Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-10.1
a22982647_v9xrabobankxagco.htm
EX-31.1
agcoex311-2018q3.htm
EX-31.2
agcoex312-2018q3.htm
EX-32.1
agcoex321-2018q3.htm
AGCO Earnings 2018-09-30
AGCO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 a2018agcoq3-10xq.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2018
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
As of November 5, 2018, there are 78,284,171 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
1,699.3
1,618.1
Pensions and postretirement health care benefits
223.7
247.3
Deferred tax liabilities
121.0
130.5
Other noncurrent liabilities
245.1
229.9
Total liabilities
4,948.2
4,876.4
Commitments and contingencies (Note 16)
Stockholders’ Equity:
AGCO Corporation stockholders’ equity:
Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 2018 and 2017
—
—
Common stock; $0.01 par value, 150,000,000 shares authorized, 78,481,817 and 79,553,825 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
0.8
0.8
Additional paid-in capital
81.8
136.6
Retained earnings
4,405.4
4,253.8
Accumulated other comprehensive loss
(1,581.9
)
(1,361.6
)
Total AGCO Corporation stockholders’ equity
2,906.1
3,029.6
Noncontrolling interests
62.8
65.7
Total stockholders’ equity
2,968.9
3,095.3
Total liabilities and stockholders’ equity
$
7,917.1
$
7,971.7
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, 2017. Results for interim periods are not necessarily indicative of the results for the year.
The Company has a wholly-owned subsidiary in Argentina that manufactures and distributes agricultural equipment and replacement parts within Argentina. As of June 30, 2018, on the basis of currently available data related to inflation indices and as a result of the devaluation of the Argentine peso relative to the United States dollar, the Argentinian economy was determined to be highly inflationary. A highly inflationary economy is one where the cumulative inflation rate for the three years preceding the beginning of the reporting period, including interim reporting periods, is in excess of 100 percent. In accordance with this designation and based on the guidance in ASC 830, “Foreign Currency Matters”, the Company changed the functional currency of its wholly-owned subsidiary from the Argentinian peso to the U.S. dollar effective July 1, 2018. For the three months ended September 30, 2018, the Company’s wholly-owned subsidiary in Argentina had net sales of approximately $21.3 million and total assets of approximately $110.7 million as of September 30, 2018. The monetary assets and liabilities denominated in the Argentine peso were approximately $25.2 million and approximately $11.0 million, respectively, as of September 30, 2018. The monetary assets and liabilities were remeasured based on current published exchange rates.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The standard revises the annual disclosure requirements by removing disclosures no longer considered cost beneficial, clarifying specific requirements of disclosures and adding certain disclosures identified as relevant. ASU 2018-14 is effective for annual periods beginning after December 15, 2020. The standard should be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company expects to early adopt the standard for the year ended December 31, 2018, and that the adoption will not have a material impact on its results of operations, financial condition and cash flows.
In August 2018, the FASB issued 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 Company is currently evaluating the impact of adopting this standard on the Company’s results of operations, financial condition and cash flows, but does not expect the impact to be material.
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. ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The standard should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. corporate income
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
tax rate in the 2017 Tax Act is recognized. Early adoption is permitted for any interim or annual period. The Company is currently evaluating the impact of adopting this standard on the Company’s results of operations, financial condition and cash flows, but does not expect the impact to be material.
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which aligns an entity’s risk management activities and financial reporting for hedge relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments include 1) the ability to apply hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk, 2) new alternatives for measuring the hedged item for fair value hedges of interest rate risk, 3) elimination of the requirement to separately measure and report hedge ineffectiveness, 4) requirement to present the earnings effect of the hedging instrument in the same income statement line in which the earnings effect of the hedged item is reported and 5) less stringent requirements for effectiveness testing, hedge documentation and applying the critical terms match method. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods using a prospective approach. Early adoption is permitted for any interim or annual period. The amendments should be applied to existing hedging relationships on the date of adoption. The Company adopted ASU 2017-12 on January 1, 2018. The standard did not have a material impact on the Company’s results of operations, financial condition and cash flows.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), which requires the service cost component of net periodic pension and postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees. The other components of net periodic pension and postretirement benefit cost are required to be classified outside the subtotal of income from operations. Of the components of net periodic pension and postretirement benefit cost, only the service cost component will be eligible for asset capitalization. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, using a retrospective approach for the presentation of the service cost component and other components of net periodic pension and postretirement benefit cost in the statement of operations; and a prospective approach for the capitalization of the service cost component of net periodic pension and postretirement benefit cost in assets. Early adoption is permitted for any interim or annual period. ASU 2017-07 allows a practical expedient for applying the retrospective presentation requirements. The Company adopted ASU 2017-07 on January 1, 2018 and retrospectively applied the standard to the presentation of the other components of net periodic pension and postretirement benefit costs in the Company’s Condensed Consolidated Statements of Operations. As part of the adoption, the Company elected to use the practical expedient, which allowed the Company to use the information previously disclosed as the basis for applying the retrospective presentation requirements of the standard. For both the three and nine months ended September 30, 2017, the Company reclassified approximately $0.1 million of expense related to the other components of net periodic pension and postretirement costs from “Selling, general and administrative expenses” and “Engineering expenses” to “Other expenses, net.” as a result of the restrospective application of ASU 2017-07.
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 is currently evaluating the impact of adopting this standard on the Company’s results of operations, financial condition and cash flows, but does not expect the impact to be material.
