.8
Income tax provision		45.0			16.8

Income before equity in net earnings of affiliates		63.4			19.0
Equity in net earnings of affiliates		9.9			9.1

Net income	$	73.3		$	28.1

Net income per common share:
Basic	$	0.89		$	0.37

Diluted	$	0.89		$	0.37

Weighted average number of common and common equivalent shares outstanding:
Basic		82.2			75.1

Diluted		82.6			75.6

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in millions)


	Six Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	73.3		$	28.1

Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		41.2			28.9
Deferred debt issuance cost amortization		9.5			1.7
Amortization of intangibles		7.8			0.8
Restricted stock compensation		0.2			0.1
Equity in net earnings of affiliates, net of cash received		(4.7	)		(3.9	)
Deferred income tax expense (benefit)		1.4			(5.0	)
Gain on sale of property, plant and equipment		(7.5	)		—
Write-down of property, plant and equipment		7.8			0.5
Changes in operating assets and liabilities, net of effects from purchase of businesses:
Accounts and notes receivable, net		(100.0	)		(89.7	)
Inventories, net		(143.5	)		(120.7	)
Other current and noncurrent assets		(1.6	)		(4.7	)
Accounts payable		117.8			6.9
Accrued expenses		10.6			(18.6	)
Other current and noncurrent liabilities		(21.3	)		7.6

Total adjustments		(82.3	)		(196.1	)

Net cash used in operating activities		(9.0	)		(168.0	)

Cash flows from investing activities:
Purchase of property, plant and equipment		(25.0	)		(28.1	)
Proceeds from sales of property, plant and equipment		36.8			8.7
Purchase of businesses, net of cash acquired		(765.4	)		—
Proceeds from sale of unconsolidated affiliate		1.8			0.7

Net cash used in investing activities		(751.8	)		(18.7	)

Cash flows from financing activities:
Proceeds from debt obligations, net		409.2			174.8
Payment of debt issuance costs		(21.1	)		—
Proceeds from issuance of common stock		301.0			0.3

Net cash provided by financing activities		689.1			175.1

Effect of exchange rate changes on cash and cash equivalents		(1.0	)		2.0

Decrease in cash and cash equivalents		(72.7	)		(9.6	)
Cash and cash equivalents, beginning of period		147.0			34.3

Cash and cash equivalents, end of period	$	74.3		$	24.7

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in millions, except per share data)

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. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations and cash flows at the dates and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 and our Form 8-K dated June 2, 2004. Certain reclassifications of previously reported financial information were made to conform to the current presentation. Results for interim periods are not necessarily indicative of the results for the year.

2. ACQUISITIONS

On January 5, 2004, the Company acquired the Valtra tractor and diesel engine operations of Kone Corporation, a Finnish company, for €606.1 million, net of approximately €19.8 million cash acquired (approximately $760 million, net). Valtra is a global tractor and off-road engine manufacturer in the Nordic region of Europe and Latin America. The acquisition of Valtra provided the Company with the opportunity to expand its business in significant global markets by utilizing Valtra’s technology and productivity leadership in the agricultural equipment market. The acquired assets and liabilities consisted primarily of inventories, accounts receivable, property, plant and equipment, technology, tradenames, trademarks, customer relationships and patents. The results of operations for the Valtra acquisition have been included in the Company’s Condensed Consolidated Financial Statements from the date of acquisition. The Valtra acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations,” and accordingly, the Company has allocated the purchase price to the assets acquired and the liabilities assumed based on a preliminary estimate of fair values as of the acquisition date. This allocation is subject to adjustment and will be completed in 2004. The Company recorded approximately $358.6 million of goodwill and approximately $156.9 million of other identifiable intangible assets such as tradenames, trademarks, technology and related patents, and customer relationship intangibles as part of the purchase price allocation. The Company completed the initial funding of the cash purchase price of Valtra through the issuance of $201.3 million principal amount of convertible senior subordinated notes in December 2003, funds borrowed under revolving credit and term loan facilities that were entered into January 5, 2004, and $100.0 million borrowed under an interim bridge facility that also closed on January 5, 2004 (Note 5).

The following pro forma data summarizes the results of operations for the three and six months ended June 30, 2003 as if the Valtra acquisition had occurred at January 1, 2003. The unaudited pro forma information has been prepared for comparative purposes only and does not purport to represent what the results of operations of the Company actually would have been had the transaction occurred on the date indicated or what the results of operations may be in any future period. The pro forma information also excludes the impact of equity and debt offerings that were completed by the Company during the second quarter of 2004 (Note 5).


