QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 001-33767
AGCO CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware
58-1960019
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4205 River Green Parkway
Duluth, Georgia
30096
(Address of principal executive offices)
(Zip Code)
(770) 813-9200
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
x
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Securities registered pursuant to Section 12(b) of the Act
Title of Class
Trading Symbol
Name of exchange on which registered
Common stock
AGCO
New York Stock Exchange (NYSE)
As of May 3, 2019, there are 76,784,991 shares of the registrant’s common stock, par value of $0.01 per share, outstanding.
Long-term debt, less current portion and debt issuance costs
1,404.3
1,275.3
Operating lease liabilities
150.8
—
Pensions and postretirement health care benefits
216.8
223.2
Deferred tax liabilities
106.8
116.3
Other noncurrent liabilities
251.9
251.4
Total liabilities
5,185.3
4,632.9
Commitments and contingencies (Note 17)
Stockholders’ Equity:
AGCO Corporation stockholders’ equity:
Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 2019 and 2018
—
—
Common stock; $0.01 par value, 150,000,000 shares authorized, 76,742,850 and 76,536,755 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
0.8
0.8
Additional paid-in capital
9.7
10.2
Retained earnings
4,491.0
4,477.3
Accumulated other comprehensive loss
(1,545.8
)
(1,555.4
)
Total AGCO Corporation stockholders’ equity
2,955.7
2,932.9
Noncontrolling interests
63.3
60.6
Total stockholders’ equity
3,019.0
2,993.5
Total liabilities and stockholders’ equity
$
8,204.3
$
7,626.4
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.BASIS OF PRESENTATION
The condensed consolidated financial statements of AGCO Corporation and its subsidiaries (the “Company” or “AGCO”) included herein have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations, comprehensive income (loss) 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 consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Results for interim periods are not necessarily indicative of the results for the year. Certain prior period amounts have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The standard revises the disclosure requirements by removing disclosures no longer considered cost beneficial, modifying specific requirements of disclosures and adding certain disclosures identified as relevant. ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. Certain amendments of the standard should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments of the standard should be applied retrospectively to all periods presented. The standard will not have an impact on the Company’s results of operations, financial condition and cash flows.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows for the election to reclassify the disproportionate income tax effects of the Tax Cuts and Jobs Act (the “2017 Tax Act”) on items within accumulated other comprehensive income (loss) to retained earnings. These disproportionate income tax effect items are referred to as “stranded tax effects.” The amendments within ASU 2018-02 only relate to the reclassification of the income tax effects of the 2017 Tax Act. Certain disclosures are required in the period of adoption as to whether an entity has elected to reclassify the stranded tax effects. The Company adopted the standard effective January 1, 2019, and the adoption did not have a material impact on the Company’s results of operations, financial condition and cash flows.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Under the standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, resulting in an impairment charge that is the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge, however, should not exceed the total amount of goodwill allocated to a reporting unit. The impairment assessment under ASU 2017-04 applies to all reporting units, including those with a zero or negative carrying amount. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods using a prospective approach. Early adoption is permitted for any interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company expects to adopt ASU 2017-04 effective January 1, 2020 and will apply the standard to all impairment tests performed thereafter.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods as the adoption of the standard relates to the Company. However, the standard does not have to be adopted by the Company's finance joint ventures until annual periods beginning after December 15, 2020 and interim periods within those annual periods. This standard will likely impact the results of operations and financial condition of the Company’s finance joint ventures and as a result, will likely impact the Company’s “Investment in affiliates” and “Equity in net earnings of affiliates”
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
upon adoption. The Company’s finance joint ventures are currently evaluating the standard’s impact to their results of operations and financial condition.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which superseded the existing lease guidance under current U.S. GAAP. ASU 2016-02 is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard and leases continue to be classified as finance or operating. ASU 2016-02’s primary change is the requirement for entities to recognize a lease liability for payments and a right-of-use (“ROU”) asset representing the right to use the leased asset during the term of an operating lease arrangement. Lessees were permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of 12 months or less. Lessors’ accounting under the new standard was largely unchanged from the previous accounting standard. In addition, ASU 2016-02 expanded the disclosure requirements of lease arrangements. Upon adoption, lessees and lessors were required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, “Targeted Improvements,” which allowed for a new, optional transition method that provided the option to use the effective date as the date of initial application on transition. Under this option, the comparative periods would continue to apply the legacy guidance in ASC 840, including the disclosure requirements, and a cumulative effect adjustment would be recognized in the period of adoption rather than the earliest period presented. Under this transition option, comparative reporting would not be required and the provisions of the standard would be applied prospectively to leases in effect at the date of adoption.