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. 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” upon adoption. The Company’s finance joint ventures are currently evaluating the standard’s impact to their results of operations and financial condition.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which supersedes 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 are 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 is largely unchanged from the previous accounting standard. In addition, ASU 2016-02 expands the disclosure requirements of lease arrangements. The new standard is effective for reporting periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. Upon adoption, lessees and lessors are 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 allows for a new, optional transition method that provides 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 Accounting Standard Codification (“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 is currently working to complete the design of new processes and internal controls, which include the implementation of a software solution and finalizing the evaluation of the Company’s population of leased assets to assess the effect of the new guidance on the Company’s financial statements. The Company plans to adopt the new guidance effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to “Retained earnings” as of the beginning of the period of adoption. The new standard provides a number of optional practical expedients in transition. The Company expects to elect the “package of practical expedients” which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements (the latter is not applicable to the Company). The Company expects the adoption of the new standard to have a material effect on the Company’s Consolidated Financial Statements upon adoption. While the Company continues to assess all of the effects of the adoption, it currently believes the most significant effects relate to the recognition of new ROU assets and lease liabilities on the Company’s Consolidated Balance Sheets for operating leases, as well as providing significant new disclosures about the Company’s leasing activities. The Company does not expect material changes in its leasing activities between now and adoption. The new standard also provides practical expedients for an entity’s ongoing accounting for leases. The Company currently expects to elect the short-term lease exemption for all leases that qualify, meaning the Company will not recognize ROU assets or lease liabilities. The Company also currently expects to elect the practical expedient to separate lease and non-lease components for a majority of its leases, other than real estate and office equipment leases.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides a single, comprehensive revenue recognition model for all contracts with customers with a five-step analysis in determining when and how revenue is recognized. The new model requires revenue recognition to depict the transfer of promised goods or services to customers at an amount that reflects the consideration expected to be received in exchange for those goods or services. Additional disclosures also are required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in those judgments. Entities have the option to apply the new standard under a full retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initial adoption and application within the Condensed Consolidated Statement of Stockholders’ Equity.
The Company adopted ASU 2014-09 with an application date of January 1, 2018 using the modified retrospective approach. Under this method, the Company recognized the cumulative effect of initially applying ASU 2014-09 as an adjustment to the opening balance of stockholders’ equity as of January 1, 2018 within “Retained earnings.” The cumulative effect was approximately $0.4 million, which was related to the recognition of contract assets and contract liabilities for the value of the expected replacement parts returns. The comparative information has not been adjusted and continues to be reported under ASU 2009-13, “Revenue Recognition.” The details of the significant changes and quantitative impact of the changes are discussed below.
The Company has enhanced its accounting policies and practices, business processes, systems and controls, as well as designed and implemented specific internal controls over the implementation and adherence to the standard, including new disclosure requirements.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Replacement Parts Returns
The Company has various promotional and annual return programs with respect to the sale of replacement parts whereby the Company’s dealers, distributors and other customers can return specified replacement parts pursuant to such programs. The Company previously recognized revenue for the sale of replacement parts and recorded a corresponding provision for the amount of expected returns at the time of sale. Pursuant to the adoption of ASU 2014-09, the Company recognized a contract asset for the right to recover returned replacement parts at cost, reflected within “Other current assets” in the Company’s Condensed Consolidated Balance Sheets. Conversely, the provision for expected returns is recorded at the sales value of expected returns, reflected as a contract liability within “Accrued expenses.” The Company’s estimates of returns are based on the terms of the promotional and annual return programs and anticipated returns in the future.
The following table summarizes the impact of adopting ASU 2014-09 on the Company’ s Condensed Consolidated Balance Sheet as of September 30, 2018 (in millions):
As Reported
Balances Without Adoption of ASU 2014-09
Increase (Decrease) Due to Adoption
Assets
Accounts and notes receivable, net
$
992.7
$
992.5
$
0.2
Other current assets
401.8
390.6
11.2
Total current assets
3,789.0
3,777.6
11.4
Total assets
7,917.1
7,905.7
11.4
Liabilities and Stockholders’ Equity
Accrued expenses
$
1,425.5
$
1,413.4
$
12.1
Total current liabilities
2,659.1
2,647.0
12.1
Retained earnings
4,405.4
4,406.1
(0.7
)
Total stockholder’s equity
2,968.9
2,969.6
(0.7
)
Total liabilities and stockholder’s equity
7,917.1
7,905.7
11.4
The impact of adopting ASU 2014-09 on the Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2018 was not material.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
2. RESTRUCTURING EXPENSES
Beginning in 2014 through 2018, 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 3,370 employees between 2014 and 2017. During the nine months ended September 30, 2018, 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 460 employees. Restructuring expenses activity during the nine months ended September 30, 2018 is summarized as follows (in millions):
Write-down of Property, Plant and Equipment
Employee Severance
Total
Balance as of December 31, 2017
$
—
$
10.9
$
10.9
First quarter 2018 provision
—
5.9
5.9
First quarter 2018 cash activity
—
(3.7
)
(3.7
)
Foreign currency translation
—
0.1
0.1
Balance as of March 31, 2018
—
13.2
13.2
Second quarter 2018 provision
0.3
2.4
2.7
Less: Non-cash activity
(0.3
)
—
(0.3
)
Cash expense
—
2.4
2.4
Second quarter 2018 cash activity
—
(4.7
)
(4.7
)
Foreign currency translation
—
(0.8
)
(0.8
)
Balance as of June 30, 2018
$
—
$
10.1
$
10.1
Third quarter 2018 provision
—
1.5
1.5
Third quarter 2018 cash activity
—
(2.0
)
(2.0
)
Foreign currency translation
—
(0.4
)
(0.4
)
Balance as of September 30, 2018
$
—
$
9.2
$
9.2
3. STOCK COMPENSATION PLANS
The Company recorded stock compensation expense as follows for the three and nine months ended September 30, 2018 and 2017 (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Cost of goods sold
$
0.8
$
0.8
$
2.7
$
2.4
Selling, general and administrative expenses
9.7
7.9
30.6
29.1
Total stock compensation expense
$
10.5
$
8.7
$
33.3
$
31.5
Stock Incentive Plan
Under the Company’s 2006 Long Term Incentive Plan (the “2006 Plan”), up to 10,000,000 shares of AGCO common stock may be issued. As of September 30, 2018, of the 10,000,000 shares reserved for issuance under the 2006 Plan, approximately 3,391,294 shares were available for grant, assuming the maximum number of shares are earned related to the performance award grants discussed below. 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, restricted stock units and restricted stock awards to employees, officers and non-employee directors of the Company.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Long-Term Incentive Plan and Related Performance Awards
The weighted average grant-date fair value of performance awards granted under the 2006 Plan during the nine months ended September 30, 2018 and 2017 was $71.40 and $61.94, respectively.