	Three months		Six months
	ended		ended
	June 30, 2003		June 30, 2003
Net sales	$	1,172.3	$	2,128.2
Net income		20.1		31.3
Net income per common share – basic	$	0.27	$	0.42
Net income per common share – diluted	$	0.27	$	0.41

Notes to Condensed Consolidated Financial Statements—Continued
(unaudited, in millions, except per share data)

3. RESTRUCTURING AND OTHER INFREQUENT (INCOME) EXPENSES

On July 2, 2004, the Company announced and initiated a plan to restructure its European combine manufacturing operations located in Randers, Denmark. The restructuring plan includes the elimination of the facility’s component manufacturing operations, as well as the rationalization of the combine model range to be assembled in Randers. In connection with the restructuring plan, the Company recorded approximately $8.0 million of restructuring and other infrequent expenses in the second quarter of 2004. The amount recorded represents the impairment and write-down of certain property, plant and equipment within the component manufacturing operation, which was based upon the estimated fair value of the assets compared to their carrying value. The estimated fair value of the equipment was determined based on current conditions in the market. The portion of the land and buildings and the machinery, equipment and tooling eliminated from production will be disposed of or marketed for sale after the facility’s component manufacturing production ceases. The restructuring plan will result in the termination of approximately 300 employees. The Company is currently negotiating the terms of the proposed employee terminations with local authorities and employee representatives. The employee termination costs associated with the restructuring are expected to be approximately $6 million to $8 million and be incurred in 2004. The Company also recorded approximately $3.6 million of inventory write-downs reflected in costs of goods sold, related to inventory that was identified as obsolete as a result of the restructuring plan.

During 2002, the Company announced and initiated a restructuring plan related to the closure of its tractor manufacturing facility in Coventry, England and the relocation of existing production at Coventry to the Company’s Beauvais, France and Canoas, Brazil manufacturing facilities. The components of the restructuring expenses are summarized in the following table:


	Write-down
	of Property,					Employee			Facility
	Plant and		Employee			Retention			Closure
	Equipment		Severance			Payments			Costs			Total
2002 provision	$	11.2	$	8.3		$	18.3		$	2.4		$	40.2
Less: Non-cash expense		11.2		—			—			—			11.2

Cash expense		—		8.3			18.3			2.4			29.0
2002 cash activity		—		(0.1	)		(0.3	)		(0.3	)		(0.7	)

Balances as of December 31, 2002		—		8.2			18.0			2.1			28.3

2003 provision		—		—			10.2			1.8			12.0
2003 cash activity		—		(8.9	)		(26.7	)		(2.5	)		(38.1	)
Foreign currency translation		—		1.2			0.5			0.2			1.9

Balances as of December 31, 2003		—		0.5			2.0			1.6			4.1

First quarter 2004 provision		—		—			—			—			—
First quarter 2004 cash activity		—		(0.3	)		(0.9	)		(0.4	)		(1.6	)
Foreign currency translation		—		—			0.1			—			0.1

Balances as of March 31, 2004		—		0.2			1.2			1.2			2.6

Second quarter 2004 provision reversal		—		—			(0.2	)		(0.4	)		(0.6	)
Second quarter 2004 cash activity		—		(0.2	)		(0.5	)		(0.3	)		(1.0	)
Foreign currency translation		—		—			—			0.1			0.1

Balances as of June 30, 2004	$	—	$	—		$	0.5		$	0.6		$	1.1

The write-down of property, plant and equipment represents the impairment of machinery and equipment resulting from the facility closure and was based on the estimated fair value of the assets compared to their carrying value. The estimated fair value of the equipment was determined based on current conditions in the market. The severance costs relate to the termination of 1,051 employees. As of June 30, 2004, 1,041 employees had been terminated. The employee retention payments relate to incentives paid to Coventry

Notes to Condensed Consolidated Financial Statements—Continued
(unaudited, in millions, except per share data)

employees who remain employed until certain future termination dates and are accrued over the term of the retention period. The facility closure costs include certain noncancelable operating lease terminations and other facility exit costs. During the fourth quarter of 2003, the Company sold machinery and equipment at auction and as a result of those sales, recognized a net gain of approximately $2.0 million. This gain was reflected in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2003. On January 30, 2004, the Company sold the land, buildings and improvements of the Coventry facility for approximately $41 million, and as a result of that sale, recognized a net gain of approximately $6.9 million. This gain was reflected in “Restructuring and other infrequent (income) expenses in the Company’s Condensed Consolidated Statements of Operations during the first quarter of 2004. The Company received approximately $34.4 million of the sale proceeds on January 30, 2004, with the remainder to be paid on January 30, 2005. The Company is leasing part of the facility back from the buyers for a period of three years, with the ability to exit the lease within two years from the date of the sale. In the second quarter of 2004, the Company reversed approximately $0.6 million of provisions related to the restructuring that had been previously established. The reversals were necessary to reflect current estimates of remaining obligations related to retention payments, lease termination payouts and other exit costs. In addition, the Company completed the auctions of remaining machinery and equipment during the second quarter of 2004, which resulted in an additional $1.4 million net gain related to such actions. The net gain was reflected in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations during the second quarter of 2004. The $1.1 million of restructuring costs accrued at June 30, 2004 are expected to be incurred during 2004.