The Company adopted the new guidance effective January 1, 2019 using a modified retrospective approach and no cumulative effect adjustment was recorded upon adoption. Based on the Company’s current lease portfolio, the adoption of the standard as of January 1, 2019 resulted in the recognition on that date of ROU assets and operating lease liabilities in the amount of approximately $194.2 million and $196.4 million, respectively, in the Company’s Condensed Consolidated Balance Sheets. The adoption of the new standard did not materially impact the Company’s Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows.
ASU 2016-02 provided a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permitted the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company has elected the short-term lease exemption for all leases with a term of 12 months or less for both existing and ongoing operating leases. The Company elected the practical expedient to separate lease and non-lease components for a majority of its operating leases, other than real estate and office equipment leases.
In connection with the adoption of ASU 2016-02 on January 1, 2019, the Company completed the design of new processes and internal controls, which included the implementation of a software solution and the cataloging of the Company’s existing and ongoing population of leased assets.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
2.RESTRUCTURING EXPENSES
Beginning in 2014 through 2019, the Company announced and initiated several actions to rationalize employee headcount at various manufacturing facilities and various administrative offices located in Europe, South America, China and the United States in order to reduce costs in response to softening global market demand and lower production volumes. The aggregate headcount reduction was approximately 3,890 employees between 2014 and 2018. During the three months ended March 31, 2019, the Company recorded severance and related costs associated with further rationalizations in Europe, China, South America and the United States, in connection with the termination of approximately 30 employees. Restructuring expenses activity during the three months ended March 31, 2019 is summarized as follows (in millions):
Write-down of Property, Plant and Equipment
Employee Severance
Total
Balance as of December 31, 2018
$
—
$
7.1
$
7.1
First quarter 2019 provision
0.3
1.4
1.7
Less: Non-cash expense
(0.3
)
—
(0.3
)
Cash expense
—
1.4
1.4
First quarter 2019 cash activity
—
(2.6
)
(2.6
)
Foreign currency translation
—
(0.1
)
(0.1
)
Balance as of March 31, 2019
$
—
$
5.8
$
5.8
3.STOCK COMPENSATION PLANS
The Company recorded stock compensation expense as follows for the three months ended March 31, 2019 and 2018 (in millions):
Three Months Ended March 31,
2019
2018
Cost of goods sold
$
0.5
$
0.8
Selling, general and administrative expenses
12.0
8.4
Total stock compensation expense
$
12.5
$
9.2
Stock Incentive Plan
Under the Company’s Long-Term Incentive Plan (the “Plan”), up to 10,000,000 shares of AGCO common stock may be issued. As of March 31, 2019, of the 10,000,000 shares reserved for issuance under the Plan, approximately 3,127,344 shares were available for grant, assuming the maximum number of shares are earned related to the performance award grants discussed below. The Plan allows the Company, under the direction of the Board of Directors’ Compensation Committee, to make grants of performance shares, stock appreciation rights, restricted stock units and restricted stock awards to employees, officers and non-employee directors of the Company.
Long-Term Incentive Plan and Related Performance Awards
The weighted average grant-date fair value of performance awards granted under the Plan during the three months ended March 31, 2019 and 2018 was $61.01 and $71.40, respectively.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
During the three months ended March 31, 2019, the Company granted 542,180 performance awards related to varying performance periods. The awards granted assume the maximum target levels of performance are achieved. The compensation expense associated with all awards granted under the Plan is amortized ratably over the vesting or performance period based on the Company’s projected assessment of the level of performance that will be achieved. Performance award transactions during the three months ended March 31, 2019 were as follows and are presented as if the Company were to achieve its maximum levels of performance under the plan awards:
Shares awarded but not earned at January 1
938,862
Shares awarded
542,180
Shares forfeited
(3,620
)
Shares earned
(11,200
)
Shares awarded but not earned at March 31
1,466,222
As of March 31, 2019, the total compensation cost related to unearned performance awards not yet recognized, assuming the Company’s current projected assessment of the level of performance that will be achieved, was approximately $53.2 million, and the weighted average period over which it is expected to be recognized is approximately two years. The compensation cost not yet recognized could be higher or lower based on actual achieved levels of performance.
