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. 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, 2021. 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.
The Company cannot predict the future impact of the COVID-19 pandemic on its business, including any related impacts on the global economic and political environments, market demand for its products, supply chain disruptions, possible workforce unavailability, exchange rates, commodity prices and availability of financing, and their impact to the Company’s net sales, production volumes, costs and overall financial conditions.
New Accounting Pronouncements to be Adopted
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected versus incurred credit losses for financial assets. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which delays the effective date of ASU 2016-13 for smaller reporting companies and other non-SEC reporting entities. This applies to the Company’s equity method finance joint ventures, which are now required to adopt ASU 2016-13 for annual periods beginning after December 15, 2022 and interim periods within those annual periods. The standard, and its subsequent modification, likely will impact the results of operations and financial condition of the Company’s finance joint ventures. Therefore, adoption of the standard by the Company’s finance joint ventures likely will impact the Company’s “Investments in affiliates” and “Equity in net earnings of affiliates.” The Company’s finance joint ventures currently are evaluating the impact of ASU 2016-13 to their results of operations and financial condition.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosure by Business Entities about Government Assistance,” which improves the transparency of government assistance received by most business entities by requiring the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on a business entity's financial statements. This guidance will be effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of the new
guidance on the Company's annual disclosures.
Additionally, the Company will adopt the following pronouncement, effective for fiscal years beginning after December 15, 2022, which is not expected to have a material impact the Company's results of operations, financial condition and cash flows.
•ASU 2021-08 – “Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
2. ACQUISITIONS
On May 2, 2022, the Company acquired JCA Industries, Inc. (“JCA”) for 63.0 million Canadian dollars (or approximately $49.2 million as of May 2, 2022). JCA is located in Winnipeg, Manitoba, Canada, and specializes in the design of electronic systems and software development to automate and control agricultural equipment. The Company is in the process of determining the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed.
On January 1, 2022, the Company acquired Appareo Systems, LLC (“Appareo”) for approximately $61.9 million, net of approximately $0.5 million of cash. As a result of the acquisition of the remaining 50% interest in IAS, the Company's previous operating joint venture with Appareo, the Company recorded a gain of approximately $3.4 million on the remeasurement of the previously held equity interest within “Other expense, net” in the Company's Condensed Consolidated Statements of Operations. The fair value of the previously held 50% interest in the joint venture as of the acquisition date was approximately $11.2 million. Appareo is headquartered in Fargo, North Dakota and offers engineering, manufacturing, and technology for end-to-end product development. The Company allocated the purchase price to the assets acquired and liabilities assumed based on preliminary estimates of their fair values as of the acquisition date. The acquired net assets primarily consisted of accounts receivable, inventories, other current and noncurrent assets, assets held for sale, lease right-of-use assets and liabilities, accounts payable, accrued expenses, other current and noncurrent liabilities, property, plant and equipment, as well as customer relationship, technology, non-competition agreements and trademark identifiable intangible assets. The Company recorded approximately $20.5 million of goodwill associated with the acquisition. The results of operations of Appareo have been included in the Company’s Condensed Consolidated Financial Statements as of and from the date of acquisition. The associated goodwill has been included in the Company’s North America geographical reportable segment. Proforma financial information related to the acquisition of Appareo was not material to the Company’s results of operations.
The preliminary estimate of acquired identifiable intangible assets of Appareo as of the date of the acquisition are summarized in the following table (in millions):
| | | | | | | | | | | | | | |
Intangible Asset | | Amount | | Weighted-Average Useful Life |
| Customer relationships | | $ | 9.8 | | | 12 years |
| Technology | | 6.3 | | 9 years |
| Trademarks | | 4.9 | | 10 years |
| Non-competition agreements | | 1.4 | | | 5 years |
| | $ | 22.4 | | | |
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
3. RESTRUCTURING EXPENSES AND IMPAIRMENT CHARGES
Restructuring Expenses
In recent years, the Company has announced and initiated several actions to rationalize employee headcount in various manufacturing facilities and administrative offices located in the U.S., Europe, South America, Africa and China in order to reduce costs. Restructuring expenses activity during the three months ended March 31, 2022 is summarized as follows (in millions):
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| | | Employee Severance | | | | Other Related Closure Costs | | Total |
| Balance as of December 31, 2021 | | | $ | 14.5 | | | | | $ | 0.2 | | | $ | 14.7 | |
| First quarter 2022 provision | | | 3.0 | | | | | — | | | 3.0 | |
| First quarter 2022 cash activity | | | (3.4) | | | | | — | | | (3.4) | |
| Foreign currency translation | | | (0.3) | | | | | 0.1 | | | (0.2) | |
| Balance as of March 31, 2022 | | | $ | 13.8 | | | | | $ | 0.3 | | | $ | 14.1 | |
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Impairment Charges
In light of the current conflict between Russia and Ukraine, during the three months ended March 31, 2022, the Company assessed the fair value of its gross assets related to the joint ventures operating in Russia for potential impairment and recorded asset impairment charges of approximately $36.0 million, reflected as “Impairment charges” in its Condensed Consolidated Statements of Operations, with an offsetting benefit of approximately $12.2 million included within “Net loss (income) attributable to noncontrolling interests.” In addition, during the three months ended March 31, 2022, the Company recorded a write-down of its investment in its Russian finance joint venture of approximately $4.8 million, reflected within “Equity in net earnings of affiliates” in its Condensed Consolidated Statements of Operations.
4. STOCK COMPENSATION PLANS
The Company recorded stock compensation expense as follows for the three months ended March 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| Cost of goods sold | | $ | 0.3 | | | $ | 0.3 | | | | | |
| Selling, general and administrative expenses | | 6.7 | | | 6.5 | | | | | |
| Total stock compensation expense | | $ | 7.0 | | | $ | 6.8 | | | | | |
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, 2022, of the 10,000,000 shares reserved for issuance under the Plan, 3,823,268 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’ Talent and 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, 2022 and 2021 was $124.12 and $123.26, respectively.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
During the three months ended March 31, 2022, the Company granted 274,566 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. The 2022 and 2021 grants of performance award shares are subject to a total shareholder return modifier.
Performance award transactions during the three months ended March 31, 2022 are presented as if the Company were to achieve its maximum levels of performance and assume the 2022 and 2021 performance awards subject to the total shareholder return modifier are achieved at target levels under the plan awards, and were as follows:
| | | | | |
| Shares awarded but not earned at January 1 | 514,714 | |
| Shares awarded | 274,566 | |
| Shares forfeited | (8,780) | |
| Shares vested | (2,534) | |
| Shares awarded but not earned at March 31 | 777,966 | |
As of March 31, 2022, 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 $46.0 million, and the weighted average period over which it is expected to be recognized is approximately two and one-half years. The compensation cost not yet recognized could be higher or lower based on actual achieved levels of performance.
Restricted Stock Unit Awards
The weighted average grant-date fair value of the restricted stock units (“RSUs”) granted under the Plan during the three months ended March 31, 2022 and 2021 was $117.08 and $113.63, respectively.
