Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. We sell a full range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment, seeding and tillage equipment, implements, and grain storage and protein production systems. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names, including: Challenger®, Fendt®, GSI®, Massey Ferguson® and Valtra®, supported by our Fuse® precision agriculture solutions. We distribute most of our products through a combination of approximately 3,200 dealers and distributors as well as associates and licensees. In addition, we provide retail and wholesale financing through our finance joint ventures with Rabobank.
The COVID-19 pandemic and other economic factors continue to create volatility in the global economy, initially through government-mandated facility closures, higher absentee rates, and reduced production at both our factories and the factories that supply us with parts and components; and, more recently, through supply chain disruptions. In addition, we have had to incur various costs related to preventing the spread of COVID-19, including changes to our factories and other facilities and those related to enabling remote work. We expect COVID-19 to continue to impact our business, although the manner and extent to which it impacts us will depend on future developments, including the duration of the pandemic, the timing, distribution and impact of vaccinations, and possible mutations of the virus that are more contagious or resistant to current vaccines. Measures taken by governments around the world, as well as businesses, including us, and the general public in order to limit the spread of COVID-19 will impact our business as well. These factors, along with increasing industrial demand, could negatively affect production levels, particularly caused by delays in the receipts of parts and components. Supply chain issues of particular concern include a wide range of parts and components with a portion arising from the global semiconductor shortage. We may continue to face supplier bottlenecks and delays in all regions as well as challenges with freight logistics, and we continue to work to mitigate the impact of these issues in order to meet increased end-market demand.
Financial Highlights
We sell our equipment and replacement parts to our independent dealers, distributors and other customers. A large majority of our sales are to independent dealers and distributors that sell our products to end users. To the extent practicable, we attempt to sell products to our dealers and distributors on a level basis throughout the year to reduce the effect of seasonal
demands on our manufacturing operations and to minimize our investment in inventories. However, retail sales by dealers to farmers are highly seasonal and are a function of the timing the planting and harvesting seasons. In certain markets, particularly in North America, there is often a time lag, which varies based on the timing and level of retail demand, between our sale of the equipment to the dealer and the dealer’s sale to a retail customer.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021(1) | | 2020(1) | | 2019(1) |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold | 76.9 | | | 77.5 | | | 78.1 | |
Gross profit | 23.1 | | | 22.5 | | | 21.9 | |
Selling, general and administrative expenses | 9.8 | | | 10.9 | | | 11.5 | |
Engineering expenses | 3.6 | | | 3.7 | | | 3.8 | |
Amortization of intangibles | 0.5 | | | 0.7 | | | 0.7 | |
Impairment charges | — | | | 0.2 | | | 2.0 | |
Restructuring expenses | 0.1 | | | 0.2 | | | 0.1 | |
Bad debt expense | — | | | 0.2 | | | 0.1 | |
Income from operations | 9.0 | | | 6.6 | | | 3.9 | |
Interest expense, net | 0.1 | | | 0.2 | | | 0.2 | |
Other expense, net | 0.5 | | | 0.2 | | | 0.7 | |
Income before income taxes and equity in net earnings of affiliates | 8.5 | | | 6.1 | | | 2.9 | |
Income tax provision | 1.0 | | | 2.1 | | | 2.0 | |
Income before equity in net earnings of affiliates | 7.5 | | | 4.1 | | | 0.9 | |
Equity in net earnings of affiliates | 0.6 | | | 0.5 | | | 0.5 | |
Net income | 8.1 | | | 4.6 | | | 1.4 | |
Net (income) loss attributable to noncontrolling interests | — | | | 0.1 | | | — | |
Net income attributable to AGCO Corporation and subsidiaries | 8.1 | % | | 4.7 | % | | 1.4 | % |
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(1) Rounding may impact summation of amounts.
2021 Compared to 2020
Net income attributable to AGCO Corporation and subsidiaries for 2021 was $897.0 million, or $11.85 per diluted share, compared to $427.1 million, or $5.65 per diluted share, for 2020.
Net sales for 2021 were approximately $11,138.3 million, or 21.7% higher than 2020, primarily due to improved market demand. Regionally, net sales were higher in all regions during 2021 compared to 2020. Net sales were negatively impacted by extended COVID-related production shutdowns in both Europe and South America during the first half of 2020. Income from operations was approximately $1,001.4 million in 2021 compared to approximately $599.7 million in 2020. The increase in income from operations during 2021 was primarily the result of higher net sales and production volumes and improved margins, which benefited from positive pricing impacts and a favorable sales mix that offset substantial inflationary material and freight cost pressures along with higher manufacturing costs. Net income per diluted share was favorably impacted by the reversal of valuation allowances previously established against our deferred tax assets in both the United States and Brazil during 2021. In addition, our 2020 income from operations included approximately $20.0 million of a non-cash goodwill impairment charge during the second quarter of 2020 related to a tillage and seeding equipment joint venture in which we formerly owned a 50% interest in our North American (“NA”) region.
Regionally, income from operations in our Europe/Middle East (“EME”) region increased by approximately $170.1 million in 2021 compared to 2020, driven primarily by higher net sales and increased production volumes as well as positive pricing realization, which offset higher material costs and engineering expenses. In our North American region, income from operations improved by approximately $44.4 million compared to the prior year. Higher net sales and production levels, a
richer product mix and favorable pricing impacts contributed to the improvement in the region and helped to offset material cost inflation. In South America, income from operations increased approximately $102.9 million in 2021 compared to 2020. The increase reflects increased net sales and production volumes, a better sales mix and favorable price realization, offsetting increasing material costs. Income from operations in our Asia/Pacific/African (“APA”) region increased approximately $51.8 million in 2021 compared to 2020, primarily due to higher net sales and an improved product mix.
Industry Market Conditions
Elevated agricultural commodity prices continue to support favorable farm economics resulting in farmers upgrading and replacing aging fleets. These improved conditions generated industry growth across all the major equipment markets during 2021. Future demand for agricultural equipment will be influenced by farm income, which is a function of commodity and protein prices, crop yields and government support.
In North America, industry unit retail sales of utility and high horsepower tractors increased approximately 14% in 2021 compared to 2020. Industry unit retail sales of combines increased approximately 24% in 2021 compared to 2020. Retail sales growth was strongest for high horsepower tractors in 2021 as compared to 2020 where an extended fleet age and favorable commodity prices stimulated demand.
In Western Europe, industry unit retail sales of tractors for 2021 increased approximately 16% compared to 2020. Industry unit retail sales of combines for 2021 increased approximately 3% compared to 2020. Industry sales increased across all major markets compared to 2020. Higher wheat, dairy and livestock prices, combined with improved levels of crop production, generated positive farm economics and farmer sentiment.
In South America, industry unit retail sales of tractors for 2021 increased approximately 22% compared to 2020. Industry unit retail sales of combines for 2021 increased approximately 20% compared to 2020. The improved demand was primarily in the large markets of Brazil and Argentina, as well as in smaller South American markets. Healthy crop production as well as favorable exchange rates supported positive economic conditions for farmers who continue to replace aged equipment.
Results of Operations
Net sales for 2021 were $11,138.3 million compared to $9,149.7 million for 2020, primarily as a result of improved market demand. The following table sets forth, for the year ended December 31, 2021, the impact to net sales of currency translation by geographical segment (in millions, except percentages):
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| | | | | Change | | Change due to Currency Translation |
| 2021 | | 2020 | | $ | | % | | $ | | % |
North America | $ | 2,659.2 | | | $ | 2,175.0 | | | $ | 484.2 | | | 22.3 | % | | $ | 32.4 | | | 1.5 | % |
South America | 1,307.7 | | | 873.8 | | | 433.9 | | | 49.7 | % | | (40.5) | | | (4.6) | % |
EME | 6,221.7 | | | 5,366.9 | | | 854.8 | | | 15.9 | % | | 155.7 | | | 2.9 | % |
APA | 949.7 | | | 734.0 | | | 215.7 | | | 29.4 | % | | 52.1 | | | 7.1 | % |
| $ | 11,138.3 | | | $ | 9,149.7 | | | $ | 1,988.6 | | | 21.7 | % | | $ | 199.7 | | | 2.2 | % |
Regionally, net sales in North America increased in 2021 compared to 2020, with growth in sales of tractors and Precision Planting equipment. In the EME region, net sales were higher during 2021 compared to 2020, primarily due to increased sales in all major markets, with the largest increases contributed by growth in tractors, combines and replacement parts. Net sales increased in South America in 2021 compared to 2020, primarily due to higher net sales of tractors, combines, planting equipment, parts as well as grain and protein equipment. In the APA region, net sales increased in 2021 compared to 2020, primarily due to net sales increases in China and Australia, as well as recovery in Africa. We estimate that worldwide average price increases were approximately 6.6% and 1.6% in 2021 and 2020, respectively. Consolidated net sales of tractors and combines, which comprised approximately 61.1% of our net sales in 2021, increased approximately 23.0% in 2021 compared to 2020. Unit sales of tractors and combines increased approximately 16.7% during 2021 compared to 2020. The difference between the unit sales change and the change in net sales was primarily the result of foreign currency translation, pricing and sales mix changes.