Restricted Stock Unit Awards
During the three months ended March 31, 2019, the Company granted 165,160 restricted stock unit (“RSU”) awards. These awards entitle the participant to receive one share of the Company’s common stock for each RSU granted and vest one-third per year over a three-year requisite service period. The compensation expense associated with these awards is being amortized ratably over the requisite service period for the awards that are expected to vest. The weighted average grant-date fair value of the RSUs granted under the Plan during the three months ended March 31, 2019 and 2018 was $61.01 and $71.40, respectively. RSU transactions during the three months ended March 31, 2019 were as follows:
RSUs awarded but not vested at January 1
352,975
RSUs awarded
165,160
RSUs forfeited
(1,192
)
RSUs vested
(111,419
)
RSUs awarded but not vested at March 31
405,524
As of March 31, 2019, the total compensation cost related to the unvested RSUs not yet recognized was approximately $20.9 million, and the weighted average period over which it is expected to be recognized is approximately two years.
Stock-Settled Appreciation Rights
Compensation expense associated with the stock-settled appreciation rights (“SSAR”) awards is amortized ratably over the requisite service period for the awards that are expected to vest. The Company estimated the fair value of the grants using the Black-Scholes option pricing model. SSAR transactions during the three months ended March 31, 2019 were as follows:
SSARs outstanding at January 1
1,099,592
SSARs granted
243,600
SSARs exercised
(56,738
)
SSARs canceled or forfeited
(1,862
)
SSARs outstanding at March 31
1,284,592
As of March 31, 2019, the total compensation cost related to the unvested SSARs not yet recognized was approximately $6.0 million, and the weighted average period over which it is expected to be recognized is approximately three years.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Director Restricted Stock Grants
The Plan provides for annual restricted stock grants of the Company’s common stock to all non-employee directors. The 2019 grant was made on April 25, 2019 and equated to 19,386 shares of common stock, of which 14,105 shares of common stock were issued after shares were withheld for taxes. The Company recorded stock compensation expense of approximately $1.4 million during the three months ended June 30, 2019 associated with these grants.
4.GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of acquired intangible assets during the three months ended March 31, 2019 are summarized as follows (in millions):
Trademarks and
Tradenames
Customer
Relationships
Patents and
Technology
Land Use Rights
Total
Gross carrying amounts:
Balance as of December 31, 2018
$
203.4
$
586.3
$
155.8
$
8.6
$
954.1
Foreign currency translation
(0.9
)
(1.2
)
(1.4
)
0.2
(3.3
)
Balance as of March 31, 2019
$
202.5
$
585.1
$
154.4
$
8.8
$
950.8
Trademarks and
Tradenames
Customer
Relationships
Patents and
Technology
Land Use Rights
Total
Accumulated amortization:
Balance as of December 31, 2018
$
73.4
$
310.8
$
80.7
$
3.0
$
467.9
Amortization expense
2.8
10.0
2.5
—
15.3
Foreign currency translation
—
(0.5
)
(0.9
)
0.1
(1.3
)
Balance as of March 31, 2019
$
76.2
$
320.3
$
82.3
$
3.1
$
481.9
Trademarks and
Tradenames
Indefinite-lived intangible assets:
Balance as of December 31, 2018
$
86.9
Foreign currency translation
(0.5
)
Balance as of March 31, 2019
$
86.4
The Company currently amortizes certain acquired intangible assets, primarily on a straight-line basis, over their estimated useful lives, which range from three to 50 years.