During the nine months ended September 30, 2018, the Company granted 441,740 performance awards related to varying performance periods. The awards granted assume the maximum target level of performance is achieved, as applicable. The compensation expense associated with all awards granted under the 2006 Plan is amortized ratably over the vesting or performance period based on the Company’s projected assessment of the level of performance that will be achieved and earned. Performance award transactions during the nine months ended September 30, 2018 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
1,645,078
Shares awarded
441,740
Shares forfeited
(63,874
)
Shares earned
—
Shares awarded but not earned at September 30
2,022,944
As of September 30, 2018, the total compensation cost related to unearned performance awards not yet recognized, assuming the Company’s current projected assessment of the level of performance that will be achieved and earned, was approximately $38.4 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 nine months ended September 30, 2018, the Company granted 247,404 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 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 2006 Plan during the nine months ended September 30, 2018 and 2017 was $63.99 and $61.99, respectively. RSU transactions during the nine months ended September 30, 2018 were as follows:
Shares awarded but not vested at January 1
237,468
Shares awarded
247,404
Shares forfeited
(8,896
)
Shares vested
(120,305
)
Shares awarded but not vested at September 30
355,671
As of September 30, 2018, the total compensation cost related to the unvested RSUs not yet recognized was approximately $16.8 million, and the weighted average period over which it is expected to be recognized is approximately two years.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
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 nine months ended September 30, 2018 were as follows:
SSARs outstanding at January 1
1,060,192
SSARs granted
157,700
SSARs exercised
(84,250
)
SSARs canceled or forfeited
(8,350
)
SSARs outstanding at September 30
1,125,292
As of September 30, 2018, the total compensation cost related to the unvested SSARs not yet recognized was approximately $4.4 million, and the weighted average period over which it is expected to be recognized is approximately two years.
Director Restricted Stock Grants
The 2006 Plan provides for annual restricted stock grants of the Company’s common stock to all non-employee directors. The 2018 grant was made on April 26, 2018 and equated to 17,226 shares of common stock, of which 12,629 shares of common stock were issued after shares were withheld for taxes. The Company recorded stock compensation expense of approximately $1.1 million during the nine months ended September 30, 2018 associated with this grant.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of acquired intangible assets during the nine months ended September 30, 2018 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, 2017
$
208.4
$
600.4
$
160.0
$
9.1
$
977.9
Foreign currency translation
(4.1
)
(13.1
)
(3.2
)
(0.5
)
(20.9
)
Balance as of September 30, 2018
$
204.3
$
587.3
$
156.8
$
8.6
$
957.0
Trademarks and
Tradenames
Customer
Relationships
Patents and
Technology
Land Use Rights
Total
Accumulated amortization:
Balance as of December 31, 2017
$
61.4
$
279.7
$
73.4
$
3.0
$
417.5
Amortization expense and impairment charge
10.9
30.6
7.6
0.1
49.2
Foreign currency translation
(1.5
)
(9.4
)
(2.1
)
(0.1
)
(13.1
)
Balance as of September 30, 2018
$
70.8
$
300.9
$
78.9
$
3.0
$
453.6
Trademarks and
Tradenames
Indefinite-lived intangible assets:
Balance as of December 31, 2017
$
88.6
Foreign currency translation
(1.2
)
Balance as of September 30, 2018
$
87.4
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 nine months ended September 30, 2018 are summarized as follows (in millions):
North
America
South
America
Europe/Middle East
Asia/
Pacific/Africa
Consolidated
Balance as of December 31, 2017
$
611.1
$
136.4
$
671.0
$
122.9
$
1,541.4
Adjustment
—
—
1.9
—
1.9
Foreign currency translation
—
(23.1
)
(21.7
)
(4.1
)
(48.9
)
Balance as of September 30, 2018
$
611.1
$
113.3
$
651.2
$
118.8
$
1,494.4
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.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
5. INDEBTEDNESS
Long-term debt consisted of the following at September 30, 2018 and December 31, 2017 (in millions):
September 30, 2018
December 31, 2017
1.056% Senior term loan due 2020
$
231.6
$
239.8
Credit facility, expiring 2020
390.3
471.2
Senior term loans due 2021
115.8
119.9
57/8% Senior notes due 2021
115.8
305.3
Senior term loans due between 2019 and 2028
825.7
449.7
Other long-term debt
29.4
61.0
Debt issuance costs
(3.8
)
(4.0
)
1,704.8
1,642.9
Less: Current portion of other long-term debt
(5.5
)
(24.8
)
Total long-term debt, less current portion
$
1,699.3
$
1,618.1
1.056% Senior Term Loan
In December 2014, the Company entered into a term loan with the European Investment Bank, which provided the Company with the ability to borrow up to €200.0 million. The €200.0 million (or approximately $231.6 million as of September 30, 2018) of funding was received on January 15, 2015 with a maturity date of January 15, 2020. The Company has the ability 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.