During the three months ended March 31, 2022, the Company granted 91,583 RSU awards. RSUs granted in 2022 and 2021 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 2020 grant of RSU’s to certain executives has a three-year cliff vesting requirement subject to adjustment based on a total shareholder return modifier relative to the Company's defined peer group. The compensation expense associated with these awards is being amortized ratably over the requisite service period for the awards that are expected to vest.
RSU transactions during the three months ended March 31, 2022 assume the 2020 RSUs subject to the total shareholder return modifier are achieved at target levels, and were as follows:
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| RSUs awarded but not vested at January 1 | 159,228 | |
| RSUs awarded | 91,583 | |
| RSUs forfeited | (2,400) | |
| RSUs vested | (65,025) | |
| RSUs awarded but not vested at March 31 | 183,386 | |
As of March 31, 2022, the total compensation cost related to the unvested RSUs not yet recognized was approximately $17.0 million, and the weighted average period over which it is expected to be recognized is approximately one and one-half years.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Stock-Settled Appreciation Rights
The compensation expense associated with the stock-settled appreciation rights (“SSARs”) is amortized ratably over the requisite service period for the awards that are expected to vest. The Company estimates the fair value of the grants using the Black-Scholes option pricing model. SSAR transactions during the three months ended March 31, 2022 were as follows:
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| SSARs outstanding at January 1 | 194,611 | |
| SSARs granted | — | |
| SSARs exercised | (38,051) | |
| SSARs canceled or forfeited | — | |
| SSARs outstanding at March 31 | 156,560 | |
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The Company did not grant any SSARs during the three months ended March 31, 2022, and does not currently anticipate granting any SSARs in the future. As of March 31, 2022, the total compensation cost related to the unvested SSARs not yet recognized was approximately $0.7 million, and the weighted average period over which it is expected to be recognized is approximately one and one-half years.
Director Restricted Stock Grants
The Plan provides for annual restricted stock grants of the Company’s common stock to all non-employee directors. The 2022 grant was made on April 28, 2022 and equated to 11,664 shares of common stock, of which 10,301 shares of common stock were issued after shares were withheld for taxes. The Company recorded stock compensation expense of approximately $1.5 million during the three months ended June 30, 2022 associated with these grants.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill during the three months ended March 31, 2022 are summarized as follows (in millions):
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| North America | | South America | | Europe/Middle East | | Asia/Pacific/Africa | | Consolidated |
| Balance as of December 31, 2021 | $ | 609.6 | | | $ | 81.7 | | | $ | 469.5 | | | $ | 120.0 | | | $ | 1,280.8 | |
| Acquisition | 20.5 | | | — | | | — | | | — | | | 20.5 | |
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| Foreign currency translation | 0.1 | | | 14.1 | | | (9.5) | | | (1.3) | | | 3.4 | |
| Balance as of March 31, 2022 | $ | 630.2 | | | $ | 95.8 | | | $ | 460.0 | | | $ | 118.7 | | | $ | 1,304.7 | |
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)
Changes in the carrying amount of acquired intangible assets during the three months ended March 31, 2022 are summarized as follows (in millions):
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| Gross carrying amounts: | Trademarks and Tradenames | | Customer Relationships | | Patents and Technology | | Land Use Rights | | Total |
| Balance as of December 31, 2021 | $ | 189.0 | | | $ | 568.6 | | | $ | 139.9 | | | $ | 7.0 | | | $ | 904.5 | |
| Acquisition | 6.3 | | | 9.8 | | | 6.3 | | | — | | | 22.4 | |
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| Foreign currency translation | (1.3) | | | 0.9 | | | (1.5) | | | 0.1 | | | (1.8) | |
| Balance as of March 31, 2022 | $ | 194.0 | | | $ | 579.3 | | | $ | 144.7 | | | $ | 7.1 | | | $ | 925.1 | |
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| Accumulated amortization: | Trademarks and Tradenames | | Customer Relationships | | Patents and Technology | | Land Use Rights | | Total |
| Balance as of December 31, 2021 | $ | 93.1 | | | $ | 409.7 | | | $ | 94.7 | | | $ | 1.5 | | | $ | 599.0 | |
| Amortization expense | 3.4 | | | 9.5 | | | 2.4 | | | — | | | 15.3 | |
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| Foreign currency translation | (0.4) | | | 1.4 | | | (1.2) | | | 0.1 | | | (0.1) | |
| Balance as of March 31, 2022 | $ | 96.1 | | | $ | 420.6 | | | $ | 95.9 | | | $ | 1.6 | | | $ | 614.2 | |
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| Indefinite-lived intangible assets: | Trademarks and
Tradenames |
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| Balance as of December 31, 2021 | $ | 86.7 | |
| Foreign currency translation | (0.8) | |
| Balance as of March 31, 2022 | $ | 85.9 | |
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.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
6. INDEBTEDNESS
Long-term debt consisted of the following at March 31, 2022 and December 31, 2021 (in millions):
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| March 31, 2022 | | December 31, 2021 |
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| Credit facility, expires 2023 | $ | 600.0 | | | $ | — | |
1.002% Senior term loan due 2025 | 277.3 | | | 283.7 | |
| Senior term loans due between 2023 and 2028 | 355.5 | | | 445.9 | |
0.800% Senior notes due 2028 | 665.6 | | | 680.8 | |
| Other long-term debt | 7.5 | | | 7.7 | |
| Debt issuance costs | (4.4) | | | (4.8) | |
| 1,901.5 | | | 1,413.3 | |
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| Current portion of other long-term debt | (2.1) | | | (2.1) | |
| Total long-term indebtedness, less current portion | $ | 1,899.4 | | | $ | 1,411.2 | |
Short-term Credit Facility
In April 2022, the Company entered into a short-term revolving credit facility of €225.0 million with Coöperatieve Rabobank U.A., or “Rabobank.” The €225.0 million (or approximately $240.0 million) was borrowed on April 26, 2022, with a maturity date of March 31, 2023. Interest accrues on amounts outstanding under the credit facility, at the Company’s option, at either (1) the secured overnight financing rate (“SOFR”) for borrowings denominated in U.S. dollars or Euro Interbank Offered Rate (“EURIBOR”) for borrowings denominated in Euros plus a margin of 0.75%, 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%, or (iii) one-month adjusted term SOFR plus 1.0%, plus a margin of 0.75%. The credit facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends. The Company also has to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio.
0.800% Senior Notes Due 2028
On October 6, 2021, the Company issued €600.0 million (or approximately $665.6 million as of March 31, 2022) of senior notes at an issue price of 99.993%. The notes mature on October 6, 2028, and interest is payable annually, in arrears, at 0.800%. The notes contain covenants restricting, among other things, the incurrence of certain secured indebtedness. The senior notes are subject to both optional and mandatory redemption in certain events.
Credit Facility
In October 2018, the Company entered into a multi-currency revolving credit facility of $800.0 million. The credit facility expires 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 U.S. 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, 2022 the Company had $600.0 million of outstanding borrowings under the revolving credit facility and had the ability to borrow approximately $200.0 million under the revolving credit facility. During April 2022, the Company borrowed $200.0 million under its revolving credit facility. As of December 31, 2021 the Company had no outstanding borrowings under the revolving credit facility and had the ability to borrow approximately $800.0 million under the facility.