The following table sets forth, for the years ended December 31, 2021 and 2020, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| $ | | % of Net Sales(1) | | $ | | % of Net Sales |
Gross profit | $ | 2,572.3 | | | 23.1 | % | | $ | 2,057.5 | | | 22.5 | % |
Selling, general and administrative expenses | 1,088.2 | | | 9.8 | % | | 1,001.5 | | | 10.9 | % |
Engineering expenses | 405.8 | | | 3.6 | % | | 342.6 | | | 3.7 | % |
Amortization of intangibles | 61.1 | | | 0.5 | % | | 59.5 | | | 0.7 | % |
Impairment charge | — | | | — | % | | 20.0 | | | 0.2 | % |
Restructuring expenses | 15.3 | | | 0.1 | % | | 19.7 | | | 0.2 | % |
Bad debt expense | 0.5 | | | — | % | | 14.5 | | | 0.2 | % |
Income from operations | $ | 1,001.4 | | | 9.0 | % | | $ | 599.7 | | | 6.6 | % |
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(1) Rounding may impact summation of amounts.
Gross profit as a percentage of net sales increased during 2021 compared to 2020 primarily due to the benefit of higher net sales and production levels, as well as positive pricing, which was partially offset by the impact of material cost inflation. Production hours increased across all regions during 2021. Overall, global production hours increased approximately 25% on a global basis during 2021 compared to 2020, primarily as a result of stronger market demand during 2021. Our production facilities continue to face supply chain and logistics disruptions as well as material and freight cost inflation. These disruptions impact our ability to produce and ship units, as well as contribute to labor inefficiencies, and result in carrying higher than anticipated raw material and work in process inventory levels. We expect these conditions to continue, which may impact production levels and net sales and margins in future periods.
Selling, general and administrative expenses (“SG&A expenses”) and engineering expenses, as a percentage of net sales, were lower during 2021 compared to 2020, primarily driven by the increases in net sales. The absolute level of SG&A expenses increased during 2021 following prior year actions to lower expenses while operations were suspended, such as reduced field sales and marketing activities and lower travel expenses. We recorded stock compensation expense of approximately $26.6 million and $36.8 million during 2021 and 2020, respectively, within SG&A expenses, as is more fully explained in Notes 1 and 10 of our Consolidated Financial Statements.
During 2020, we recorded a non-cash goodwill impairment charge of approximately $20.0 million related to a tillage and seeding equipment joint venture in which we formerly owned a 50% interest. The impairment charge was recorded as “Impairment charges” within our Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included within “Net loss attributable to noncontrolling interests.”
We recorded restructuring expenses of approximately $15.3 million and $19.7 million during 2021 and 2020, respectively. The restructuring expenses primarily related to severance and other related costs associated with the rationalization of employee headcount at various manufacturing facilities and administrative offices located in the United States, Europe and South America during 2021 and 2020, as well as the rationalization of our grain storage and protein production systems operations. See Note 3 of our Consolidated Financial Statements.
Interest expense, net was $6.7 million for 2021 compared to $15.0 million for 2020 resulting primarily from higher interest income in 2021 as compared to 2020. See “Liquidity and Capital Resources” for further information on our available funding.
Other expense, net was $50.4 million in 2021 compared to $22.7 million in 2020. We have a minority equity interest in Tractors and Farm Equipment Limited (“TAFE”). During 2020, TAFE repurchased a portion of its common stock from us resulting in a gain of approximately $32.5 million recorded within “Other expense, net.” See Note 14 of our Consolidated Financial Statements for additional information. In addition, losses on sales of receivables, primarily related to our accounts receivable sales agreements with our finance joint ventures in North America, Europe and Brazil, were approximately $24.5 million and $24.1 million in 2021 and 2020, respectively.
We recorded an income tax provision of $108.4 million in 2021 compared to $187.7 million in 2020. Our tax provision and effective tax rate are impacted by the differing tax rates of the various tax jurisdictions in which we operate, permanent differences for items treated differently for financial accounting and income tax purposes, losses in jurisdictions where no income tax benefit is recorded, and provisions for unrecognized income tax benefits related to uncertain tax positions. At December 31, 2021 and 2020, we had gross deferred tax assets of $291.8 million and $360.9 million, respectively, including $69.5 million and $62.9 million, respectively, related to net operating loss carryforwards. At December 31, 2021, we had total valuation allowances as an offset to our gross deferred tax assets of approximately $47.4 million. This valuation allowance included allowances against deferred tax assets (including net operating loss carryforwards) in the U.S. and certain foreign jurisdictions. As of December 31, 2021, our income tax provision included the benefit of reversals of approximately $67.8 million and $55.6 million related to valuation allowances previously established against the Company’s net deferred tax assets in the United States and Brazil, respectively. Improvements in income in the United States and Brazil during 2020 and 2021, along with updated future projected income levels, supported the reversal of both of the valuation allowances. At December 31, 2020, we had total valuation allowances as an offset to the gross deferred tax assets of approximately $181.0 million. This valuation allowance included allowances against deferred tax assets (including net operating loss carryforwards) in the United States and certain foreign jurisdictions. Realization of the net deferred tax assets as of December 31, 2021 will depend on generating sufficient taxable income in future periods, net of reversing deferred tax liabilities. We believe it is more likely than not that the remaining net deferred tax assets should be able to be realized. Refer to Note 6 of our Consolidated Financial Statements for further information.
Equity in net earnings of affiliates, which is primarily comprised of income from our AGCO Finance joint ventures, was $65.6 million in 2021 compared to $45.5 million in 2020, primarily due to higher net earnings from our AGCO Finance joint ventures. See “Finance Joint Ventures” for further information regarding our finance joint ventures and their results of operations and Note 5 of our Consolidated Financial Statements for further information.
2020 Compared to 2019
A comparison of the results of operations for 2020 versus that of 2019 was included in our Annual Report on Form 10-K for the year ended December 31, 2020.
AGCO Finance Joint Ventures
Our AGCO Finance joint ventures provide both retail financing and wholesale financing to our dealers in the United States, Canada, Europe, Brazil, Argentina and Australia. The joint ventures are owned by AGCO and by a wholly-owned subsidiary of Rabobank. The majority of the assets of the finance joint ventures consist of finance receivables. The majority of the liabilities consist of notes payable and accrued interest. Under the various joint venture agreements, Rabobank or its affiliates provide financing to the finance joint ventures, primarily through lines of credit. We do not guarantee the debt obligations of the joint ventures. In the United States and Canada, we guarantee certain minimum residual values to those joint ventures upon expiration of certain eligible leases between the finance joint ventures and end users. See “Commitments and Off-Balance Sheet Arrangements” and Note 12 to our Consolidated Financial Statements for additional information.
As of December 31, 2021, our capital investment in the finance joint ventures, which is included in “Investment in affiliates” on our Consolidated Balance Sheets, was approximately $359.2 million compared to approximately $395.3 million as of December 31, 2020. The total finance portfolio in our finance joint ventures was approximately $10.9 billion and $10.7 billion as of December 31, 2021 and 2020, respectively. The total finance portfolio as of December 31, 2021 and 2020 included approximately $9.2 billion and $8.8 billion, respectively, of retail receivables and $1.7 billion and $1.9 billion of wholesale receivables from AGCO dealers as of December 31, 2021 and 2020, respectively. The wholesale receivables either were sold directly to AGCO Finance without recourse from our operating companies, or AGCO Finance provided the financing directly to the dealers. During 2021, we did not make additional investments in our finance joint ventures, and we received dividends of approximately $84.4 million from certain of our finance joint ventures. During 2020, we made approximately $1.9 million of additional investments in our finance joint ventures, and there were no dividends paid from our finance joint ventures. Our finance joint ventures were restricted from paying dividends to us during 2020 as a result of COVID-19 pandemic banking regulations. Our share in the earnings of the finance joint ventures, included in “Equity in net earnings of affiliates” within our Consolidated Statements of Operations, was approximately $64.4 million and $45.0 million for the years ended December 31, 2021 and 2020, respectively, with the increase in earnings primarily due to higher income in our finance joint ventures in the U.S., Canada and France during 2021 as compared to 2020.