Credit Facility
The Company’s revolving credit and term loan facility as of September 30, 2018 consisted of an $800.0 million multi-currency revolving credit facility and a €312.0 million (or approximately $361.3 million as of September 30, 2018) term loan facility. The maturity date of the credit facility was June 26, 2020. Under the credit facility agreement, interest accrued on amounts outstanding, at the Company’s option, depending on the currency borrowed, at either (1) LIBOR or EURIBOR plus a margin ranging from 1.0% to 1.75% based on the Company’s leverage ratio, or (2) the base rate, which is equal to the higher of (i) the administrative agent’s base lending rate for the applicable currency, (ii) the federal funds rate plus 0.5%, and (iii) one-month LIBOR for loans denominated in U.S. dollars plus 1.0% plus a margin ranging from 0.0% to 0.25% based on the Company’s leverage ratio. As is more fully described in Note 10, the Company entered into an interest rate swap in 2015 to convert the term loan facility’s floating interest rate to a fixed interest rate of 0.33% plus the applicable margin over the remaining life of the term loan facility. As of September 30, 2018, the Company had $390.3 million of outstanding borrowings under the credit facility and the ability to borrow approximately $771.0 million under the facility. Approximately $29.0 million was outstanding under the multi-currency revolving credit facility and €312.0 million (or approximately $361.3 million) was outstanding under the term loan facility as of September 30, 2018. As of December 31, 2017, approximately $97.0 million was outstanding under the Company’s multi-currency revolving credit facility, and the Company had the ability to borrow approximately $703.0 million under the facility. Approximately €312.0 million (or approximately $374.2 million) was outstanding under the term loan facility as of December 31, 2017.
During 2015, the Company designated its €312.0 million ($361.3 million as of September 30, 2018) term loan facility as a hedge of its net investment in foreign operations to offset foreign currency translation gains or losses on the net investment. See Note 10 for additional information about the net investment hedge.
On October 17, 2018 the Company entered into a new credit facility agreement, consisting of a multi-currency revolving credit facility of $800.0 million. The maturity date of the new credit facility is October 17, 2023. Under the new credit facility agreement, the Company’s credit spread is based on the Company’s published long-term debt rating. 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
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
credit rating. The new credit facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of a default. The Company also has to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio. In connection with the closing of new credit facility in October 2018, the Company also repaid its outstanding €312.0 million ($361.3 million as of September 30, 2018) term loan under its previous revolving credit and term loan facility discussed above. The Company recorded approximately $0.9 million associated with the write-off of deferred debt issuance costs associated with the repayment.
Senior Term Loans Due 2021
In April 2016, the Company entered into two term loan agreements with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”), in the amount of €100.0 million and €200.0 million, respectively. The provisions of the two term loans were identical in nature. In December 2017, the Company repaid its €200.0 million (or approximately $239.8 million) term loan. The Company's €100.0 million (or approximately $115.8 million as of September 30, 2018) remains outstanding. The Company had the ability to prepay the term loans before their maturity date on April 26, 2021. Interest is payable on the remaining term loan per annum, paid quarterly in arrears, equal to the EURIBOR plus a margin ranging from 1.0% to 1.75% based on the Company’s net leverage ratio.
5 7/8% Senior Notes
The Company’s 57/8% senior notes due December 1, 2021 constituted senior unsecured and unsubordinated indebtedness. Interest was payable on the notes semi-annually in arrears. At any time prior to September 1, 2021, the Company could redeem the notes, in whole or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date at the treasury rate plus 0.5%, plus accrued and unpaid interest, including additional interest, if any. Beginning September 1, 2021, the Company could redeem the notes, in whole or in part from time to time, at its option, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any. As is more fully described in Note 10, the Company entered into an interest rate swap in 2015 to convert the senior notes’ fixed interest rate to a floating interest rate over the remaining life of the senior notes. During 2016, the Company terminated the interest rate swap. As a result, the Company recorded a deferred gain of approximately $7.3 million associated with the termination, which is being amortized as a reduction to “Interest expense, net” over the remaining term of the 57/8% senior notes through December 1, 2021.
In May 2018, the Company completed a cash tender offer to purchase any and all of its outstanding 57/8% senior notes at a cash purchase price of $1,077.50 per $1,000.00 of senior notes. As a result of the tender offer, the Company repurchased approximately $185.9 million of principal amount of the senior notes for approximately $200.3 million, plus accrued interest. The repurchase resulted in a loss on extinguishment of debt of approximately $15.7 million, including associated fees. The Company also recorded approximately $3.0 million of accelerated amortization of the deferred gain related to the terminated interest rate swap instrument associated with the senior notes discussed above. Both the loss on extinguishment and the accelerated amortization were reflected in “Interest expense, net,” for the nine months ended September 30, 2018. As of September 30, 2018 and December 31, 2017, the unamortized portion of the deferred gain was approximately $1.7 million and $5.3 million, respectively. The amortization for the three and nine months ended September 30, 2018 was approximately $0.1 million and $3.6 million, respectively. The amortization for the three and nine months ended September 30, 2017 was approximately $0.3 million and $1.0 million, respectively.