On April 9, 2020, the Company entered into an amendment to its credit facility to include incremental term loans (“2020 term loans”) that allow the Company to borrow aggregate principal amounts of €235.0 million and $267.5 million (or an aggregate of approximately $528.2 million as of March 31, 2022). Amounts can be drawn incrementally at any time prior to maturity, but must be drawn down proportionately. Amounts drawn must be in a minimum principal amount of $100.0 million and integral multiples of $50.0 million in excess thereof. Once amounts have been repaid, those amounts are not permitted to be re-drawn. The maturity date of the 2020 term loans was April 8, 2022. On April 15, 2020, the Company borrowed €117.5 million and $133.8 million of 2020 term loans. There were no other borrowings on the 2020 term loans subsequent to
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
the initial borrowings in April 2020. On February 16, 2021, the Company repaid the 2020 term loans of €117.5 million and $133.8 million (or an aggregate of approximately $276.0 million as of February 16, 2021). As of March 31, 2022, the Company had the ability to borrow €117.5 million and $133.7 million (or an aggregate of approximately $264.0 million) of the 2020 term loans.
As described above, the Company’s credit facility allows it to select from among various interest rate options. Due to the phase-out of LIBOR, LIBOR-based rates no longer will be available for borrowings denominated in U.S. dollars after December 31, 2022, and already are not available for loans denominated in other currencies. The interest rates reflected in the Company’s credit facility were designed to accommodate the discontinuation of LIBOR-based rates and a shift to SOFR or a base rate, and, as such, the Company does not believe that moving to other rates will have a materially adverse effect on the Company’s results of operations or financial position. In addition, the credit facility agreement also provides for an expedited amendment process once a replacement for LIBOR is established, which the Company may elect to utilize to add additional interest-rate alternatives.
1.002% Senior Term Loan Due 2025
On January 25, 2019, the Company borrowed €250.0 million (or approximately $277.3 million as of March 31, 2022) from the European Investment Bank. The loan matures on 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.
Senior Term Loans Due Between 2023 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 €338.0 million through a group of another seven related term loan agreements. Of the 2016 term loans, the Company repaid an aggregate amount of €56.0 million (or approximately $61.1 million) upon maturity of two term loan agreements in October 2019. Additionally, the Company repaid €192.0 million (or approximately $223.8 million as of October 19, 2021) upon maturity of two 2016 senior term loans in October 2021. In August 2021, prior to the issuance of the senior notes due 2028, the Company repaid two of its 2018 senior term loans upon maturity with an aggregate amount of €72.0 million (or approximately $85.5 million as of August 1, 2021). On February 1, 2022, the Company repaid €72.5 million (or approximately $81.7 million) of one of its 2018 senior term loans due August 2023 with existing cash on hand.
In aggregate, as of March 31, 2022, the Company had indebtedness of €320.5 million (or approximately $355.5 million as of March 31, 2022) through a group of seven remaining related term loan agreements. The provisions of the term loan agreements are substantially identical, with the exception of interest rate terms and maturities. As of March 31, 2022, for the term loans with a fixed interest rate, interest is payable in arrears on an annual basis, with interest rates ranging from 0.90% to 2.26% and maturity dates between August 2023 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 1.10% to 1.25% and maturity dates between October 2023 and August 2025.
Short-Term Borrowings
As of March 31, 2022 and December 31, 2021, the Company had short-term borrowings due within one year of approximately $93.2 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 both March 31, 2022 and December 31, 2021, outstanding letters of credit totaled approximately $14.6 million.
7. RECOVERABLE 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
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
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 $142.3 million and $114.4 million, respectively, of VAT tax credits, net of reserves, as of March 31, 2022 and December 31, 2021.
8. INVENTORIES
Inventories at March 31, 2022 and December 31, 2021 were as follows (in millions):
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| March 31, 2022 | | December 31, 2021 |
| Finished goods | $ | 857.1 | | | $ | 718.2 | |
| Repair and replacement parts | 747.0 | | | 697.8 | |
| Work in process | 593.0 | | | 282.8 | |
| Raw materials | 1,062.6 | | | 894.9 | |
| Inventories, net | $ | 3,259.7 | | | $ | 2,593.7 | |
9. PRODUCT WARRANTY
The warranty reserve activity for the three months ended March 31, 2022 and 2021, including deferred revenue associated with the Company's extended warranties that have been sold, was as follows (in millions):
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| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| Balance at beginning of period | $ | 592.5 | | | $ | 521.8 | | | | | |
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| Accruals for warranties issued during the period | 83.3 | | | 93.3 | | | | | |
| Settlements made (in cash or in kind) during the period | (57.7) | | | (55.3) | | | | | |
| Foreign currency translation | (3.6) | | | (17.8) | | | | | |
| Balance at March 31 | $ | 614.5 | | | $ | 542.0 | | | | | |
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 $519.6 million, $492.7 million and $450.0 million of warranty reserves are included in “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively. Approximately $94.9 million, $99.8 million and $92.0 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2022, December 31, 2021, and March 31, 2021, respectively.
The Company recognizes recoveries 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.”
10. 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.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
A reconciliation of net income attributable to AGCO Corporation and 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, 2022 and 2021 is as follows (in millions, except per share data):
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| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| Basic net income per share: | | | | | | | |
| Net income attributable to AGCO Corporation and subsidiaries | $ | 151.8 | | | $ | 150.8 | | | | | |
| Weighted average number of common shares outstanding | 74.6 | | | 75.3 | | | | | |
| Basic net income per share attributable to AGCO Corporation and subsidiaries | $ | 2.03 | | | $ | 2.00 | | | | | |
| Diluted net income per share: | | | | | | | |
| Net income attributable to AGCO Corporation and subsidiaries | $ | 151.8 | | | $ | 150.8 | | | | | |
| Weighted average number of common shares outstanding | 74.6 | | | 75.3 | | | | | |
| Dilutive SSARs, performance share awards and RSUs | 0.3 | | | 0.6 | | | | | |
Weighted average number of common shares and common share equivalents outstanding for purposes of computing diluted net income per share | 74.9 | | | 75.9 | | | | | |
| Diluted net income per share attributable to AGCO Corporation and subsidiaries | $ | 2.03 | | | $ | 1.99 | | | | | |
There were no SSARs outstanding for the three months ended March 31, 2022 and 2021 that had an antidilutive impact.