Changes in the carrying amount of goodwill during the three months ended March 31, 2019 are summarized as follows (in millions):
North
America
South
America
Europe/Middle East
Asia/Pacific/Africa
Consolidated
Balance as of December 31, 2018
$
611.1
$
116.7
$
649.6
$
118.1
$
1,495.5
Foreign currency translation
—
(0.5
)
(9.5
)
0.1
(9.9
)
Balance as of March 31, 2019
$
611.1
$
116.2
$
640.1
$
118.2
$
1,485.6
Goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The Company conducts its annual impairment analyses as of October 1 each fiscal year. There have been no indicators of impairment during the three months ended March 31, 2019.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
5.INDEBTEDNESS
Long-term debt consisted of the following at March 31, 2019 and December 31, 2018 (in millions):
March 31, 2019
December 31, 2018
1.056% Senior term loan due 2020
$
224.7
$
228.7
Senior term loan due 2022
168.5
171.5
Credit facility, expires 2023
207.9
114.4
1.002% Senior term loan due 2025
280.9
—
Senior term loans due between 2019 and 2028
801.1
815.3
Other long-term debt
17.1
20.6
Debt issuance costs
(2.8
)
(2.6
)
1,697.4
1,347.9
Less: 1.056% Senior term loan due 2020
(224.7
)
—
Senior term loans due 2019
(62.9
)
(63.8
)
Current portion of other long-term debt
(5.5
)
(8.8
)
Total long-term indebtedness, less current portion
$
1,404.3
$
1,275.3
1.056% Senior Term Loan
In December 2014, the Company entered into a term loan with the European Investment Bank (“EIB”), which provided the Company with the ability to borrow up to €200.0 million. The €200.0 million (or approximately $224.7 million as of March 31, 2019) of funding was received on January 15, 2015 with a maturity date of January 15, 2020. The Company is permitted to prepay the term loan before its maturity date. Interest is payable on the term loan at 1.056% per annum, payable quarterly in arrears.
Senior Term Loan Due 2022
In October 2018, the Company entered into a term loan agreement with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”), in the amount of €150.0 million (or approximately $168.5 million as of March 31, 2019). The Company has the ability to prepay the term loan before its maturity date of October 28, 2022. Interest is payable on the remaining term loan quarterly in arrears at an annual rate equal to the EURIBOR plus a margin ranging from 0.875% to 1.875% based on the Company’s credit rating.
Credit Facility
In October 2018 the Company entered into an $800.0 million multi-currency revolving credit facility. The credit facility matures on October 17, 2023. Interest accrues on amounts outstanding under the credit facility, at the Company’s option, at either (1) LIBOR plus a margin ranging from 0.875% to 1.875% based on the Company’s credit rating, or (2) the base rate, which is equal to the higher of (i) the administrative agent’s base lending rate for the applicable currency, (ii) the federal funds rate plus 0.5%, and (iii) one-month LIBOR for loans denominated in US dollars plus 1.0%, plus a margin ranging from 0.0% to 0.875% based on the Company’s credit rating. As of March 31, 2019, the Company had approximately $207.9 million of outstanding borrowings under the credit facility and the ability to borrow approximately $592.1 million under the facility. As of December 31, 2018, the Company had approximately $114.4 million of outstanding borrowings under the credit facility and the ability to borrow approximately $685.6 million million under the facility.
1.002% Senior Term Loan
In December 2018, the Company entered into a term loan with the EIB, which provided the Company with the ability to borrow up to €250.0 million. The €250.0 million (or approximately $280.9 million as of March 31, 2019) of funding was received on January 25, 2019 with a maturity date of January 24, 2025. The Company is permitted to prepay the term loan before its maturity date. Interest is payable on the term loan at 1.002% per annum, payable semi-annually in arrears.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Senior Term Loans Due Between 2019 and 2028
In October 2016, the Company borrowed an aggregate amount of €375.0 million through a group of seven related term loan agreements, and in August 2018, the Company borrowed an additional aggregate amount of indebtedness of €338.0 million through a group of another seven related term loan agreements.
In aggregate, the Company has indebtedness of €713.0 million (or approximately $801.1 million as of March 31, 2019) through a group of fourteen related term loan agreements, as discussed above. The provisions of the term loan agreements are substantially identical, with the exception of interest rate terms and maturities. The Company is permitted to prepay the term loans before their maturity dates. For the term loans with a fixed interest rate, interest is payable in arrears on an annual basis, with interest rates ranging from 0.70% to 2.26% and a maturity date between October 2019 and August 2028. For the term loans with a floating interest rate, interest is payable in arrears on a semi-annual basis, with interest rates based on the EURIBOR plus a margin ranging from 0.70% to 1.25% and a maturity date between October 2019 and August 2025.
Short-Term Borrowings
As of March 31, 2019 and December 31, 2018, the Company had short-term borrowings due within one year of approximately $181.5 million and $138.0 million, respectively.