In October 2018, the Company repurchased the remaining principal amount of the senior notes of approximately $114.1 million for approximately $122.5 million, plus accrued interest. The repurchase resulted in a loss on extinguishment of debt of approximately $8.8 million, including associated fees. The Company also recorded approximately $1.7 million of accelerated amortization of the deferred gain related to the terminated interest rate swap instrument associated with the senior notes discussed above. Both the loss on extinguishment and the accelerated amortization will be reflected in “Interest expense, net,” for the three months ended December 31, 2018.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Senior Term Loans Due Between 2019 and 2028
On August 1, 2018, the Company borrowed an aggregate amount of indebtedness of €338.0 million (or approximately $394.7 million) through a group of seven related term loan agreements. Proceeds from the borrowings were used to repay borrowings under the Company’s revolving credit facility.
In aggregate, the Company has indebtedness of €713.0 million (or approximately $825.7 million as of September 30, 2018) through a group of fourteen related term loan agreements, inclusive of the seven agreements discussed above. The provisions of the term loan agreements are identical in nature, with the exception of interest rate terms and maturities. The Company has the ability 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 September 30, 2018 and December 31, 2017, the Company had short-term borrowings due within one year of approximately $181.3 million and $90.8 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 September 30, 2018 and December 31, 2017, outstanding letters of credit totaled $14.1 million and $15.2 million, respectively.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
6. INVENTORIES
Inventories at September 30, 2018 and December 31, 2017 were as follows (in millions):
September 30, 2018
December 31, 2017
Finished goods
$
773.4
$
684.1
Repair and replacement parts
601.2
605.9
Work in process
250.9
178.7
Raw materials
476.3
404.2
Inventories, net
$
2,101.8
$
1,872.9
7. PRODUCT WARRANTY
The warranty reserve activity for the three and nine months ended September 30, 2018 and 2017 consisted of the following (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Balance at beginning of period
$
324.8
$
296.9
$
316.0
$
255.6
Acquisitions
—
2.1
—
2.1
Accruals for warranties issued during the period
55.6
47.7
164.3
152.6
Settlements made (in cash or in kind) during the period
(49.7
)
(49.3
)
(139.7
)
(127.4
)
Foreign currency translation
(0.7
)
6.2
(10.6
)
20.7
Balance at September 30
$
330.0
$
303.6
$
330.0
$
303.6
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 $283.9 million and $273.6 million of warranty reserves are included in “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively. Approximately $46.1 million and $42.4 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
8. 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 and nine months ended September 30, 2018 and 2017 is as follows (in millions, except per share data):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Basic net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
71.1
$
60.7
$
186.8
$
142.1
Weighted average number of common shares outstanding
78.7
79.5
79.2
79.5
Basic net income per share attributable to AGCO Corporation and subsidiaries
$
0.90
$
0.76
$
2.36
$
1.79
Diluted net income per share:
Net income attributable to AGCO Corporation and subsidiaries
$
71.1
$
60.7
$
186.8
$
142.1
Weighted average number of common shares outstanding
78.7
79.5
79.2
79.5
Dilutive SSARs, performance share awards and RSUs
1.0
0.7
0.9
0.6
Weighted average number of common shares and common share equivalents outstanding for purposes of computing diluted net income per share
79.7
80.2
80.1
80.1
Diluted net income per share attributable to AGCO Corporation and subsidiaries
$
0.89
$
0.76
$
2.33
$
1.77
SSARs to purchase approximately 0.5 million and 0.4 million shares of the Company’s common stock for the three and nine months ended September 30, 2018, respectively, and approximately 0.3 million shares of the Company’s common stock for the three and nine months ended September 30, 2017, were outstanding but not included in the calculation of weighted average common and common equivalent shares outstanding because they had an antidilutive impact.
9. INCOME TAXES
At September 30, 2018 and December 31, 2017, the Company had approximately $160.1 million and $163.4 million, respectively, of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. At September 30, 2018 and December 31, 2017, the Company had approximately $56.8 million and $61.8 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 September 30, 2018 and December 31, 2017, the Company had accrued interest and penalties related to unrecognized tax benefits of $25.2 million and $23.0 million, respectively. Generally, tax years 2012 through 2017 remain open to examination by taxing authorities in the United States and certain other foreign tax jurisdictions.
On December 22, 2017, the 2017 Tax Act was enacted in the United States. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, including a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act also provides for a one-time transition tax on certain foreign earnings and the acceleration of depreciation for certain assets placed into service after September 27, 2017, as well as prospective changes beginning in 2018, including the repeal of the domestic manufacturing deduction, capitalization of research and development expenditures, additional limitations on executive compensation and limitations on the deductibility of interest.