11. INCOME TAXES
At March 31, 2022 and December 31, 2021, the Company had approximately $256.5 million and $246.4 million, respectively, of gross unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. Gross unrecognized income tax benefits as of March 31, 2022 and December 31, 2021 exclude certain indirect favorable effects that relate to other tax jurisdictions of approximately $61.5 million and $70.2 million, respectively. In addition, the gross unrecognized income tax benefits as of March 31, 2022 and December 31, 2021 exclude certain deposits made in a foreign jurisdiction of approximately $46.8 million and $6.7 million, respectively, associated with an ongoing audit. At March 31, 2022 and December 31, 2021, the Company had approximately $12.7 million and $40.1 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, reflected in “Other current liabilities” in the Company’s Condensed Consolidated Balance Sheets. At March 31, 2022 and December 31, 2021, the Company had approximately $234.3 million and $196.7 million, respectively, of accrued taxes and approximately $9.5 million and $9.6 million, respectively, of deferred taxes related to uncertain tax positions that it expects to settle or pay beyond 12 months, reflected in “Other noncurrent liabilities” and “Deferred tax liabilities,” respectively, in the Company’s Condensed Consolidated Balance Sheets. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. At March 31, 2022 and December 31, 2021, the Company had accrued interest and penalties related to unrecognized tax benefits of approximately $31.7 million and $32.7 million, respectively. Generally, tax years 2016 through 2021 remain open to examination by taxing authorities in the United States and certain other foreign tax jurisdictions. The Company and its subsidiaries are routinely examined by tax authorities in the United States and in various state, local and foreign jurisdictions. As of March 31, 2022, a number of income tax examinations in foreign jurisdictions are ongoing.
The Company maintains a valuation allowance to fully reserve against its net deferred tax assets in 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 regularly assesses the likelihood that its deferred tax assets will be recovered from estimated future taxable income and available tax planning strategies and has determined that all adjustments to the valuation allowances have been 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.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 2022 and 2021, 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 approximately $235.9 million as of March 31, 2022. The Company did not have any derivatives that were designated as cash flow hedges related to foreign currency contracts as of December 31, 2021.
Steel Commodity Contracts
During 2022 and 2021, the Company designated certain steel commodity contracts as cash flow hedges of expected future purchases of steel. The total notional value of derivatives that were designated as cash flow hedges was approximately $21.6 million and $31.9 million as of March 31, 2022 and December 31, 2021, respectively.
The following tables summarize 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, 2022 and 2021 (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) |
| 2022 | | | | | | | |
Foreign currency contracts(1) | $ | (3.8) | | | Cost of goods sold | | $ | (0.1) | | | $ | 2,054.4 | |
Commodity contracts(2) | 1.4 | | | Cost of goods sold | | 1.0 | | | $ | 2,054.4 | |
| Total | $ | (2.4) | | | | | $ | 0.9 | | | |
| 2021 | | | | | | | |
| Foreign currency contracts | $ | (6.8) | | | Cost of goods sold | | $ | (3.7) | | | $ | 1,808.2 | |
| Commodity contracts | 7.8 | | | Cost of goods sold | | — | | | 1,808.2 | |
| Total | $ | 1.0 | | | | | $ | (3.7) | | | |
(1) The outstanding contracts as of March 31, 2022 range in maturity through December 2022.
(2) The outstanding contracts as of March 31, 2022 range in maturity through August 2022.
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 three months ended March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Before-Tax Amount | | Income Tax | | After-Tax Amount |
| Accumulated derivative net losses as of December 31, 2021 | | $ | (0.5) | | | $ | (0.1) | | | $ | (0.4) | |
| Net changes in fair value of derivatives | | (3.1) | | | (0.7) | | | (2.4) | |
| Net gains reclassified from accumulated other comprehensive loss into income | | (1.2) | | | (0.3) | | | (0.9) | |
| Accumulated derivative net losses as of March 31, 2022 | | $ | (4.8) | | | $ | (1.1) | | | $ | (3.7) | |
As of March 31, 2022, approximately $2.4 million of derivatives net losses, before taxes, remain in accumulated other comprehensive loss held by the Company related to commodity contracts, as the inventory associated with the losses had not yet been sold.
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 expired on January 19, 2021. At maturity of the cross currency swap contract, the Company delivered the notional amount of approximately €245.7 million (or approximately $297.1 million as of January 19, 2021) and received $300.0 million from the counterparties, resulting in a gain of approximately $2.9 million that was recognized in accumulated other comprehensive loss. The Company received quarterly interest payments from the counterparties based on a fixed interest rate until the maturity of the cross currency swap.
On January 29, 2021, the Company entered into a new 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 29, 2028. At maturity of the cross currency swap contract, the Company will deliver the notional amount of approximately €247.9 million (or approximately $275.0 million as of March 31, 2022) 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 the maturity of the cross currency swap.
The following table summarizes the notional values of the instrument designated as a net investment hedge (in millions):
| | | | | | | | | | | |
| Notional Amount as of |
| March 31, 2022 | | December 31, 2021 |
| Cross currency swap contract | $ | 300.0 | | | $ | 300.0 | |
| | | |
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The following table summarizes the changes in the fair value of the cross currency swap contract designated as a net investment hedge during the three months ended March 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in Accumulated
Other Comprehensive Loss for the Three Months Ended | | |
| Before-Tax Amount | | Income Tax | | After-Tax Amount | | | | |
| March 31, 2022 | $ | 4.2 | | | $ | 1.1 | | | $ | 3.1 | | | | | |
| March 31, 2021 | (4.1) | | | — | | | (4.1) | | | | | |
Derivative Transactions Not Designated as Hedging Instruments
During 2022 and 2021, 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, 2022 and December 31, 2021, the Company had outstanding foreign currency contracts with a notional amount of approximately $3,360.9 million and $3,681.9 million, respectively.