Outlook
Our operations are subject to the cyclical nature of the agricultural industry. Sales of our equipment are affected by, among other things, changes in net cash farm income, farm land values, weather conditions, the demand for agricultural commodities, commodity and protein prices and general economic conditions.
Global industry demand for farm equipment is expected to be higher across all major markets during 2022. Our net sales are expected to increase in 2022 compared to 2021, resulting from improved sales volumes and pricing, partially offset by negative foreign currency translation. Gross and operating margins are expected to improve from 2021 levels, reflecting the impact of higher net sales and production volumes as well as pricing initiatives to offset material cost inflation. Engineering expenses and other technology investments are expected to increase in 2022 compared to 2021 to support our product development plans as well as our precision agriculture and digital initiatives.
Our outlook is also based on current estimates of supplier component deliveries, and the ability of the Company's supply chain to deliver parts and components on schedule is currently difficult to predict. If supply chain performance worsens, our results of operations will be adversely impacted. Refer to “Risk Factors” for further discussion of the COVID-19 pandemic and other factors.
Liquidity and Capital Resources
Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels. In addition, unusual events such as the recent supply chain disruptions can result in increases in inventories and, consequentially, our financing requirements. Internally generated funds are supplemented when necessary from external sources, primarily our credit facility and accounts receivable sales agreement facilities. We believe that the following facilities, together with available cash and internally generated funds, will be sufficient to support our working capital, capital expenditures and debt service requirements for the foreseeable future (in millions):
| | | | | |
| December 31, 2021 |
| |
| |
1.002% Senior term loan due 2025(1) | 283.7 | |
| |
Senior term loans due between 2023 and 2028(1) | 445.9 | |
0.800% Senior Notes Due 2028(1) | 680.8 | |
Other long-term debt | 7.7 | |
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(1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $4.8 million.
On October 6, 2021, we issued €600.0 million (or approximately $680.8 million as of December 31, 2021) 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 senior 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.
During October 2021, we used the proceeds received from the senior notes to repay our €150.0 million (or approximately $173.4 million as of October 8, 2021) senior term loan due 2022, $370.0 million related to our multi-currency revolving credit facility, and two of our 2016 senior term loans due October 2021 with an aggregate amount outstanding of €192.0 million (or approximately $223.8 million as of October 19, 2021). In August 2021, prior to the issuance of the senior notes, we repaid two of our 2018 senior term loans due August 2021 with an aggregate amount of €72.0 million (or approximately $85.5 million as of August 1, 2021).
In October 2018, we entered into a multi-currency revolving credit facility of $800.0 million. The credit facility matures on October 17, 2023. Interest accrues on amounts outstanding under the credit facility, at our option, at either (1) LIBOR plus a margin ranging from 0.875% to 1.875% based on our 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 our credit rating. As mentioned previously, on October 15, 2021, we repaid $370.0 million of our multicurrency revolving credit facility as a result of the issuance of our 0.800% senior notes due 2028. As of December 31, 2021, we had no outstanding borrowings under the revolving credit facility, and the ability to borrow was approximately $800.0 million under the revolving credit facility.
On April 15, 2020, we borrowed €117.5 million and $133.8 million under a term loan facility that had been added to our multi-currency revolving credit facility. While outstanding, the loans bore interest at one-month LIBOR plus a margin of 1.625%. We repaid the two loans on February 16, 2021 (for an aggregate amount of approximately $276.0 million as of that date). Refer to Note 7 of our Consolidated Financial Statements for further information regarding our current facilities.
As described above, our credit facility allows us 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 for loans denominated in other currencies after December 31, 2021. The interest rates reflected in the our credit facility were designed to accommodate the discontinuation of LIBOR-based rates and a shift to the “Secured Overnight Financing Rate” (“SOFR”) or a base rate, and, as such, we do not believe that moving to the other rates will have a materially adverse effect on our 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 we may elect to utilize to add additional interest-rate alternatives.
On January 25, 2019, we borrowed €250.0 million (or approximately $283.7 million as of December 31, 2021) from the European Investment Bank. The loan matures on January 24, 2025. Interest is payable on the term loan at 1.002% per annum, payable semi-annually in arrears.
In October 2018, we entered into a term loan agreement with Rabobank in the amount of €150.0 million. Interest was payable on the term loan quarterly in arrears at an annual rate, equal to the EURIBOR plus a margin ranging from 0.875% to 1.875% based on our credit rating. As mentioned previously, during October 2021, we repaid this term loan of approximately $173.4 million as of October 8, 2021 with the proceeds from our 0.800% senior notes due 2028.
In October 2016, we borrowed an aggregate amount of €375.0 million through a group of seven related term loan agreements. These agreements had maturities ranging from October 2019 to October 2026. Of the 2016 term loans, we repaid an aggregate amount of €56.0 million (or approximately $61.1 million) of two of these term loans in October 2019. Additionally, as mentioned previously, we 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 2018, we borrowed an additional aggregate amount of indebtedness of €338.0 million through a group of another seven related term loan agreements. In August 2021, prior to the issuance of the senior notes due 2028, we repaid two of our 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, we repaid an additional amount of €72.5 million (or approximately $81.7 million) of one of our 2018 senior term loans due August 2023 with existing cash on hand. The provisions of the term loan agreements are substantially identical in nature with the exception of interest rate terms and maturities. In aggregate, as of December 31, 2021, we had indebtedness of approximately €393.0 million (or approximately $445.9 million as of December 31, 2021) under a total group of eight remaining term loan agreements. As of February 1, 2022, as a result of a further repayment discussed previously, we had indebtedness of €320.5 million (or approximately $361.0 million) through a group of seven remaining term loan agreements. As of December 31, 2021, 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 0.90% to 1.25% and maturity dates between August 2023 and August 2025.
As of December 31, 2021 and 2020, we had short-term borrowings due within one year of approximately $90.8 million and $33.8 million, respectively.
We are in compliance with the financial covenants contained in these facilities and expect to continue to maintain such compliance. Should we ever encounter difficulties, our historical relationship with our lenders has been strong and we anticipate their continued long-term support of our business. Refer to Note 7 to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding our current facilities, including the financial covenants contained in each debt instrument.
Our accounts receivable sales agreements in North America, Europe and Brazil permit the sale, on an ongoing basis, of a majority of our receivables to our U.S., Canadian, European and Brazilian finance joint ventures. The sales of all receivables are without recourse to us. We do not service the receivables after the sales occur, and we do not maintain any direct retained interest in the receivables. These agreements are accounted for as off-balance sheet transactions and have the effect of reducing accounts receivable and short-term liabilities by the same amount. As of December 31, 2021 and 2020, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements for the years then ended was approximately $1.3 billion and $1.5 billion, respectively.
In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world. As of December 31, 2021 and 2020, the cash received from these arrangements for the years then ended was approximately $215.4 million and $199.9 million, respectively.
Our finance joint ventures in Europe, Brazil and Australia also provide wholesale financing directly to our dealers. The receivables associated with these arrangements also are without recourse to us. As of December 31, 2021 and 2020, these finance joint ventures had approximately $82.1 million and $85.2 million, respectively, of outstanding accounts receivable associated with these arrangements. These arrangements are accounted for as off-balance sheet transactions.
In order to efficiently manage our liquidity, we generally pay vendors in accordance with negotiated terms. To enable vendors to obtain payment in advance of our payment due dates to them, we have established programs in certain markets with financial institutions under which the vendors have the option to be paid by the financial institutions earlier than the payment due dates. When vendors receive early payments they receive discounted amounts and we then pay the financial institutions the face amounts of the invoices on the payment due dates. We do not reimburse vendors for any costs they incur for participation in the programs. Amounts owed to the financial institutions are presented as “Accounts payable” in our Consolidated Balance Sheets. Should we not be able to negotiate extended payment terms with our vendors, or should financial institutions no longer be willing to participate in early payment programs with us, we would expect to have sufficient liquidity to timely pay our vendors without any material impact on us or our financial position.
Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders’ equity, was 29.7% at December 31, 2021 compared to 34.8% at December 31, 2020.
Cash Flows
Cash flows provided by operating activities were approximately $660.2 million during 2021 compared to approximately $896.5 million during 2020. The decrease during 2021 was primarily due to an increase in inventories, partially offset by increases in net income and accounts payable as compared to 2020. Supply chain disruptions resulted in higher raw material and work-in-process inventory levels during 2021 as compared to the prior year. Free cash flow, which is defined as “Net cash provided by operating activities” less “Purchases of property, plant and equipment”, was approximately $390.4 million during 2021, as compared to approximately $626.6 million during 2020.
Our working capital requirements are seasonal, with investments in working capital typically building in the first half of the year and then reducing in the second half of the year. We had $1,559.5 million in working capital at December 31, 2021, as compared with $1,005.6 million at December 31, 2020. Accounts receivable and inventories, combined, at December 31, 2021 were approximately $754.8 million higher than at December 31, 2020, primarily due to higher net sales and production levels, as well as the significant impact of supply chain constraints during 2021.
Share Repurchase Program
In August and November 2021, we entered into two accelerated share repurchase (“ASR”) agreements with financial institutions to repurchase an aggregate of $135.0 million of shares of our common stock. We received approximately 952,204 shares in these transactions as of December 31, 2021. On January 19, 2022, we received additional 113,824 shares upon final settlement of our November 2021 ASR agreement. In February and March 2020, we entered into two ASR agreements with financial institutions to repurchase an aggregate of $55.0 million of shares of our common stock. We received approximately 970,141 shares in these transactions as of December 31, 2020. All shares received under the ASR agreements 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 our Consolidated Balance Sheets.
Contractual Obligations and Cash Requirements
Our material cash requirements include the following contractual and other obligations:
Indebtedness – As of December 31, 2021, we had approximately $44.4 million of payments due during the year ended December 31, 2022, related to indebtedness and certain short-term obligations, in addition to approximately $15.1 million of interest payments associated with indebtedness we expect to pay during 2022. Interest payments generally do not vary materially year to year. Indebtedness amounts reflect the principal amount of our senior term loan, senior notes, credit facility and certain short-term borrowings, gross of any debt issuance costs. Refer to Note 7 of the Consolidated Financial Statements for additional information regarding our indebtedness.
Capital and operating lease obligations – As of December 31, 2021, we had approximately $4.0 million and $45.7 million of payments due during the year ended December 31, 2022, related to capital and operating lease obligations, respectively. Refer to Note 17 of the Consolidated Financial Statements for additional information regarding our lease obligations.
Unconditional purchase obligations – As of December 31, 2021, we had approximately $131.1 million of outstanding purchase obligations payable during the year ended December 31, 2022. These obligations generally do not vary materially year to year.
Other short-term and long-term obligations – As of December 31, 2021, we had approximately $40.1 million of income tax liabilities related to uncertain income tax provisions connected with ongoing income tax audits in various jurisdictions due during the year ended December 31, 2022. Additionally, we had approximately $37.8 million of estimated future minimum contribution requirements under our U.S. and non-U.S. defined benefit pension and postretirement plans due during the year ended December 31, 2022. Refer to Notes 6 and 8 of the Consolidated Financial Statements for additional information regarding our uncertain tax positions and pension and postretirement plans, respectively. These obligations comprise a majority of our other short-term and long-term obligations.
Commitments and Off-Balance Sheet Arrangements
Guarantees
We maintain a remarketing agreement with our finance joint venture in the United States, whereby we are obligated to repurchase up to $6.0 million of repossessed equipment each calendar year. We believe any losses that might be incurred on the resale of this equipment will not materially impact our financial position or results of operations, due to the fact that the repurchase obligations would be equivalent to the fair value of the underlying equipment.
At December 31, 2021, we guaranteed indebtedness owed to third parties of approximately $25.2 million, primarily related to dealer and end-user financing of equipment. Such guarantees generally obligate us 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, we 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 offset a substantial portion of the amounts paid. We also guarantee indebtedness owed to certain of our 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. We believe the credit risk associated with all of these guarantees is not material to our financial position or results of operations.
In addition, at December 31, 2021, we had accrued approximately $23.3 million of outstanding guarantees of residual values that may be owed to our 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 the guarantee is approximately $160.7 million.
Other
At December 31, 2021, we had outstanding designated and non-designated foreign exchange contracts with a gross notional amount of approximately $3,681.9 million. The outstanding contracts as of December 31, 2021 range in maturity through October 2022. We also had outstanding designated steel commodity contracts with a gross notional amount of approximately $31.9 million that range in maturity through July 2022. See Note 11 of our Consolidated Financial Statements for additional information.
As discussed in “Liquidity and Capital Resources,” we sell a majority of our wholesale accounts receivable in North America, Europe and Brazil to our U.S., Canadian, European and Brazilian finance joint ventures. We also sell certain accounts receivable under factoring arrangements to financial institutions around the world. We have determined that these facilities should be accounted for as off-balance sheet transactions.
Contingencies
We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position or results of operations and accrue and/or disclose loss contingencies as appropriate. See Note 12 of our Consolidated Financial Statements for further information.
Related Parties
In the ordinary course of business, we engage in transactions with related parties. See Note 14 of our Consolidated Financial Statements for information regarding related party transactions and their impact to our consolidated results of operations and financial position.
Foreign Currency Risk Management
We have significant manufacturing locations in the United States, France, Germany, Finland, Italy, China and Brazil, and we purchase a portion of our tractors, combines and components from third-party foreign suppliers, primarily in various European countries and in Japan. We also sell products in approximately 140 countries throughout the world. The majority of our net sales outside the United States are denominated in the currency of the customer location, with the exception of sales in Middle East, Africa, Asia and parts of South America, where net sales are primarily denominated in British pounds, Euros or the United States dollar.
We manage our transactional foreign currency 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, we hedge certain, but not all, of our exposures through the use of foreign currency contracts. Our translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars may be partially hedged from time to time. When practical, this translation impact is reduced by financing local operations with local borrowings. Our hedging policy prohibits use of foreign currency contracts for speculative trading purposes.
The total notional value of our foreign currency instruments was $3,681.9 million and $3,722.4 million as of December 31, 2021 and 2020, respectively, inclusive of both those instruments that are designated and qualified for hedge accounting and non-designated derivative instruments. We enter into 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, and we enter into foreign currency contracts to economically hedge receivables and payables on our balance sheets that are denominated in foreign currencies other than the functional currency. In addition, we use derivative and non-derivative instruments to hedge a portion of our net investment in foreign operations against adverse movements in exchange rates. See Note 11 of our Consolidated Financial Statements for further information about our hedging transactions and derivative instruments.
Assuming a 10% change relative to the currency of the hedge contracts, the fair value of the foreign currency instruments could be negatively impacted by approximately $52.6 million as of December 31, 2021. Due to the fact that these instruments are primarily entered into for hedging purposes, the gains or losses on the contracts would largely be offset by losses and gains on the underlying firm commitment or forecasted transaction.
Interest Rate Risk
Our interest expense is, in part, sensitive to the general level of interest rates. We manage our exposure to interest rate risk through our mix of floating rate and fixed rate debt. From time to time, we enter into interest rate swap agreements to manage our exposure to interest rate fluctuations. See Notes 7 and 11 of our Consolidated Financial Statements for additional information.
Based on our floating rate debt and our accounts receivable sales facilities outstanding at December 31, 2021, a 10% increase in interest rates, would have increased, collectively, “Interest expense, net” and “Other expense, net” for the year ended December 31, 2021 by approximately $2.1 million.
Recent Accounting Pronouncements
See Note 1 of our Consolidated Financial Statements for information regarding recent accounting pronouncements and their impact to our consolidated results of operations and financial position.
Critical Accounting Estimates
We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. In the preparation of these financial statements, we make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” We believe that our application of the policies discussed below involves significant levels of judgment, estimates and complexity.
Due to the levels of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations.