In 2017, the Company recorded a provision in accordance with Staff Accounting Bulletin No. 118, which provides SEC Staff guidance for the application of ASC 740, “Income Taxes”, in the reporting period in which the 2017 Tax Act was
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
enacted. The provision reflected both the income tax effects of the 2017 Tax Act for which the accounting under ASC 740 was complete as well as provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC 740 is incomplete but a reasonable estimate was determined. The Company did not identify any items for which the income tax effects of the 2017 Tax Act had not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The Company is in the process of finalizing its calculations with respect to the tax reform legislation. The final impact of the tax reform legislation may differ due to factors such as refinement of the Company’s calculations, changes in interpretations and assumptions that the Company and its advisors have made, and additional guidance that may be issued in the future by the U.S. and state governments. For the nine months ended September 30, 2018, the Company did not make any material adjustments to the provisional amounts recorded as of December 31, 2017.
The Company has previously established valuation allowances to fully or partially reserve against certain net deferred tax assets in several jurisdictions, including the United States. 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 assesses the likelihood that its deferred tax assets will be recovered from estimated future taxable income and available tax planning strategies and determines in certain cases that adjustments to the valuation allowances are appropriate. In making these assessments, all available evidence is 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 deferred tax assets, net of any applicable valuation allowances, in future years.
10. 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 over 150 countries throughout the world. The Company’s most significant transactional foreign currency exposures are the Euro, Brazilian real and the Canadian dollar in relation to the United States dollar, and the Euro in relation to the British pound.
The Company attempts to manage its transactional foreign exchange exposure by hedging foreign currency cash flow forecasts and commitments arising from the anticipated settlement of receivables and payables and from future purchases and sales. Where naturally offsetting currency positions do not occur, the Company hedges certain, but not all, of its exposures through the use of foreign currency contracts. The Company’s translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars 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 and the Swiss franc in relation to the Euro. 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 designates 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 14 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 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 $109.3 million and $96.8 million as of September 30, 2018 and December 31, 2017, respectively.
Interest Rate Swap Contract
The Company monitors the mix of short-term and long-term debt regularly. From time to time, the Company manages the risk to interest rate fluctuations through the use of derivative financial instruments. During 2015, the Company entered into an interest rate swap instrument with a notional amount of €312.0 million (or approximately $361.3 million at September 30, 2018) and an expiration date of June 26, 2020. The swap was designated and accounted for as a cash flow hedge. Under the swap agreement, the Company pays a fixed interest rate of 0.33% plus the applicable margin, and the counterparty to the agreement pays a floating interest rate based on the three-month EURIBOR.
Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss and are subsequently reclassified into “Interest expense, net” as a rate adjustment in the same period in which the related interest on the Company’s floating rate term loan facility affects earnings.
As a result of the Company’s new credit facility agreement and related terms therein as well as the change in the mix of short-term and long-term debt, the Company terminated the interest rate swap contract on October 22, 2018 and recorded a loss of approximately $3.9 million which will be reflected in “Interest expense, net” for the three months ended December 31, 2018. Refer to Note 5 for further information.
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 and nine months ended September 30, 2018 and 2017 (in millions):
Recognized in Net Income
Three Months Ended September 30,
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)
2018
Foreign currency contracts
$
(0.1
)
Cost of goods sold
$
(0.3
)
$
1,741.0
Interest rate swap contract
0.2
Interest expense, net
(0.5
)
7.0
Total
$
0.1
$
(0.8
)
2017
Foreign currency contracts
$
(0.3
)
Cost of goods sold
$
1.1
$
1,557.7
Interest rate swap contract
(1.0
)
Interest expense, net
(0.6
)
11.6
Total
$
(1.3
)
$
0.5
Recognized in Net Income
Nine Months Ended September 30,
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)
2018
Foreign currency contracts(1)
$
(1.3
)
Cost of goods sold
$
(1.7
)
$
5,301.8
Interest rate swap contract
(0.7
)
Interest expense, net
(1.8
)
38.5
Total
$
(2.0
)
$
(3.5
)
2017
Foreign currency contracts
$
2.9
Cost of goods sold
$
(0.3
)
$
4,544.8
Interest rate swap contract
(0.6
)
Interest expense, net
(1.7
)
33.6
Total
$
2.3
$
(2.0
)
____________________________________
(1) The outstanding contracts as of September 30, 2018 range in maturity through January 2019.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The following table summarizes the activity in accumulated other comprehensive loss related to the derivatives held by the Company during the nine months ended September 30, 2018 (in millions):
Before-Tax Amount
Income Tax
After-Tax Amount
Accumulated derivative net losses as of December 31, 2017
$
(6.0
)
$
(1.3
)
$
(4.7
)
Net changes in fair value of derivatives
(2.4
)
(0.4
)
(2.0
)
Net losses reclassified from accumulated other comprehensive loss into income
3.7
0.2
3.5
Accumulated derivative net losses as of September 30, 2018
$
(4.7
)
$
(1.5
)
$
(3.2
)
Fair Value Hedges
The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in benchmark interest rates. During 2016, the Company terminated an interest rate swap transaction with a notional amount of $300.0 million and received cash proceeds of approximately $7.3 million. The resulting gain was deferred and was being amortized as a reduction to “Interest expense, net” over the remaining term of the Company’s 57/8% senior notes through December 1, 2021. During 2018, the remaining unamortized gain was recognized primarily through accelerated amortization due to the repurchase of the 57/8% senior notes as is more fully described in Note 5.
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.
During 2015, the Company designated its €312.0 million (or approximately $361.3 million as of September 30, 2018) term loan facility with a maturity date of June 26, 2020 as a hedge of its net investment in foreign operations to offset foreign currency translation gains or losses on the net investment. In October 2018, the Company repaid the term loan facility and the foreign currency denominated debt was de-designated as a net investment hedge. Refer to Note 5 for further information.