The following table summarizes the impact that changes in the fair value of derivatives not designated as hedging instruments had on net income (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | (Loss) Gain Recognized in Net Income for the Three Months Ended | | |
| Classification of (Loss) Gain | | March 31, 2022 | | March 31, 2021 | | | | |
| Foreign currency contracts | Other expense, net | | $ | (13.8) | | | $ | 34.4 | | | | | |
The table below sets forth the fair value of derivative instruments as of March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives as of
March 31, 2022 | | Liability Derivatives as of
March 31, 2022 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivative instruments designated as hedging instruments: | | | | | | | |
| Foreign currency contracts | Other current assets | | $ | 1.3 | | | Other current liabilities | | $ | 6.3 | |
| Commodity contracts | Other current assets | | 3.2 | | | Other current liabilities | | 0.7 | |
| | | | | | | |
| Cross currency swap contract | Other noncurrent assets | | 16.7 | | | Other noncurrent liabilities | | — | |
| Derivative instruments not designated as hedging instruments: | | | | | | | |
Foreign currency contracts(1) | Other current assets | | 10.9 | | | Other current liabilities | | 22.7 | |
| Total derivative instruments | | | $ | 32.1 | | | | | $ | 29.7 | |
(1) The outstanding contracts as of March 31, 2022 range in maturity through October 2022.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The table below sets forth the fair value of derivative instruments as of December 31, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives as of
December 31, 2021 | | Liability Derivatives as of
December 31, 2021 |
| 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 | | $ | — | |
| Commodity contracts | Other current assets | | 0.2 | | | Other current liabilities | | 2.0 | |
| Cross currency swap contract | Other noncurrent assets | | 12.5 | | | Other noncurrent liabilities | | — | |
| Derivative instruments not designated as hedging instruments: | | | | | | | |
Foreign currency contracts(1) | Other current assets | | 15.1 | | | Other current liabilities | | 5.1 | |
| Total derivative instruments | | | $ | 27.8 | | | | | $ | 7.1 | |
(1) The outstanding contracts as of December 31, 2021 range in maturity through October 2022.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
13. CHANGES IN STOCKHOLDERS’ EQUITY
The following tables set forth changes in stockholders’ equity attributed to AGCO Corporation and its subsidiaries and to noncontrolling interests for the three months ended March 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in Capital | | Retained
Earnings | | Accumulated Other
Comprehensive Loss | | Noncontrolling
Interests | | Total Stockholders’
Equity |
| Balance, December 31, 2021 | $ | 0.7 | | | $ | 3.9 | | | $ | 5,182.2 | | | $ | (1,770.9) | | | $ | 27.9 | | | $ | 3,443.8 | |
| Stock compensation | — | | | 7.0 | | | — | | | — | | | — | | | 7.0 | |
Issuance of stock awards | — | | | (7.0) | | | (12.9) | | | — | | | — | | | (19.9) | |
| SSARs exercised | — | | | (1.0) | | | — | | | — | | | — | | | (1.0) | |
| Comprehensive income: | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | 151.8 | | | — | | | (14.8) | | | 137.0 | |
| Other comprehensive loss, net of reclassification adjustments: | | | | | | | | | | | |
Foreign currency translation adjustments | — | | | — | | | — | | | 137.5 | | | 0.8 | | | 138.3 | |
| Defined benefit pension plans, net of tax | — | | | — | | | — | | | 1.7 | | | — | | | 1.7 | |
Deferred gains and losses on derivatives, net of tax | — | | | — | | | — | | | (3.3) | | | — | | | (3.3) | |
| Payment of dividends to stockholders | — | | | — | | | (14.9) | | | — | | | — | | | (14.9) | |
| | | | | | | | | | | |
| Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | (13.8) | | | (13.8) | |
| | | | | | | | | | | |
| Balance, March 31, 2022 | $ | 0.7 | | | $ | 2.9 | | | $ | 5,306.2 | | | $ | (1,635.0) | | | $ | 0.1 | | | $ | 3,674.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in Capital | | Retained
Earnings | | Accumulated Other
Comprehensive Loss | | Noncontrolling
Interests | | Total Stockholders’
Equity |
| Balance, December 31, 2020 | $ | 0.8 | | | $ | 30.9 | | | $ | 4,759.1 | | | $ | (1,810.8) | | | $ | 38.0 | | | $ | 3,018.0 | |
| Stock compensation | — | | | 6.8 | | | — | | | — | | | — | | | 6.8 | |
Issuance of stock awards | — | | | (29.5) | | | — | | | — | | | — | | | (29.5) | |
| SSARs exercised | — | | | (2.5) | | | — | | | — | | | — | | | (2.5) | |
| Comprehensive income: | | | | | | | | | | | |
| Net income | — | | | — | | | 150.8 | | | — | | | 0.6 | | | 151.4 | |
| Other comprehensive loss, net of reclassification adjustments: | | | | | | | | | | | |
Foreign currency translation adjustments | — | | | — | | | — | | | (46.9) | | | (0.4) | | | (47.3) | |
Defined benefit pension plans, net of tax | — | | | — | | | — | | | 35.1 | | | — | | | 35.1 | |
Deferred gains and losses on derivatives, net of tax | — | | | — | | | — | | | 4.7 | | | — | | | 4.7 | |
Payment of dividends to stockholders | — | | | — | | | (12.0) | | | — | | | — | | | (12.0) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance, March 31, 2021 | $ | 0.8 | | | $ | 5.7 | | | $ | 4,897.9 | | | $ | (1,817.9) | | | $ | 38.2 | | | $ | 3,124.7 | |
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Total comprehensive (loss) income attributable to noncontrolling interests for the three months ended March 31, 2022 and 2021 was as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| Net (loss) income | $ | (14.8) | | | $ | 0.6 | | | | | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustments | 0.8 | | | (0.4) | | | | | |
| | | | | | | |
| Total comprehensive (loss) income | $ | (14.0) | | | $ | 0.2 | | | | | |
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 three months ended March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | Deferred Net (Losses) Gains on Derivatives | | Cumulative Translation Adjustment | | Total |
| Accumulated other comprehensive loss, December 31, 2021 | $ | (230.4) | | | $ | (0.4) | | | $ | (1,540.1) | | | $ | (1,770.9) | |
| Other comprehensive income (loss) before reclassifications | — | | | (2.4) | | | 137.5 | | | 135.1 | |
| Net losses (gains) reclassified from accumulated other comprehensive loss | 1.7 | | | (0.9) | | | — | | | 0.8 | |
| Other comprehensive income (loss), net of reclassification adjustments | 1.7 | | | (3.3) | | | 137.5 | | | 135.9 | |
| Accumulated other comprehensive loss, March 31, 2022 | $ | (228.7) | | | $ | (3.7) | | | $ | (1,402.6) | | | $ | (1,635.0) | |
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 March 31, 2022 and 2021 (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 | | Three Months Ended March 31, 2022(1) | | Three Months Ended March 31, 2021(1) | |
| Derivatives: | | | | | | |
| Net losses on foreign currency contracts | | $ | 0.1 | | | $ | 3.4 | | | Cost of goods sold |
| Net gains on commodity contracts | | $ | (1.3) | | | $ | — | | | Cost of goods sold |
| | | | | | |
| Reclassification before tax | | (1.2) | | | 3.4 | | | |
| | 0.3 | | | 0.3 | | | Income tax provision |
| Reclassification net of tax | | $ | (0.9) | | | $ | 3.7 | | | |
| | | | | | |
| Defined benefit pension plans: | | | | | | |
| Amortization of net actuarial losses | | $ | 2.2 | | | $ | 4.0 | | | Other expense, net(2) |
| Amortization of prior service cost | | 0.2 | | | 0.5 | | | Other expense, net(2) |
| Reclassification before tax | | 2.4 | | | 4.5 | | | |
| | (0.7) | | | (0.6) | | | Income tax provision |
| Reclassification net of tax | | $ | 1.7 | | | $ | 3.9 | | | |
| | | | | | |
| Net losses reclassified from accumulated other comprehensive loss | | $ | 0.8 | | | $ | 7.6 | | | |
(1) Losses (gains) included within the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021, respectively.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost. See Note 15 for additional information on the Company’s defined benefit pension plans.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
In November 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to repurchase an aggregate of $60.0 million shares of its common stock. The Company received 393,733 shares in this transaction as of December 31, 2021. On January 19, 2022, the Company received an additional 113,824 shares upon final settlement of its November 2021 ASR agreement. All shares received under the ASR agreement discussed above were retired upon receipt and the excess of the purchase price over par value per share was recorded to a combination of “Additional paid-in capital” and “Retained earnings” within the Company’s Condensed Consolidated Balance Sheets.
As of March 31, 2022, the remaining amount authorized to be repurchased under board-approved share repurchase authorizations was approximately $110.0 million, which has no expiration date.
Dividends
On April 28, 2022, the Company's Board of Directors approved an increase to its quarterly dividend commencing in the second quarter of 2022 by 20% to $0.24 per common share and declared a special dividend of $4.50 per common share that will be paid during the second quarter of 2022.