Standby Letters of Credit and Similar Instruments
The Company has arrangements with various banks to issue standby letters of credit or similar instruments, which guarantee the Company’s obligations for the purchase or sale of certain inventories and for potential claims exposure for insurance coverage. At March 31, 2019 and December 31, 2018, outstanding letters of credit totaled $13.9 million and $14.1 million, respectively.
6RECOVERABLE INDIRECT TAXES
The Company’s Brazilian operations incur value added taxes (“VAT”) on certain purchases of raw materials, components and services. These taxes are accumulated as tax credits and create assets that are reduced by the VAT collected from the Company’s sales in the Brazilian market. The Company regularly assesses the recoverability of these tax credits, and establishes reserves when necessary against them, through analyses that include, amongst others, the history of realization, the transfer of tax credits to third parties as authorized by the government, anticipated changes in the supply chain and the future expectation of tax debits from the Company’s ongoing operations. The Company believes that these tax credits, net of established reserves, are realizable. The Company had recorded approximately $160.0 million and $156.0 million, respectively, of VAT tax credits, net of reserves, as of March 31, 2019 and December 31, 2018.
7.INVENTORIES
Inventories at March 31, 2019 and December 31, 2018 were as follows (in millions):
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
8.PRODUCT WARRANTY
The warranty reserve activity for the three months ended March 31, 2019 and 2018 consisted of the following (in millions):
Three Months Ended March 31,
2019
2018
Balance at beginning of period
$
360.9
$
316.0
Accruals for warranties issued during the period
51.1
58.5
Settlements made (in cash or in kind) during the period
(47.4
)
(55.9
)
Foreign currency translation
(3.3
)
7.2
Balance at March 31
$
361.3
$
325.8
The Company’s agricultural equipment products generally are warranted against defects in material and workmanship for a period of one to four years. The Company accrues for future warranty costs at the time of sale based on historical warranty experience. Approximately $306.5 million and $308.6 million of warranty reserves are included in “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, respectively. Approximately $54.8 million and $52.3 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018, respectively.
The Company recognizes recoveries from its suppliers of the costs associated with warranties it provides when the collection is probable. When specifics of the recovery have been agreed upon with the Company’s suppliers through confirmation of liability for the recovery, the Company records the recovery within “Accounts and notes receivable, net.” Estimates of the amount of warranty claim recoveries to be received from the Company's suppliers based upon contractual supplier arrangements are recorded within “Other current assets.”
9.NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted net income per common share assumes the exercise of outstanding SSARs and the vesting of performance share awards and RSUs using the treasury stock method when the effects of such assumptions are dilutive. A reconciliation of net income attributable to AGCO Corporation and its subsidiaries and weighted average common shares outstanding for purposes of calculating basic and diluted net income per share for the three months ended March 31, 2019 and 2018 is as follows (in millions, except per share data):
Three Months Ended March 31,
2019
2018
Basic net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
65.1
$
24.3
Weighted average number of common shares outstanding
76.6
79.6
Basic net income per share attributable to AGCO Corporation and subsidiaries
$
0.85
$
0.31
Diluted net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
65.1
$
24.3
Weighted average number of common shares outstanding
76.6
79.6
Dilutive SSARs, performance share awards and RSUs
0.9
0.9
Weighted average number of common shares and common share equivalents outstanding for purposes of computing diluted net income per share
77.5
80.5
Diluted net income per share attributable to AGCO Corporation and subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
SSARs to purchase approximately 0.7 million and 0.4 million shares of the Company’s common stock for the three months ended March 31, 2019 and 2018, respectively, were outstanding but not included in the calculation of weighted average common and common equivalent shares outstanding because they had an antidilutive impact.
10.INCOME TAXES
At March 31, 2019 and December 31, 2018, the Company had approximately $165.3 million and $166.1 million, respectively, of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. At March 31, 2019 and December 31, 2018, the Company had approximately $56.3 million and $58.5 million, respectively, of accrued or deferred taxes related to uncertain income tax positions connected with ongoing income tax audits in various jurisdictions that it expects to settle or pay in the next 12 months. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. At March 31, 2019 and December 31, 2018, the Company had accrued interest and penalties related to unrecognized tax benefits of $28.3 million and $27.2 million, respectively. Generally, tax years 2013 through 2018 remain open to examination by taxing authorities in the United States and certain other foreign tax jurisdictions.