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 $284.5 million as of September 30, 2018) 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.
The following table summarizes the notional values of the instrument designated as a net investment hedge (in millions):
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
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 and nine months ended September 30, 2018 and 2017 (in millions):
Gain (Loss) Recognized in Accumulated
Other Comprehensive Loss for the Three Months Ended
Gain (Loss) Recognized in Accumulated
Other Comprehensive Loss for the Nine Months Ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Foreign currency denominated debt
$
1.9
$
(11.8
)
$
12.8
$
(38.9
)
Cross currency swap contract
0.1
—
11.7
—
Derivative Transactions Not Designated as Hedging Instruments
During 2018 and 2017, 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 September 30, 2018 and December 31, 2017, the Company had outstanding foreign currency contracts with a notional amount of approximately $1,332.9 million and $1,701.4 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):
For the Three Months Ended
For the Nine Months Ended
Classification of (Loss) Gain
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
Foreign currency contracts
Other expense, net
$
(0.8
)
$
13.9
$
1.6
$
35.8
The table below sets forth the fair value of derivative instruments as of September 30, 2018 (in millions):
Asset Derivatives as of September 30, 2018
Liability Derivatives as of September 30, 2018
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivative instruments designated as hedging instruments:
Foreign currency contracts
Other current assets
$
0.4
Other current liabilities
$
1.4
Interest rate swap contract
Other noncurrent assets
—
Other noncurrent liabilities
3.7
Cross currency swap contract
Other noncurrent assets
11.7
Other noncurrent liabilities
—
Derivative instruments not designated as hedging instruments:
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The table below sets forth the fair value of derivative instruments as of December 31, 2017 (in millions):
Asset Derivatives as of December 31, 2017
Liability Derivatives as of December 31, 2017
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Derivative instruments designated as hedging instruments:
Foreign currency contracts
Other current assets
$
—
Other current liabilities
$
1.2
Interest rate swap contract
Other noncurrent assets
—
Other noncurrent liabilities
4.8
Derivative instruments not designated as hedging instruments:
Foreign currency contracts
Other current assets
7.8
Other current liabilities
11.0
Total derivative instruments
$
7.8
$
17.0
11. 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 nine months ended September 30, 2018 (in millions):
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
Total Stockholders’
Equity
Balance, December 31, 2017
$
0.8
$
136.6
$
4,253.8
$
(1,361.6
)
$
65.7
$
3,095.3
Stock compensation
—
33.0
—
—
—
33.0
Issuance of stock awards
—
(3.1
)
—
—
—
(3.1
)
SSARs exercised
—
(0.4
)
—
—
—
(0.4
)
Comprehensive income:
Net income (loss)
—
—
186.8
—
(0.7
)
186.1
Other comprehensive loss, net of reclassification adjustments:
Foreign currency translation adjustments
—
—
—
(230.8
)
(3.0
)
(233.8
)
Defined benefit pension plans, net of tax
—
—
—
9.0
—
9.0
Unrealized loss on derivatives, net of tax
—
—
—
1.5
—
1.5
Payment of dividends to stockholders
—
—
(35.6
)
—
—
(35.6
)
Purchases and retirement of common stock
—
(84.3
)
—
—
—
(84.3
)
Investment by or distribution to noncontrolling interests, net
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Total comprehensive (loss) income attributable to noncontrolling interests for the three and nine months ended September 30, 2018 and 2017 was as follows (in millions):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Net (loss) income
$
(0.4
)
$
0.1
$
(0.7
)
$
2.1
Other comprehensive (loss) income:
Foreign currency translation adjustments
(0.9
)
0.5
(3.0
)
1.1
Total comprehensive (loss) income
$
(1.3
)
$
0.6
$
(3.7
)
$
3.2
The following table sets forth changes in accumulated other comprehensive loss by component, net of tax, attributed to AGCO Corporation and its subsidiaries for the nine months ended September 30, 2018 (in millions):
Defined Benefit Pension Plans
Deferred Net (Losses) Gains on Derivatives
Cumulative Translation Adjustment
Total
Accumulated other comprehensive loss, December 31, 2017
$
(285.1
)
$
(4.7
)
$
(1,071.8
)
$
(1,361.6
)
Other comprehensive loss before reclassifications
—
(2.0
)
(230.8
)
(232.8
)
Net losses reclassified from accumulated other comprehensive loss
9.0
3.5
—
12.5
Other comprehensive income (loss), net of reclassification adjustments
9.0
1.5
(230.8
)
(220.3
)
Accumulated other comprehensive loss, September 30, 2018
$
(276.1
)
$
(3.2
)
$
(1,302.6
)
$
(1,581.9
)
The following table sets forth reclassification adjustments out of accumulated other comprehensive loss by component attributed to AGCO Corporation and its subsidiaries for the three months ended September 30, 2018 and 2017 (in millions):
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item within the Condensed Consolidated
Statements of Operations
Details about Accumulated Other Comprehensive Loss Components
Three Months Ended September 30, 2018(1)
Three Months Ended September 30, 2017(1)
Derivatives:
Net losses (gains) on foreign currency contracts
$
0.4
$
(0.9
)
Cost of goods sold
Net losses on interest rate swap contract
0.5
0.6
Interest expense, net
Reclassification before tax
0.9
(0.3
)
(0.1
)
(0.2
)
Income tax provision
Reclassification net of tax
$
0.8
$
(0.5
)
Defined benefit pension plans:
Amortization of net actuarial losses
$
3.0
$
3.2
(2)
Amortization of prior service cost
0.3
0.3
(2)
Reclassification before tax
3.3
3.5
(0.4
)
(0.4
)
Income tax provision
Reclassification net of tax
$
2.9
$
3.1
Net losses reclassified from accumulated other comprehensive loss
$
3.7
$
2.6
____________________________________
(1) Losses (gains) included within the Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 and 2017.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost. See Note 13 to the Company’s Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The following table sets forth reclassification adjustments out of accumulated other comprehensive loss by component attributed to AGCO Corporation and its subsidiaries for the nine months ended September 30, 2018 and 2017 (in millions):