14. 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 March 31, 2022 and December 31, 2021, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.2 billion and $1.3 billion, respectively.
Under the terms of the accounts receivable sales agreements in North America, Europe and Brazil, the Company pays an annual 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 accounts receivable sales agreements, calculated based upon LIBOR plus a margin on any non-interest bearing accounts receivable outstanding and sold under the accounts receivable sales agreements. Following the phase out of LIBOR-denominated rates, the Company expects this funding to be based upon the interest rate charged by Rabobank to its affiliate, which, in turn, such affiliate then lends to the AGCO Finance entities plus an agreed-upon margin. These fees are 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 sales occur and does not maintain any direct retained interest in the receivables. The Company accounts for the receivable sales agreements as off-balance sheet transactions.
In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world. As of March 31, 2022 and December 31, 2021, the cash received from these arrangements was approximately $181.2 million and $215.4 million, respectively.
Losses on sales of receivables associated with the accounts receivable sales agreements discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $7.9 million and $4.6 million for the three months ended March 31, 2022 and 2021, respectively.
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 March 31, 2022 and December 31, 2021, these finance joint ventures had approximately $87.8 million and $82.1 million, respectively, of outstanding accounts receivable associated with these arrangements. The Company accounts for these arrangements as off-balance sheet transactions.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
15. PENSION AND POSTRETIREMENT BENEFIT PLANS
Net periodic pension and postretirement benefit cost for the Company’s defined pension and postretirement benefit plans for the three months ended March 31, 2022 and 2021 are set forth below (in millions):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| Pension benefits | | 2022 | | 2021 | | | | |
| Service cost | | $ | 3.3 | | | $ | 4.1 | | | | | |
| Interest cost | | 4.0 | | | 3.2 | | | | | |
| Expected return on plan assets | | (4.6) | | | (7.8) | | | | | |
| Amortization of net actuarial losses | | 2.2 | | | 4.0 | | | | | |
| Amortization of prior service cost | | 0.1 | | | 0.5 | | | | | |
Curtailment(1) | | — | | | (1.2) | | | | | |
| Net periodic pension cost | | $ | 5.0 | | | $ | 2.8 | | | | | |
(1) During the three months ended March 31, 2021, the Company amended its Executive Nonqualified Pension Plan (“ENPP”) to freeze the plan as of December 31, 2024 to future salary benefit accruals, and to eliminate a life-time annuity feature for participants reaching age 65 subsequent to December 31, 2022. This amendment resulted in a curtailment gain related to the ENPP's net prior service credit.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| Postretirement benefits | | 2022 | | 2021 | | | | |
| Service cost | | $ | 0.1 | | | $ | 0.1 | | | | | |
| Interest cost | | 0.2 | | | 0.2 | | | | | |
| | | | | | | | |
| Amortization of prior service cost | | 0.1 | | | — | | | | | |
| Net periodic postretirement benefit cost | | $ | 0.4 | | | $ | 0.3 | | | | | |
The components of net periodic pension and postretirement benefits cost, other than the service cost component, are included in “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations.
The following table summarizes the activity in accumulated other comprehensive loss related to the Company's defined pension and postretirement benefit plans during the three months ended March 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | |
| Before-Tax Amount | | Income Tax | | After-Tax Amount |
| Accumulated other comprehensive loss, December 31, 2021 | $ | (302.4) | | | $ | (72.0) | | | $ | (230.4) | |
| Amortization of net actuarial losses | 2.2 | | | 0.6 | | | 1.6 | |
| Amortization of prior service cost | 0.2 | | | 0.1 | | | 0.1 | |
| Accumulated other comprehensive loss as of March 31, 2022 | $ | (300.0) | | | $ | (71.3) | | | $ | (228.7) | |
During the three months ended March 31, 2022, the Company made approximately $10.6 million of contributions to its defined pension benefit plans. The Company currently estimates its minimum contributions for 2022 to its defined pension benefit plans will aggregate approximately $36.4 million.
During the three months ended March 31, 2022, the Company made approximately $0.3 million of contributions to its postretirement health care and life insurance benefit plans. The Company currently estimates that it will make approximately $1.5 million of contributions to its postretirement health care and life insurance benefit plans during 2022.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company categorizes its assets and liabilities into one of three levels based on the assumptions used in valuing the asset or liability. Estimates of fair value for financial assets and liabilities are based on a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. In accordance with this guidance, fair value measurements are classified under the following hierarchy:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 - Model-derived valuations in which one or more significant inputs are unobservable.
The Company categorizes its pension plan assets into one of the three levels of the fair value hierarchy.
The Company enters into foreign currency, commodity and interest rate swap contracts. The fair values of the Company’s derivative instruments are determined using discounted cash flow valuation models. The significant inputs used in these models are readily available in public markets, or can be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these discounted cash flow valuation models for derivative instruments include the applicable exchange rates, forward rates or interest rates. Such models used for option contracts also use implied volatility. See Note 12 for additional information on the Company’s derivative instruments and hedging activities.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Derivative assets | $ | — | | | $ | 32.1 | | | $ | — | | | $ | 32.1 | |
| Derivative liabilities | — | | | 29.7 | | | — | | | 29.7 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Derivative assets | $ | — | | | $ | 27.8 | | | $ | — | | | $ | 27.8 | |
| Derivative liabilities | — | | | 7.1 | | | — | | | 7.1 | |
| | | | | | | |
| | | | | | | |
The carrying amounts of long-term debt under the Company’s 1.002% senior term loan due 2025 and senior term loans due between 2023 and 2028 approximate fair value based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. At March 31, 2022, the estimated fair value of the Company's 0.800% senior notes due 2028, based on listed market values, was approximately €541.7 million (or approximately $600.9 million as of March 31, 2022), compared to the carrying value of €600.0 million (or approximately $665.6 million as of March 31, 2022). See Note 6 for additional information on the Company’s long-term debt.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
17. SEGMENT REPORTING
The Company’s four reportable segments distribute a full range of agricultural equipment and related replacement parts. The Company evaluates segment performance primarily based on income from operations. Sales for each segment are based on the location of the third-party customer. The Company’s selling, general and administrative expenses and engineering expenses are generally charged to each segment based on the region and division where the expenses are incurred. As a result, the components of income from operations for one segment may not be comparable to another segment. Segment results for the three months ended March 31, 2022 and 2021 and assets as of March 31, 2022 and December 31, 2021 based on the Company’s reportable segments are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | North America | | South America | | Europe/Middle East | | Asia/Pacific/Africa | | Consolidated |
| 2022 | | | | | | | | | | |
| Net sales | | $ | 701.0 | | | $ | 356.4 | | | $ | 1,403.1 | | | $ | 225.2 | | | $ | 2,685.7 | |
| Income from operations | | 54.8 | | | 46.1 | | | 162.3 | | | 34.0 | | | 297.2 | |