Discount and Sales Incentive Allowances
We provide various volume bonus and sales incentive programs with respect to our products. These sales incentive programs include reductions in invoice prices, reductions in retail financing rates, dealer commissions and dealer incentive allowances. In most cases, incentive programs are established and communicated to our dealers on a quarterly basis. The incentives are paid either at the time of the cash settlement of the receivable (which is generally at the time of retail sale), at the time of retail financing, at the time of warranty registration, or at a subsequent time based on dealer purchase volumes. The incentive programs are product line specific and generally do not vary by dealer. The cost of sales incentives associated with dealer commissions and dealer incentive allowances is estimated based upon the terms of the programs and historical experience, is based on a percentage of the sales price, and estimates for sales incentives are made and recorded at the time of sale for expected incentive programs using the expected value method. These estimates are reassessed each reporting period and are revised in the event of subsequent modifications to incentive programs, as they are communicated to dealers. The related provisions and accruals are made on a product or product-line basis and are monitored for adequacy and revised at least quarterly in the event of subsequent modifications to the programs. Interest rate subsidy payments, which are a reduction in retail financing rates, are recorded in the same manner as dealer commissions and dealer incentive allowances. Volume discounts are estimated and recognized based on historical experience, and related reserves are monitored and adjusted based on actual dealer purchase volumes and the dealers’ progress towards achieving specified cumulative target levels. Estimates of these incentives are based on the terms of the programs and historical experience. All incentive programs are recorded and presented as a reduction of revenue, due to the fact that we do not receive a distinct good or service in exchange for the consideration provided. In the United States and Canada, reserves for incentive programs related to accounts receivable not sold to our U.S. and Canadian finance joint ventures are recorded as “accounts receivable allowances” within our Consolidated Balance Sheets due to the fact that the incentives are paid through a reduction of future cash settlement of the receivable. Globally, reserves for incentive programs that will be paid in cash or credit memos, as is the case with most of our volume discount programs, as well as sales incentives associated with accounts receivable sold to our finance joint ventures, are recorded within “Accrued expenses” within our Consolidated Balance Sheets.
At December 31, 2021, we had recorded an allowance for discounts and sales incentives of approximately $610.3 million that will be paid either through a reduction of future cash settlements of receivables and through credit memos to our dealers or through reductions in retail financing rates paid to our finance joint ventures. If we were to allow an additional 1% of sales incentives and discounts at the time of retail sale for those sales subject to such discount programs, our reserve would increase by approximately $22.9 million as of December 31, 2021. Conversely, if we were to decrease our sales incentives and discounts by 1% at the time of retail sale, our reserve would decrease by approximately $22.9 million as of December 31, 2021.
Deferred Income Taxes and Uncertain Income Tax Positions
We recorded an income tax provision of $108.4 million in 2021 compared to $187.7 million in 2020 and $180.8 million in 2019. Our tax provision and effective tax rate are impacted by the differing tax rates of the various tax jurisdictions in which we operate, permanent differences for items treated differently for financial accounting and income tax purposes, losses in jurisdictions where no income tax benefit is recorded and provisions for unrecognized income tax benefits related to uncertain tax positions.
As of December 31, 2021, our income tax provision included the benefit of reversals of approximately $67.8 million and $55.6 million related to valuation allowances previously established against the Company’s net deferred tax assets in the United States and Brazil, respectively. Improvements in income in the United States and Brazil during 2020 and 2021, along
with updated future projected income levels, supported the reversal of both of the valuation allowances. In addition, we maintain a valuation allowance to reserve a portion of our net deferred tax assets in the United States and certain foreign jurisdictions. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets may not be realized. We assessed the likelihood that our deferred tax assets should be recovered from estimated future taxable income and the current economic climate, as well as available tax planning strategies and determined that the adjustment to the valuation allowance was appropriate. We believe it is more likely than not that we should be able to realize our remaining net deferred tax assets, net of the valuation allowance, in future years.
At December 31, 2021 and 2020, we had gross deferred tax assets of $291.8 million and $360.9 million, respectively, including $69.5 million and $62.9 million, respectively, related to net operating loss carryforwards. At December 31, 2021 and 2020, we had total valuation allowances as an offset to our gross deferred tax assets of $47.4 million and $181.0 million, respectively. These valuation allowances are held against deferred tax assets (including net operating loss carryforwards) in the United States and certain foreign jurisdictions. Realization of the remaining deferred tax assets as of December 31, 2021 depends on generating sufficient taxable income in future periods, net of reversing deferred tax liabilities. We believe it is more likely than not that the remaining net deferred tax assets should be able to be realized.
We recognize income tax benefits from uncertain tax positions only when there is a more than 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities based on the technical merits of the positions. As of December 31, 2021 and 2020, we had approximately $246.4 million and $227.9 million, respectively, of gross unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2021 and 2020, we had approximately $40.1 million and $57.1 million, respectively, of current accrued taxes related to uncertain income tax positions connected with ongoing tax audits in various jurisdictions that we expect to settle or pay in the next 12 months. We recognize interest and penalties related to uncertain income tax positions in income tax expense. As of December 31, 2021 and 2020, we had accrued interest and penalties related to unrecognized tax benefits of approximately $32.7 million and $39.4 million, respectively. See Note 6 of our Consolidated Financial Statements for further discussion of our uncertain income tax positions.
Pensions
We sponsor defined benefit pension plans covering certain employees, principally in the United Kingdom, the United States, Germany, Switzerland, Finland, France, Norway and Argentina. Our primary plans cover certain employees in the United States and the United Kingdom.
In the United States, we sponsor a funded, qualified defined benefit pension plan for our salaried employees, as well as a separate funded qualified defined benefit pension plan for our hourly employees. Both plans are closed to new entrants and frozen, and we fund at least the minimum contributions required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code to both plans. In addition, we maintain an unfunded, nonqualified defined benefit pension plan for certain senior executives, which is our Executive Nonqualified Pension Plan (“ENPP”). The ENPP also is closed to new entrants, and, during 2021, we amended the ENPP to freeze future salary benefit accruals as of December 31, 2024 and to eliminate a lifetime annuity feature for participants reaching age 65 subsequent to December 31, 2022.
In the United Kingdom, we sponsor a funded defined benefit pension plan that provides an annuity benefit based on participants’ final average earnings and service. Participation in this plan is limited to certain older, longer service employees and existing retirees. This plan is closed to new participants.
See Note 8 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding costs and assumptions for employee retirement benefits.
Nature of Estimates Required. The measurement date for all of our benefit plans is December 31. The measurement of our pension obligations, costs and liabilities is dependent on a variety of assumptions provided by management and used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.
Assumptions and Approach Used. The assumptions used in developing the required estimates include, but are not limited to, the following key factors:
| | | | | |
• Discount rates | • Inflation |
• Salary growth | • Expected return on plan assets |
• Retirement rates and ages | • Mortality rates |
For the years ended December 31, 2021, 2020 and 2019, we used a globally consistent methodology to set the discount rate in the countries where our largest benefit obligations exist. In the United States, the United Kingdom and the Euro Zone, we constructed a hypothetical bond portfolio of high-quality corporate bonds and then applied the cash flows of our benefit plans to those bond yields to derive a discount rate. The bond portfolio and plan-specific cash flows vary by country, but the methodology in which the portfolio is constructed is consistent. In the United States, the bond portfolio is large enough to result in taking a “settlement approach” to derive the discount rate, in which high-quality corporate bonds are assumed to be purchased and the resulting coupon payments and maturities are used to satisfy our U.S. pension plans’ projected benefit payments. In the United Kingdom and the Euro Zone, the discount rate is derived using a “yield curve approach,” in which an individual spot rate, or zero coupon bond yield, for each future annual period is developed to discount each future benefit payment and, thereby, determine the present value of all future payments. We use a spot yield curve to determine the discount rate applicable in the United Kingdom to measure the U.K. pension plan’s service cost and interest cost. Under the settlement and yield curve approaches, the discount rate is set to equal the single discount rate that produces the same present value of all future payments.
The other key assumptions and methods were set as follows:
•Our inflation assumption is based on an evaluation of external market indicators.
•The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation.
•The expected return on plan asset assumptions reflects asset allocations, investment strategy, historical experience and the views of investment managers, and reflects a projection of the expected arithmetic returns over ten years.
•Determination of retirement rates and ages as well as termination rates, based on actual plan experience, actuarial standards of practice and the manner in which our defined benefit plans are being administered.
•The mortality rates for the U.K. defined benefit pension plan was updated during 2021 to reflect the latest expected improvements in the life expectancy of the plan participants. The mortality rates for the U.S. defined benefit pension plans were also updated during 2021 to reflect the Society of Actuaries’ most recent findings on the topic of mortality.