In October 2002, the Company applied to the High Court in London, England, for clarification of a provision in its U.K. pension plan that governs the value of pension payments payable to an employee who is over 50 years old and who retires from service in certain circumstances prior to his normal retirement date. The primary matter before the High Court was whether pension payments to such employees, including those who take early retirement and those terminated due to the closure of the Company’s Coventry facility, should be reduced to compensate for the fact that the pension payments begin prior to a normal retirement age of 65. In December 2002, the High Court ruled against the Company’s position that reduced pension payments are payable in the context of early retirements or terminations. The Company appealed the High Court’s ruling, and in July 2003, the Court of Appeal ruled that employees terminated as a result of the closure of the Coventry facility do not qualify for full pensions, thereby reversing the earlier High Court ruling for this aspect of the case, but ruled that other employees might qualify. The representatives of the beneficiaries of the pension plan sought the right to appeal to the House of Lords, and on March 26, 2004, the House of Lords denied their request.

As a result of the Court of Appeal’s ruling in that case, certain employees who took early retirement in prior years under voluntary retirement arrangements would be entitled to additional payments, and therefore the Company recorded a charge in the second quarter of 2003, included in “Restructuring and other infrequent expenses,” of approximately £7.5 million ($12.4 million) to reflect its estimate of the additional pension liability associated with previous early retirement programs.

In addition, during 2002 and 2003, the Company initiated several rationalization plans and recorded restructuring and other infrequent expenses in total of approximately $4.6 million. The expenses primarily related to severance costs and certain lease termination and other exit costs associated with the rationalization of the Company’s European engineering and marketing personnel, certain components of the Company’s German manufacturing facilities located in Kempten and Marktoberdorf, Germany, as well as a European combine engineering rationalization that was initiated during 2003. During the six months ended June 30, 2004, the Company recorded $0.2 million of restructuring and other infrequent expenses associated with these European rationalization initiatives, as well as $0.1 million related to the closure and consolidation of Valtra’s U.S. and Canadian sales offices into the Company’s existing U.S. and Canadian sales organizations. A total of $4.0 million of severance costs have been recorded associated with these activities, and relate to the termination of approximately 215 employees in total. At June 30, 2004, a total of approximately $4.2 million of expenses had been incurred and paid. The remaining accrued balance of $0.7 million as of June 30, 2004 is expected to be incurred during 2004.

Notes to Condensed Consolidated Financial Statements—Continued
(unaudited, in millions, except per share data)

4. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s acquired intangible assets are as follows:


	June 30, 2004					December 31, 2003
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amounts		Amortization			Amounts		Amortization
Amortized intangible assets:
Trademarks and tradenames	$	32.8	$	(3.1	)	$	31.8	$	(2.5	)
Customer relationships		72.4		(4.8	)		3.5		(1.0	)
Patents and technology		46.3		(3.6	)		1.1		(0.2	)

Total	$	151.5	$	(11.5	)	$	36.4	$	(3.7	)

Unamortized intangible assets:
Trademarks	$	89.2				$	53.4

Changes in the carrying amount of goodwill during the six months ended June 30, 2004 are summarized as follows:


	North		South			Europe/Africa/
	America		America			Middle East			Consolidated
Balance as of December 31, 2003	$	165.5	$	42.3		$	123.9		$	331.7
Acquisition		—		70.9			287.7			358.6
Foreign currency translation		—		(6.9	)		(12.7	)		(19.6	)

Balance as of June 30, 2004	$	165.5	$	106.3		$	398.9		$	670.7

Goodwill is tested for impairment in each of the Company’s segments on an annual basis and more often if indications of impairment exist as required under Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”) “Goodwill and Other Intangible Assets.” The results of the Company’s analyses conducted on October 1, 2003 indicated no reduction in the carrying amount of goodwill was required in 2003. The Company will perform its next impairment analyses as of October 1, 2004, 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.

5. LONG-TERM DEBT

Long-term debt consisted of the following at June 30, 2004 and December 31, 2003:


	June 30,			December 31,
	2004			2003
Credit facility	$	429.6		$	—
1¾% Convertible senior subordinated notes due 2033		201.3			201.3
9½% Senior notes due 2008		250.0			250.0
6⁷/₈% Senior subordinated notes due 2014		243.8			—
8½% Senior subordinated notes due 2006		—			249.3
Other long-term debt		12.2			12.7

		1,136.9			713.3
Less: current portion of long-term debt		(6.8	)		(2.2	)

Total long-term debt, less current portion	$	1,130.1		$	711.1

On January 5, 2004, the Company entered into a new credit facility and borrowed $100.0 million under an interim bridge facility to fund the acquisition of Valtra (Note 2).

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