| Depreciation | | 15.2 | | | 7.0 | | | 28.2 | | | 4.3 | | | 54.7 | |
| Capital expenditures | | 15.7 | | | 10.0 | | | 39.2 | | | 1.4 | | | 66.3 | |
| 2021 | | | | | | | | | | |
| Net sales | | $ | 611.1 | | | $ | 240.5 | | | $ | 1,327.2 | | | $ | 199.9 | | | $ | 2,378.7 | |
| Income from operations | | 74.9 | | | 16.2 | | | 144.3 | | | 21.0 | | | 256.4 | |
| Depreciation | | 15.6 | | | 6.6 | | | 28.4 | | | 4.2 | | | 54.8 | |
| Capital expenditures | | 12.3 | | | 6.6 | | | 43.5 | | | 1.1 | | | 63.5 | |
| Assets | | | | | | | | | | |
| As of March 31, 2022 | | $ | 1,594.6 | | | $ | 1,151.3 | | | $ | 2,598.1 | | | $ | 656.1 | | | $ | 6,000.1 | |
| As of December 31, 2021 | | 1,328.1 | | | 922.7 | | | 2,348.7 | | | 610.6 | | | 5,210.1 | |
A reconciliation from the segment information to the consolidated balances for income from operations and total assets is set forth below (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| Segment income from operations | $ | 297.2 | | | $ | 256.4 | | | | | |
| Impairment charges | (36.0) | | | — | | | | | |
| Corporate expenses | (32.2) | | | (35.9) | | | | | |
| Amortization of intangibles | (15.3) | | | (17.5) | | | | | |
| Stock compensation expense | (6.7) | | | (6.5) | | | | | |
| Restructuring expenses | (3.0) | | | (1.3) | | | | | |
| Consolidated income from operations | $ | 204.0 | | | $ | 195.2 | | | | | |
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Segment assets | $ | 6,000.1 | | | $ | 5,210.1 | |
| Cash, cash equivalents and restricted cash | 655.7 | | | 889.1 | |
| Investments in affiliates | 423.2 | | | 413.5 | |
| Deferred tax assets, other current and noncurrent assets | 1,096.0 | | | 996.4 | |
| Intangible assets, net | 396.8 | | | 392.2 | |
| Goodwill | 1,304.7 | | | 1,280.8 | |
| Consolidated total assets | $ | 9,876.5 | | | $ | 9,182.1 | |
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
18. COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Arrangements
Guarantees
The Company maintains a remarketing agreement with its U.S. finance joint venture, AGCO Finance LLC, whereby the Company is obligated to repurchase up to $6.0 million of repossessed equipment each calendar year. The Company believes that any losses that it might incur on the resale of this equipment will not be material, due to the fair value of the underlying equipment.
At March 31, 2022, the Company has outstanding guarantees of indebtedness owed to related and third parties of approximately $24.9 million, primarily related to dealer and end-user financing of equipment. Such guarantees generally obligate the Company to repay outstanding finance obligations owed to financial institutions if dealers or end users default on such loans through 2027. Losses under such guarantees historically have been insignificant. In addition, the Company generally would expect to be able to recover a significant portion of the amounts paid under such guarantees from the sale of the underlying financed farm equipment, as the fair value of such equipment is expected to be sufficient to offset a substantial portion of the amounts paid. The Company also has obligations to guarantee indebtedness owed to certain of its finance joint ventures if dealers or end users default on loans. Losses under such guarantees historically have been insignificant, and the guarantees are not material. The Company believes the credit risk associated with these guarantees is not material.
In addition, at March 31, 2022, the Company had accrued approximately $22.4 million of outstanding guarantees of residual values that may be owed to its finance joint ventures in the United States and Canada due upon expiration of certain eligible operating leases between the finance joint ventures and end users. The maximum potential amount of future payments under these guarantees is approximately $174.4 million.
Leases
Lease payment amounts for operating and finance leases with remaining terms greater than one year as of March 31, 2022 and December 31, 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Operating Leases(1) | | Finance Leases | | Operating Leases(1) | | Finance Leases |
| 2022 | | $ | 35.1 | | | $ | 3.4 | | | $ | 45.7 | | | $ | 4.0 | |
| 2023 | | 39.1 | | | 0.8 | | | 36.2 | | | 0.9 | |
| 2024 | | 27.6 | | | 0.5 | | | 24.5 | | | 0.6 | |
| 2025 | | 19.9 | | | 0.4 | | | 17.3 | | | 0.4 | |
| 2026 | | 14.5 | | | 0.2 | | | 12.3 | | | 0.2 | |
| Thereafter | | 52.3 | | | 6.4 | | | 39.1 | | | 6.3 | |
| Total lease payments | | 188.5 | | | 11.7 | | | 175.1 | | | 12.4 | |
Less: imputed interest(2) | | (21.0) | | | (2.3) | | | (17.3) | | | (2.5) | |
| | | | | | | | |
| Present value of leased liabilities | | $ | 167.5 | | | $ | 9.4 | | | $ | 157.8 | | | $ | 9.9 | |
(1) Operating lease payments include options to extend or terminate at the Company's sole discretion, which are included in the determination of lease term when they are reasonably certain to be exercised.
(2) Calculated for each lease using either the implicit interest rate or the incremental borrowing rate when the implicit interest rate is not readily available.
Other
At March 31, 2022, the Company had outstanding designated and non-designated foreign exchange contracts with a gross notional amount of approximately $3,596.8 million. The outstanding contracts as of March 31, 2022 range in maturity through December 2022. The Company also had outstanding designated steel commodity contracts with a gross notional amount of approximately $21.6 million that range in maturity through August 2022.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
The Company sells a majority of its wholesale receivables in North America, Europe and Brazil to its U.S., Canadian, European and Brazilian finance joint ventures. The Company also sells certain accounts receivable under factoring arrangements to financial institutions around the world. The Company accounts for the sale of such receivables as off-balance sheet transactions.
Contingencies
In August 2008, as part of routine audits, the Brazilian taxing authorities disallowed deductions relating to the amortization of certain goodwill recognized in connection with a reorganization of the Company’s Brazilian operations and the related transfer of certain assets to the Company’s Brazilian subsidiaries. The amount of the tax disallowance through March 31, 2022, not including interest and penalties, was approximately 131.5 million Brazilian reais (or approximately $27.8 million). The amount ultimately in dispute will be significantly greater because of interest and penalties. The Company has been advised by its legal and tax advisors that its position with respect to the deductions is allowable under the tax laws of Brazil. The Company is contesting the disallowance and believes that it is not likely that the assessment, interest or penalties will be required to be paid. However, the ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which could take several years.
During 2017, the Company purchased Precision Planting, which provides precision agricultural technology solutions. In 2018, Deere & Company filed separate complaints in the U.S. District Court of Delaware against the Company and its Precision Planting subsidiary alleging that certain products of those entities infringe certain patents of Deere. The two complaints subsequently were consolidated into a single case, Case No. 1:18-cv-00827-CFC (CONSOLIDATED), that currently is scheduled for trial in July 2022. It is the Company’s position that no patents have been, or are continuing to be, infringed, and the Company is vigorously contesting the allegations in the complaint. The Company has an indemnity right under the purchase agreement related to the acquisition of Precision Planting from its previous owner. Pursuant to that right, the previous owner of Precision Planting currently is responsible for the litigation costs associated with the complaint and is obligated to reimburse AGCO for some or all of the damages in the event of an adverse outcome in the litigation. In the event of an adverse outcome, the Company estimates that the range of possible damages, based upon the advice of third-party specialists, would be up to approximately $7.0 million. Deere & Company has provided an estimate of its damages that is significantly higher than the Company estimates and that the Company believes does not have merit.