The Company maintains a valuation allowance to fully reserve against its net deferred tax assets in the United States and certain foreign jurisdictions. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies and determined that all adjustments to the valuation allowances were appropriate. In making this assessment, all available evidence was considered including the current economic climate, as well as reasonable tax planning strategies. The Company believes it is more likely than not that the Company will realize its remaining net deferred tax assets, net of the valuation allowance, in future years.
11.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has significant manufacturing operations in the United States, France, Germany, Finland and Brazil, and it purchases a portion of its tractors, combines and components from third-party foreign suppliers, primarily in various European countries and in Japan. The Company also sells products in approximately 140 countries throughout the world. The Company’s most significant transactional foreign currency exposures are the Euro, Brazilian real and the Canadian dollar in relation to the United States dollar, and the British pound in relation to the Euro. The Company attempts to manage its transactional foreign exchange exposure by hedging foreign currency cash flow forecasts and commitments arising from the anticipated settlement of receivables and payables and from future purchases and sales. Where naturally offsetting currency positions do not occur, the Company hedges certain, but not all, of its exposures through the use of foreign currency contracts. The Company’s translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars may be partially hedged from time to time. The Company’s most significant translation exposures are the Euro, the British pound and the Brazilian real in relation to the United States dollar. When practical, the translation impact is reduced by financing local operations with local borrowings.
The Company uses floating rate and fixed rate debt to finance its operations. The floating rate debt obligations expose the Company to variability in interest payments due to changes in the EURIBOR and LIBOR benchmark interest rates. The Company believes it is prudent to limit the variability of a portion of its interest payments, and to meet that objective, the Company periodically enters into interest rate swaps to manage the interest rate risk associated with the Company’s borrowings. The Company will designate interest rate contracts used to convert the interest rate exposure on a portion of the Company’s debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting the Company’s interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges.
To protect the value of the Company’s investment in foreign operations against adverse changes in foreign currency exchange rates, the Company from time to time, may hedge a portion of the Company’s net investment in the foreign subsidiaries by using a cross currency swap. The component of the gains and losses on the Company’s net investment in the designated foreign operations driven by changes in foreign exchange rates are economically offset by movements in the fair value of the cross currency swap contracts.
The Company’s senior management establishes the Company’s foreign currency and interest rate risk management policies. These policies are reviewed periodically by the Finance Committee of the Company’s Board of Directors. The policies allow for the use of derivative instruments to hedge exposures to movements in foreign currency and interest rates. The Company’s policies prohibit the use of derivative instruments for speculative purposes.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
All derivatives are recognized on the Company’s Condensed Consolidated Balance Sheets at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a cash flow hedge of a forecasted transaction, (2) a fair value hedge of a recognized liability, (3) a hedge of a net investment in a foreign operation, or (4) a non-designated derivative instrument.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking various hedge transactions. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items or the net investment hedges in foreign operations. When it is determined that a derivative is no longer highly effective as a hedge, hedge accounting is discontinued on a prospective basis.
The Company categorizes its derivative assets and liabilities into one of three levels based on the assumptions used in valuing the asset or liability. See Note 15 for a discussion of the fair value hierarchy as per the guidance in ASC 820. The Company’s valuation techniques are designed to maximize the use of observable inputs and minimize the use of unobservable inputs.
Counterparty Risk
The Company regularly monitors the counterparty risk and credit ratings of all the counterparties to the derivative instruments. The Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. If the Company perceives any risk with a counterparty, then the Company will cease to do business with that counterparty. There have been no negative impacts to the Company from any non-performance of any counterparties.
Derivative Transactions Designated as Hedging Instruments
Cash Flow Hedges
Foreign Currency Contracts
The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates. The changes in the fair values of these cash flow hedges are recorded in accumulated other comprehensive loss and are subsequently reclassified into “Cost of goods sold” during the period the sales and purchases are recognized. These amounts offset the effect of the changes in foreign currency rates on the related sale and purchase transactions.