•The fair value of assets used to determine the expected return on assets does not reflect any delayed recognition of asset gains and losses.
The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such periods.
Our U.S. and U.K. defined benefit pension plans, including our ENPP, comprised approximately 85% of our consolidated projected benefit obligation as of December 31, 2021. The effects of a 25 basis point change in certain actuarial assumptions on the 2022 net annual pension and ENPP costs and related benefit obligations as of December 31, 2021 would be as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year-end Benefit Obligation | | 2022 Net Annual Pension Cost |
| 25 basis point increase | | 25 basis point decrease | | 25 basis point increase | | 25 basis point decrease |
Discount rate: | | | | | | | |
U.S. qualified defined benefit pension plans and ENPP | $ | (3.6) | | | $ | 3.8 | | | $ | (0.2) | | | $ | 0.2 | |
U.K. defined benefit pension plans | (22.2) | | | 23.7 | | | (0.2) | | | 0.2 | |
| | | | | | | | | | | |
| 2022 Net Annual Pension Cost |
| 25 basis point increase | | 25 basis point decrease |
Long-term rate of return on plan assets: | | | |
U.S. qualified defined benefit pension plans and ENPP | $ | (0.1) | | | $ | 0.1 | |
U.K. defined benefit pension plans | (1.8) | | | 1.8 | |
Unrecognized actuarial net losses related to our defined benefit pension plans and ENPP were $291.7 million as of December 31, 2021 compared to $385.1 million as of December 31, 2020. The decrease in unrecognized net actuarial losses between years primarily resulted from higher discount rates at December 31, 2021 compared to December 31, 2020, as well as a result of the amendment to our ENPP as previously discussed. The unrecognized net actuarial losses will be impacted in future periods by actual asset returns, discount rate changes, currency exchange rate fluctuations, actual demographic experience and certain other factors. For some of our defined benefit pension plans, these losses, to the extent they exceed 10% of the greater of the plan’s liabilities or the fair value of assets (“the gain/loss corridor”), will be amortized on a straight-line basis over the periods discussed as follows. For our U.S. salaried, U.S. hourly and U.K. defined benefit pension plans, the population covered is predominantly inactive participants, and losses related to those plans, to the extent they exceed the gain/loss corridor, will be amortized over the average remaining lives of those participants while covered by the respective plan. For our ENPP, the population is predominantly active participants, and losses related to the plan will be amortized over the average future working lifetime of the active participants expected to receive benefits. As of December 31, 2021, the average amortization periods were as follows:
| | | | | | | | | | | | | | | | | |
| ENPP | | U.S. Plans | | U.K. Plan |
Average amortization period of losses related to defined benefit pension plans | 7 years | | 14 years | | 19 years |
Unrecognized prior service cost related to our defined benefit pension plans was $7.1 million as of December 31, 2021 compared to $20.1 million as of December 31, 2020. The decrease in the unrecognized prior service cost between years is due primarily to the amortization of unrecognized prior service cost related to prior plan amendments, as well as the amendment in 2021 previously discussed related to our ENPP. The 2021 amendment resulted in both a curtailment gain and a net prior service credit.
As of December 31, 2021, our unfunded or underfunded obligations related to our defined benefit pension plans and ENPP were approximately $89.2 million, primarily related to our defined benefit pension plans in Europe and the United States. In 2021, we contributed approximately $36.0 million towards those obligations, and we expect to fund approximately $36.3 million in 2022. Future funding is dependent upon compliance with local laws and regulations and changes to those laws and regulations in the future, as well as the generation of operating cash flows in the future. We currently have an agreement in place with the trustees of the U.K. defined benefit plan that obligates us to fund approximately £15.6 million per year (or approximately $21.1 million) towards that obligation through December 2022. The funding arrangement is based upon the current funded status and could change in the future as discount rates, local laws and regulations, and other factors change.
See Note 8 of our Consolidated Financial Statements for more information regarding the investment strategy and concentration of risk.
Goodwill, Other Intangible Assets and Long-Lived Assets
We test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate that fair value of a reporting unit may be below its carrying value. A reporting unit is an operating segment or one level below an operating segment, for example, a component. We combine and aggregate two or more components of an operating segment as a single reporting unit if the components have similar economic characteristics. Our reportable segments are not our reporting units.
Goodwill is evaluated for impairment annually as of October 1 using a qualitative assessment or a quantitative one-step assessment. If we elect to perform a qualitative assessment and determine the fair value of our reporting units more likely than not exceeds their carrying value of net assets, no further evaluation is necessary. For reporting units where we perform a one-step quantitative assessment, we compare the fair value of each reporting unit to its respective carrying value of net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value of net assets, the goodwill is not considered impaired. If the carrying value of net assets is higher than the fair value of the reporting unit, an impairment charge is recorded in the amount by which the carrying value exceeds the reporting unit’s fair value.
We utilize a combination of valuation techniques, including an income approach, whereby the present value of future expected operating net cash flows are calculated using a discount rate; and a guideline public company method, whereby EBITDA and revenue multiples are derived from the market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market. Assumptions included in these approaches can positively and negatively impact the results of our assessments such as interest rates, sales and margin growth rates, tax rates, cost structures, market share, pricing, capital expenditures, working capital levels and the use of control premiums. For all
reporting units, a 10 percent decrease in the estimated fair value would have had no effect on the carrying value of goodwill as of our annual measurement date on October 1, 2021.
We review our long-lived assets, which include intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation for recoverability is performed at a level where independent cash flows may be attributed to either an asset or asset group. If we determine that the carrying amount of an asset or asset group is not recoverable based on the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. We also evaluate the amortization periods assigned to our intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell.
We make various assumptions, including assumptions regarding future cash flows, market multiples, growth rates and discount rates, in our assessments of the impairment of goodwill, other indefinite-lived intangible assets and long-lived assets. The assumptions about future cash flows and growth rates are based on the current and long-term business plans of the reporting unit or related to the long-lived assets. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the reporting unit or long-lived assets. These assumptions require significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments.
The results of our goodwill and long-lived assets impairment analyses conducted as of October 1, 2021 indicated that no indicators of impairment existed and no reduction in the carrying amount of goodwill and long-lived assets was required.
The COVID-19 pandemic has adversely impacted the global economy as a whole. Based on macroeconomic conditions throughout 2020, we assessed our goodwill and other intangible assets for indications of impairment as of March 31, 2020, June 30, 2020 and September 30, 2020. As of June 30, 2020, we concluded there were indicators of impairment during the three months ended June 30, 2020 related to one of our smaller reporting units, which was a 50%-owned tillage and seeding equipment joint venture. We consolidated the reporting unit as we were determined to be the primary beneficiary of the joint venture. Deteriorating market conditions for the products the joint venture sold were negatively impacted by the COVID-19 pandemic in the second quarter of 2020, greater than initially expected. As a result, updated strategic reviews with revised forecasts indicated an impairment of the entire goodwill balance of this reporting unit was necessary as of June 30, 2020. During the three months ended June 30, 2020, an impairment charge of approximately $20.0 million was recorded as “Goodwill impairment charge” within our Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included within “Net loss attributable to noncontrolling interests.” The joint venture was sold during 2021.
The results of our goodwill and long-lived assets impairment analyses conducted as of October 1, 2020 indicated that no other indicators of impairment existed and no reduction in the carrying amount of goodwill and long-lived assets was required related to our other reporting units.
Our goodwill impairment analysis conducted as of October 1, 2019 indicated that the carrying value of the net assets of our grain storage and protein production systems business in Europe/Middle East was in excess of the fair value of the reporting unit, and therefore, we recorded a non-cash impairment charge of approximately $173.6 million within “Impairment charges” in our Consolidated Statements of Operations. This impairment charge was a substantial portion of the reporting unit’s goodwill balance.
During the three months ended December 31, 2019, we also recorded a non-cash impairment charge of approximately $3.0 million within “Impairment charges” in our Consolidated Statements of Operations. The impairment charge related to certain long-lived intangible assets associated with our grain storage and protein production systems operations within North America due to the discontinuation of a certain brand name and related products and customers.
Numerous facts and circumstances are considered when evaluating the carrying amount of our goodwill. The fair value of a reporting unit is impacted by the reporting unit’s expected financial performance, which is dependent upon the agricultural industry and other factors that could adversely affect the agricultural industry, including but not limited to, declines in the general economy, increases in farm input costs, weather conditions, lower commodity and protein prices and changes in the availability of credit. The estimated fair value of the individual reporting units is assessed for reasonableness by reviewing a variety of indicators evaluated over a reasonable period of time.