Amount Reclassified from Accumulated Other Comprehensive Loss
Affected Line Item within the Condensed Consolidated
Statements of Operations
Details about Accumulated Other Comprehensive Loss Components
Nine months ended September 30, 2018(1)
Nine months ended September 30, 2017(1)
Derivatives:
Net losses on foreign currency contracts
$
1.9
$
0.6
Cost of goods sold
Net losses on interest rate swap contract
1.8
1.7
Interest expense, net
Reclassification before tax
3.7
2.3
(0.2
)
(0.3
)
Income tax provision
Reclassification net of tax
$
3.5
$
2.0
Defined benefit pension plans:
Amortization of net actuarial losses
$
9.3
$
9.3
(2)
Amortization of prior service cost
1.0
1.0
(2)
Reclassification before tax
10.3
10.3
(1.3
)
(1.4
)
Income tax provision
Reclassification net of tax
$
9.0
$
8.9
Net losses reclassified from accumulated other comprehensive loss
$
12.5
$
10.9
____________________________________
(1) Losses included within the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018 and 2017.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost. See Note 13 to the Company’s Condensed Consolidated Financial Statements.
Share Repurchase Program
During the nine months ended September 30, 2018, through open market transactions, the Company repurchased 534,403 shares of its common stock for approximately $34.3 million at an average price paid of $64.14 per share. Repurchased shares were retired on the date of purchase, and the excess of the purchase price over par value per share was recorded to “Additional paid-in capital” within the Company’s Condensed Consolidated Balance Sheets.
During the three months ended September 30, 2018, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to repurchase an aggregate of $50.0 million of shares of the Company’s common stock. The Company received approximately 638,978 shares during the three months ended September 30, 2018 related to the ASR agreement. The specific number of shares the Company ultimately repurchased was determined at the completion of the term of the ASR based on the daily volume-weighted average share price of the Company’s common stock less an agreed upon discount. Upon settlement of the ASR, the Company was entitled to receive additional shares of common stock or, under certain circumstances, was required to remit a settlement amount. In October 2018, the Company received an additional 197,848 shares of common stock upon final settlement of the ASR. All shares received under the ASR were retired upon receipt, and the excess of the purchase price over par value per share was recorded to “Additional paid-in capital” within the Company’s Condensed Consolidated Balance Sheets.
As of September 30, 2018, the remaining amount authorized to be repurchased was approximately $247.1 million, of which $215.7 million expires in December 2019 and $31.4 million has no expiration date.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
12. ACCOUNTS RECEIVABLE SALES AGREEMENTS
The Company has accounts receivable sales agreements that permit the sale, on an ongoing basis, of a majority of its wholesale receivables in North America, Europe and Brazil to its U.S., Canadian, European and Brazilian finance joint ventures. As of both September 30, 2018 and December 31, 2017, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.3 billion.
Under the terms of the accounts receivable agreements in North America, Europe and Brazil, the Company pays an annual servicing fee related to the servicing of the receivables sold. The Company also pays the respective AGCO Finance entities a subsidized interest payment with respect to the sales agreements, calculated based upon LIBOR plus a margin on any non-interest bearing accounts receivable outstanding and sold under the sales agreements. These fees were reflected within losses on the sales of receivables included within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations. The Company does not service the receivables after the sale occurs and does not maintain any direct retained interest in the receivables. The Company reviewed its accounting for the accounts receivable sales agreements and determined that these facilities should be accounted for as off-balance sheet transactions.
Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $6.7 million and $24.2 million, respectively, during the three and nine months ended September 30, 2018. Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $10.3 million and $27.5 million, respectively, during the three and nine months ended September 30, 2017.
The Company’s finance joint ventures in Europe, Brazil and Australia also provide wholesale financing directly to the Company’s dealers. The receivables associated with these arrangements are without recourse to the Company. The Company does not service the receivables after the sale occurs and does not maintain any direct retained interest in the receivables. As of September 30, 2018 and December 31, 2017, these finance joint ventures had approximately $50.3 million and $41.6 million, respectively, of outstanding accounts receivable associated with these arrangements. The Company reviewed its accounting for these arrangements and determined that these arrangements should be accounted for as off-balance sheet transactions.
In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world. The Company reviewed the sale of such receivables and determined that these arrangements should be accounted for as off-balance sheet transactions.
13. EMPLOYEE BENEFIT PLANS
Net periodic pension and postretirement benefit cost for the Company’s defined pension and postretirement benefit plans for the three months ended September 30, 2018 and 2017 are set forth below (in millions):
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Net periodic pension and postretirement benefit cost for the Company’s defined pension and postretirement benefit plans for the nine months ended September 30, 2018 and 2017 are set forth below (in millions):