During 2019 and 2018, the Company designated certain foreign currency contracts as cash flow hedges of expected future sales and purchases. The total notional value of derivatives that were designated as cash flow hedges was $205.8 million and $127.0 million as of March 31, 2019 and December 31, 2018, respectively.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The following table summarizes the after-tax impact that changes in the fair value of derivatives designated as cash flow hedges had on accumulated other comprehensive loss and net income during the three months ended March 31, 2019 and 2018 (in millions):
Recognized in Net Income
Three Months Ended March 31,
Gain (Loss) Recognized in Accumulated Other Comprehensive Loss
Classification of Gain (Loss)
Gain (Loss) Reclassified from Accumulated
Other Comprehensive Loss into Income
Total Amount of the Line Item in the Condensed Consolidated Statements of Operations Containing Hedge Gains (Losses)
2019
Foreign currency contracts (1)
$
(4.7
)
Cost of goods sold
$
(0.6
)
$
1,539.1
2018
Foreign currency contracts
$
(1.4
)
Cost of goods sold
$
(0.6
)
$
1,579.5
Interest rate swap contract
(0.7
)
Interest expense, net
(0.6
)
10.3
Total
$
(2.1
)
$
(1.2
)
(1) The outstanding contracts as of March 31, 2019 range in maturity through December 2019.
.
The following table summarizes the activity in accumulated other comprehensive loss related to the derivatives held by the Company during the three months ended March 31, 2019 (in millions):
Before-Tax Amount
Income Tax
After-Tax Amount
Accumulated derivative net gains as of December 31, 2018
$
1.6
$
0.2
$
1.4
Net changes in fair value of derivatives
(5.1
)
(0.4
)
(4.7
)
Net losses reclassified from accumulated other comprehensive loss into income
0.6
—
0.6
Accumulated derivative net losses as of March 31, 2019
$
(2.9
)
$
(0.2
)
$
(2.7
)
Net Investment Hedges
The Company uses non-derivative and derivative instruments, to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. For instruments that are designated as hedges of net investments in foreign operations, changes in the fair value of the derivative instruments are recorded in foreign currency translation adjustments, a component of accumulated other comprehensive loss, to offset changes in the value of the net investments being hedged. When the net investment in foreign operations is sold or substantially liquidates, the amounts recorded in accumulated other comprehensive loss are reclassified to earnings. To the extent foreign currency denominated debt is de-designated from a net investment hedge relationship, changes in the value of the foreign currency denominated debt are recorded in earnings through the maturity date.
In January 2018, the Company entered into a cross currency swap contract as a hedge of its net investment in foreign operations to offset foreign currency translation gains or losses on the net investment. The cross currency swap has an expiration date of January 19, 2021. At maturity of the cross currency swap contract, the Company will deliver the notional amount of approximately €245.7 million (or approximately $276.1 million as of March 31, 2019) and will receive $300.0 million from the counterparties. The Company will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swap.
During the three months ended March 31, 2019, the Company designated €160.0 million (or approximately $179.8 million as of March 31, 2019) of its multi-currency revolving credit facility with a maturity date of October 17, 2023 as a hedge of its net investment in foreign operations to offset foreign currency translation gains or losses on the net investment.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The following table summarizes the notional values of the instrument designated as a net investment hedge (in millions):
Notional Amount as of
March 31, 2019
December 31, 2018
Cross currency swap contract
$
300.0
$
300.0
Foreign currency denominated debt
179.8
—
The following table summarizes the after-tax impact of changes in the fair value of the instrument designated as a net investment hedge during the three months ended March 31, 2019 and 2018 (in millions):
Gain (Loss) Recognized in Accumulated
Other Comprehensive Loss for the Three Months Ended
March 31, 2019
March 31, 2018
Cross currency swap contract
$
6.9
$
(4.6
)
Foreign currency denominated debt
1.7
(10.4
)
Derivative Transactions Not Designated as Hedging Instruments
During 2019 and 2018, the Company entered into foreign currency 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 contracts were classified as non-designated derivative instruments. Gains and losses on such contracts are substantially offset by losses and gains on the remeasurement of the underlying asset or liability being hedged and are immediately recognized into earnings. As of March 31, 2019 and December 31, 2018, the Company had outstanding foreign currency contracts with a notional amount of approximately $2,358.0 million and $1,335.8 million, respectively.
The following table summarizes the impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings (in millions):
Gain Recognized in Earnings For the Three Months Ended
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
12.CHANGES IN STOCKHOLDERS’ EQUITY
The following table sets forth changes in stockholders’ equity attributed to AGCO Corporation and its subsidiaries and to noncontrolling interests for the three months ended March 31, 2019 and 2018 (in millions):