As of December 31, 2021, we had approximately $1,280.8 million of goodwill. While our annual impairment testing in 2021 supported the carrying amount of this goodwill, we may be required to re-evaluate the carrying amount in future periods,
thus utilizing different assumptions that reflect the then current market conditions and expectations, and, therefore, we could conclude that an impairment has occurred.
Recoverable Indirect Taxes
Our 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 our sales in the Brazilian market. We regularly assesses the recoverability of these tax credits, and establishes reserves when necessary against them, through analyses that include, amongst others, the history of realization, the transfer of tax credits to third parties as authorized by the government, anticipated changes in the supply chain and the future expectation of tax debits from our ongoing operations. We believe that these tax credits, net of established reserves are realizable. Our assessment of realization of these tax assets involves significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments. We recorded approximately $114.4 million and $91.2 million, respectively, of VAT tax credits, net of reserves, as of December 31, 2021 and 2020.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements of AGCO and its subsidiaries for each of the years in the three-year period ended December 31, 2021 are included in this Item:
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
AGCO Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of AGCO Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule II — Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the reserve and allowance for volume discount and sales incentive programs in certain geographic regions
As discussed in Note 1 to the consolidated financial statements, the Company provides various volume discount and sales incentive programs with respect to its products. As of December 31, 2021, the Company had accrued volume discounts and sales incentives of approximately $602.3 million and an allowance for sales incentive discounts of approximately $8.0 million. Sales incentive programs include reductions in invoice prices, reductions in retail financial rates, dealer commissions and dealer incentive allowances. Volume discounts and sales incentives are recorded at the time of sale as a reduction of revenue using the expected value method.
We identified the assessment of the reserve and allowance for volume discount and sales incentive programs in certain geographic regions as a critical audit matter. Auditor judgment was required to evaluate certain assumptions which had a higher degree of measurement uncertainty. Significant assumptions included estimated incentive rates,
which were the estimated rates at which programs were applied to eligible products, and estimated achievement by dealers of specified cumulative targeted purchase levels.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s reserve and allowance for volume discount and sales incentive process, including controls related to the development of the significant assumptions. For certain volume discount and sales incentive programs, we compared the program details to dealer communications and the significant assumptions to historical results for similar programs. We assessed the Company’s historical ability to estimate significant assumptions by comparing the prior year estimated amounts to actual discounts and sales incentives realized by the customers. We evaluated the significant assumptions by comparing them to actual results, including the results of transactions occurring after year-end.
Assessment of gross unrecognized income tax benefits in certain jurisdictions
As discussed in Note 6 to the consolidated financial statements, the Company has recorded a liability for gross unrecognized income tax benefits of approximately $246.4 million as of December 31, 2021. The Company recognizes income tax benefits from uncertain tax positions only when there is a more than 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities based on the technical merits of the positions.
We identified the assessment of gross unrecognized income tax benefits in certain jurisdictions as a critical audit matter. Complex auditor judgment and specialized skills were required in evaluating the Company’s interpretation and application of tax laws and the estimate of the amount of tax benefits expected to be realized.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s gross unrecognized income tax benefit process. This included controls related to the Company’s consideration of information that could affect the recognition or measurement of income tax benefits from uncertain tax positions and the interpretation and application of tax laws. We involved tax professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s interpretation and application of tax laws
•developing an expectation of the Company’s tax positions and comparing the results to the Company’s assessment
Assessment of goodwill impairment for certain reporting units
As discussed in Note 1 to the consolidated financial statements, the Company evaluates goodwill for impairment annually as of October 1 and when events or circumstances indicate that fair value of a reporting unit may be below its carrying value. As of December 31, 2021, the Company has $1,280.8 million of goodwill. The Company performs its goodwill impairment analyses using either a qualitative or a quantitative assessment. The fair values of the reporting units are determined based on a combination of valuation techniques, including an income approach and guideline public company method. Based on the Company’s analysis, the Company determined that the fair values of certain reporting units were in excess of the carrying values and therefore did not record any goodwill impairment for these reporting units.
We identified the assessment of goodwill impairment for certain reporting units as a critical audit matter because a high degree of subjective auditor judgment was required to evaluate the fair value of the reporting units. The fair value model used the following significant assumptions for which there was limited observable market information: forecasted revenue growth and discount rates. The determined fair values were sensitive to changes in these significant assumptions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill impairment process, including controls over the significant assumptions. We performed sensitivity analyses over the significant assumptions to assess their impact on the Company’s fair value determination. We compared the Company’s forecasted revenue growth used in the valuation model against underlying business strategies and growth plans. We compared the Company’s historical revenue forecasts to actual results to assess the Company’s ability to forecast. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in:
•comparing the Company’s discount rate inputs to publicly available information for comparable entities to test the selected discount rate
•recomputing the estimate of fair value for the reporting units using the Company’s significant assumptions and comparing the result to the Company’s fair value estimate
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Atlanta, Georgia
February 25, 2022
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net sales | $ | 11,138.3 | | | $ | 9,149.7 | | | $ | 9,041.4 | |
Cost of goods sold | 8,566.0 | | | 7,092.2 | | | 7,057.1 | |
Gross profit | 2,572.3 | | | 2,057.5 | | | 1,984.3 | |
Operating expenses: | | | | | |
Selling, general and administrative expenses | 1,088.2 | | | 1,001.5 | | | 1,040.3 | |
Engineering expenses | 405.8 | | | 342.6 | | | 343.4 | |
Amortization of intangibles | 61.1 | | | 59.5 | | | 61.1 | |
Impairment charges | — | | | 20.0 | | | 176.6 | |
Restructuring expenses | 15.3 | | | 19.7 | | | 9.0 | |
Bad debt expense | 0.5 | | | 14.5 | | | 5.8 | |
Income from operations | 1,001.4 | | | 599.7 | | | 348.1 | |
Interest expense, net | 6.7 | | | 15.0 | | | 19.9 | |
Other expense, net | 50.4 | | | 22.7 | | | 67.1 | |
Income before income taxes and equity in net earnings of affiliates | 944.3 | | | 562.0 | | | 261.1 | |
Income tax provision | 108.4 | | | 187.7 | | | 180.8 | |
Income before equity in net earnings of affiliates | 835.9 | | | 374.3 | | | 80.3 | |
Equity in net earnings of affiliates | 65.6 | | | 45.5 | | | 42.5 | |
Net income | 901.5 | | | 419.8 | | | 122.8 | |
Net (income) loss attributable to noncontrolling interests | (4.5) | | | 7.3 | | | 2.4 | |
Net income attributable to AGCO Corporation and subsidiaries | $ | 897.0 | | | $ | 427.1 | | | $ | 125.2 | |
Net income per common share attributable to AGCO Corporation and subsidiaries: | | | | | |
Basic | $ | 11.93 | | | $ | 5.69 | | | $ | 1.64 | |
Diluted | $ | 11.85 | | | $ | 5.65 | | | $ | 1.63 | |
Cash dividends declared and paid per common share | $ | 4.74 | | | $ | 0.63 | | | $ | 0.63 | |
Weighted average number of common and common equivalent shares outstanding: | | | | | |
Basic | 75.2 | | | 75.0 | | | 76.2 | |
Diluted | 75.7 | | | 75.6 | | | 77.0 | |
See accompanying notes to Consolidated Financial Statements.
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Net income | $ | 901.5 | | | $ | 419.8 | | | $ | 122.8 | |
Other comprehensive gain (loss), net of reclassification adjustments: | | | | | |
Defined benefit pension plans, net of taxes: | | | | | |
Prior service credit (cost) arising during the year | 10.0 | | | 0.3 | | | (4.7) | |
Net loss recognized due to settlement | 0.1 | | | 0.3 | | | 0.6 | |
Net loss recognized due to curtailment | 6.3 | | | — | | | — | |
Net actuarial gain (loss) arising during the year | 53.6 | | | (32.7) | | | (23.3) | |
Amortization of prior service cost included in net periodic pension cost | 0.6 | | | 2.1 | | | 1.6 | |
Amortization of net actuarial losses included in net periodic pension cost | 12.3 | | | 13.1 | | | 11.8 | |
Derivative adjustments: | | | | | |
Net changes in fair value of derivatives | 5.1 | | | 5.1 | | | (2.6) | |
Net gains reclassified from accumulated other comprehensive loss into income | (3.0) | | | (6.3) | | | (0.1) | |
Foreign currency translation adjustments | (45.5) | | | (201.8) | | | (20.6) | |
Other comprehensive gain (loss), net of reclassification adjustments | 39.5 | | | (219.9) | | | (37.3) | |
Comprehensive income | 941.0 | | | 199.9 | | | 85.5 | |
Comprehensive (income) loss attributable to noncontrolling interests | (4.1) | | | 11.6 | | | (0.1) | |
Comprehensive income attributable to AGCO Corporation and subsidiaries | $ | 936.9 | | | $ | 211.5 | | | $ | 85.4 | |
See accompanying notes to Consolidated Financial Statements.