The Company is a party to various other legal claims and actions incidental to its business. The Company believes that none of these claims or actions, either individually or in the aggregate, are material to its business or financial statements as a whole, including its results of operations and financial condition.
19. REVENUE
Contract Liabilities
Contract liabilities relate to the following: (1) unrecognized revenues where advance payment of consideration precedes the Company’s performance with respect to extended warranty and maintenance contracts and where the performance obligation is satisfied over time, (2) unrecognized revenues where advance payment of consideration precedes the Company’s performance with respect to certain grain storage and protein production systems and where the performance obligation is satisfied over time and (3) unrecognized revenues where advance payment of consideration precedes the Company’s performance with respect to technology services and where the performance obligation is satisfied over time.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Significant changes in the balance of contract liabilities for the three months ended March 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | 226.2 | | | $ | 172.0 | |
| Advance consideration received | 43.0 | | | 57.1 | |
| Revenue recognized during the period for extended warranty contracts, maintenance services and technology services | (18.6) | | | (13.0) | |
| Revenue recognized during the period related to grain storage and protein production systems | (14.6) | | | (27.2) | |
| Foreign currency translation | (3.6) | | | (2.6) | |
| Balance at March 31 | $ | 232.4 | | | $ | 186.3 | |
The contract liabilities are classified as either “Accrued expenses” or “Other current liabilities” and “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets. During the three months ended March 31, 2022, we recognized approximately $24.0 million of revenue that was recorded as a contract liability at the beginning of 2022. During the three months ended March 31, 2021, we recognized approximately $25.7 million of revenue that was recorded as a contract liability at the beginning of 2021.
Remaining Performance Obligations
The estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2022 are $58.7 million for the remainder of 2022, $69.1 million in 2023, $42.5 million in 2024, $20.2 million in 2025 and $10.9 million thereafter, and relate primarily to extended warranty contracts. The Company applied the practical expedient in ASU 2014-09 and has not disclosed information about remaining performance obligations that have original expected durations of 12 months or less.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Disaggregated Revenue
Net sales for the three months ended March 31, 2022 disaggregated by primary geographical markets and major products consisted of the following (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America | | South America | | Europe/Middle East(1) | | Asia/Pacific/Africa | | Consolidated(1) |
| Primary geographical markets: | | | | | | | | | | |
| United States | | $ | 570.3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 570.3 | |
| Canada | | 101.1 | | | — | | | — | | | — | | | 101.1 | |
| South America | | — | | | 352.9 | | | — | | | — | | | 352.9 | |
| Germany | | — | | | — | | | 317.2 | | | — | | | 317.2 | |
| France | | — | | | — | | | 271.6 | | | — | | | 271.6 | |
| United Kingdom and Ireland | | — | | | — | | | 145.4 | | | — | | | 145.4 | |
| Finland and Scandinavia | | — | | | — | | | 197.0 | | | — | | | 197.0 | |
| Other Europe | | — | | | — | | | 438.6 | | | — | | | 438.6 | |
| Middle East and Algeria | | — | | | — | | | 33.4 | | | — | | | 33.4 | |
| Africa | | — | | | — | | | — | | | 36.0 | | | 36.0 | |
| Asia | | — | | | — | | | — | | | 104.6 | | | 104.6 | |
| Australia and New Zealand | | — | | | — | | | — | | | 84.6 | | | 84.6 | |
| Mexico, Central America and Caribbean | | 29.6 | | | 3.5 | | | — | | | — | | | 33.1 | |
| | $ | 701.0 | | | $ | 356.4 | | | $ | 1,403.1 | | | $ | 225.2 | | | $ | 2,685.7 | |
| | | | | | | | | | |
| Major products: | | | | | | | | | | |
| Tractors | | $ | 251.9 | | | $ | 206.6 | | | $ | 915.1 | | | $ | 125.4 | | | $ | 1,499.0 | |
| Replacement parts | | 94.6 | | | 38.2 | | | 286.1 | | | 26.7 | | | 445.6 | |
| Grain storage and protein production systems | | 131.1 | | | 40.0 | | | 31.3 | | | 37.5 | | | 239.9 | |
| Combines, application equipment and other machinery | | 223.4 | | | 71.6 | | | 170.6 | | | 35.6 | | | 501.2 | |
| | $ | 701.0 | | | $ | 356.4 | | | $ | 1,403.1 | | | $ | 225.2 | | | $ | 2,685.7 | |
(1) Rounding may impact the summation of amounts.
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)
Net sales for the three months ended March 31, 2021 disaggregated by primary geographical markets and major products consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America | | South America | | Europe/Middle East | | Asia/Pacific/Africa | | Consolidated |
| Primary geographical markets: | | | | | | | | | | |
| United States | | $ | 498.7 | | | $ | — | | | $ | — | | | $ | — | | | $ | 498.7 | |
| Canada | | 91.6 | | | — | | | — | | | — | | | 91.6 | |
| South America | | — | | | 238.6 | | | — | | | — | | | 238.6 | |
| Germany | | — | | | — | | | 345.5 | | | — | | | 345.5 | |
| France | | — | | | — | | | 215.5 | | | — | | | 215.5 | |
| United Kingdom and Ireland | | — | | | — | | | 128.4 | | | — | | | 128.4 | |
| Finland and Scandinavia | | — | | | — | | | 157.4 | | | — | | | 157.4 | |
| Other Europe | | — | | | — | | | 423.5 | | | — | | | 423.5 | |
| Middle East and Algeria | | — | | | — | | | 56.9 | | | — | | | 56.9 | |
| Africa | | — | | | — | | | — | | | 25.8 | | | 25.8 | |
| Asia | | — | | | — | | | — | | | 102.3 | | | 102.3 | |
| Australia and New Zealand | | — | | | — | | | — | | | 71.8 | | | 71.8 | |
| Mexico, Central America and Caribbean | | 20.8 | | | 1.9 | | | — | | | — | | | 22.7 | |
| | $ | 611.1 | | | $ | 240.5 | | | $ | 1,327.2 | | | $ | 199.9 | | | $ | 2,378.7 | |
| | | | | | | | | | |
| Major products: | | | | | | | | | | |
| Tractors | | $ | 190.3 | | | $ | 111.2 | | | $ | 881.3 | | | $ | 94.0 | | | $ | 1,276.8 | |
| Replacement parts | | 85.1 | | | 29.0 | | | 261.0 | | | 23.5 | | | 398.6 | |
| Grain storage and protein production systems | | 106.4 | | | 21.6 | | | 29.1 | | | 56.9 | | | 214.0 | |
| Combines, application equipment and other machinery | | 229.3 | | | 78.7 | | | 155.8 | | | 25.5 | | | 489.3 | |
| | $ | 611.1 | | | $ | 240.5 | | | $ | 1,327.2 | | | $ | 199.9 | | | $ | 2,378.7 | |