AGCO CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
ASSETS |
Current Assets: | | | |
Cash and cash equivalents | $ | 889.1 | | | $ | 1,119.1 | |
Accounts and notes receivable, net | 991.5 | | | 856.0 | |
Inventories, net | 2,593.7 | | | 1,974.4 | |
Other current assets | 539.8 | | | 418.9 | |
Total current assets | 5,014.1 | | | 4,368.4 | |
Property, plant and equipment, net | 1,464.8 | | | 1,508.5 | |
Right-of-use lease assets | 154.1 | | | 165.1 | |
Investments in affiliates | 413.5 | | | 442.7 | |
Deferred tax assets | 169.3 | | | 77.6 | |
Other assets | 293.3 | | | 179.8 | |
Intangible assets, net | 392.2 | | | 455.6 | |
Goodwill | 1,280.8 | | | 1,306.5 | |
Total assets | $ | 9,182.1 | | | $ | 8,504.2 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | | | |
Current portion of long-term debt | $ | 2.1 | | | $ | 325.9 | |
| | | |
Short term borrowings | 90.8 | | | 33.8 | |
Accounts payable | 1,078.3 | | | 855.1 | |
Accrued expenses | 2,062.2 | | | 1,916.7 | |
Other current liabilities | 221.2 | | | 231.3 | |
Total current liabilities | 3,454.6 | | | 3,362.8 | |
Long-term debt, less current portion and debt issuance costs | 1,411.2 | | | 1,256.7 | |
Operating lease liabilities | 115.5 | | | 125.9 | |
Pensions and postretirement health care benefits | 209.0 | | | 253.4 | |
Deferred tax liabilities | 116.9 | | | 112.4 | |
Other noncurrent liabilities | 431.1 | | | 375.0 | |
Total liabilities | 5,738.3 | | | 5,486.2 | |
Commitments and contingencies (Note 12) | | | |
| | | |
Stockholders’ Equity: | | | |
AGCO Corporation stockholders’ equity: | | | |
Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 2021 and 2020 | — | | | — | |
Common stock; $0.01 par value, 150,000,000 shares authorized, 74,441,312 and 74,962,231 shares issued and outstanding at December 31, 2021 and 2020, respectively | 0.7 | | | 0.8 | |
Additional paid-in capital | 3.9 | | | 30.9 | |
Retained earnings | 5,182.2 | | | 4,759.1 | |
Accumulated other comprehensive loss | (1,770.9) | | | (1,810.8) | |
Total AGCO Corporation stockholders’ equity | 3,415.9 | | | 2,980.0 | |
Noncontrolling interests | 27.9 | | | 38.0 | |
Total stockholders’ equity | 3,443.8 | | | 3,018.0 | |
Total liabilities and stockholders’ equity | $ | 9,182.1 | | | $ | 8,504.2 | |
See accompanying notes to Consolidated Financial Statements.
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Stockholders’ Equity | | |
| Common Stock | | | | Defined Benefit Pension Plans | | Cumulative Translation Adjustment | | Deferred Gains (Losses) on Derivatives | | Accumulated Other Comprehensive Loss | | | | |
| Shares | | Amount | | | | | | | | | | |
Balance, December 31, 2018 | 76,536,755 | | | $ | 0.8 | | | $ | 10.2 | | | $ | 4,477.3 | | | $ | (282.4) | | | $ | (1,274.4) | | | $ | 1.4 | | | $ | (1,555.4) | | | $ | 60.6 | | | $ | 2,993.5 | | | |
Net income (loss) | — | | | — | | | — | | | 125.2 | | | — | | | — | | | — | | | — | | | (2.4) | | | 122.8 | | | |
Payment of dividends to shareholders | — | | | — | | | — | | | (48.0) | | | — | | | — | | | — | | | — | | | — | | | (48.0) | | | |
Issuance of restricted stock | 14,105 | | | — | | | 1.0 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1.0 | | | |
Issuance of stock awards | 608,444 | | | — | | | (13.3) | | | (9.7) | | | — | | | — | | | — | | | — | | | — | | | (23.0) | | | |
SSARs exercised | 106,514 | | | — | | | (3.1) | | | (1.7) | | | — | | | — | | | — | | | — | | | — | | | (4.8) | | | |
Stock compensation | — | | | — | | | 40.3 | | | — | | | — | | | — | | | — | | | — | | | — | | | 40.3 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Investment by noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2.0 | | | 2.0 | | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.4) | | | (0.4) | | | |
Changes in noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9.1) | | | (9.1) | | | |
Purchases and retirement of common stock | (1,794,256) | | | — | | | (30.4) | | | (99.6) | | | — | | | — | | | — | | | — | | | — | | | (130.0) | | | |
| | | | | | | | | | | | | | | | | | | | | |
Defined benefit pension plans, net of taxes: | | | | | | | | | | | | | | | | | | | | | |
Prior service cost arising during year | — | | | — | | | — | | | — | | | (4.7) | | | — | | | — | | | (4.7) | | | — | | | (4.7) | | | |
Net loss recognized due to settlement | — | | | — | | | — | | | — | | | 0.6 | | | — | | | — | | | 0.6 | | | — | | | 0.6 | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss arising during year | — | | | — | | | — | | | — | | | (23.3) | | | — | | | — | | | (23.3) | | | — | | | (23.3) | | | |
Amortization of prior service cost included in net periodic pension cost | — | | | — | | | — | | | — | | | 1.6 | | | — | | | — | | | 1.6 | | | — | | | 1.6 | | | |
Amortization of net actuarial losses included in net periodic pension cost | — | | | — | | | — | | | — | | | 11.8 | | | — | | | — | | | 11.8 | | | — | | | 11.8 | | | |
Deferred gains and losses on derivatives, net | — | | | — | | | — | | | — | | | — | | | — | | | (2.7) | | | (2.7) | | | — | | | (2.7) | | | |
Change in cumulative translation adjustment | — | | | — | | | — | | | — | | | — | | | (23.1) | | | — | | | (23.1) | | | 2.5 | | | (20.6) | | | |
Balance, December 31, 2019 | 75,471,562 | | | 0.8 | | | 4.7 | | | 4,443.5 | | | (296.4) | | | (1,297.5) | | | (1.3) | | | (1,595.2) | | | 53.2 | | | 2,907.0 | | | |
Net income (loss) | — | | | — | | | — | | | 427.1 | | | — | | | — | | | — | | | — | | | (7.3) | | | 419.8 | | | |
Payment of dividends to shareholders | — | | | — | | | — | | | (48.0) | | | — | | | — | | | — | | | — | | | — | | | (48.0) | | | |
Issuance of restricted stock | 19,862 | | | — | | | 1.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1.1 | | | |
Issuance of stock awards | 374,212 | | | — | | | (7.3) | | | (8.4) | | | — | | | — | | | — | | | — | | | — | | | (15.7) | | | |
SSARs exercised | 66,736 | | | — | | | (4.1) | | | (0.1) | | | — | | | — | | | — | | | — | | | — | | | (4.2) | | | |
Stock compensation | — | | | — | | | 39.9 | | | (3.4) | | | — | | | — | | | — | | | — | | | — | | | 36.5 | | | |
| | | | | | | | | | | | | | | | | | | | | |
Investment by noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3.3) | | | (3.3) | | | |
Changes in noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.5) | | | (0.5) | | | |
Purchases and retirement of common stock | (970,141) | | | — | | | (3.4) | | | (51.6) | | | — | | | — | | | — | | | — | | | — | | | (55.0) | | | |
| | | | | | | | | | | | | | | | | | | | | |
Defined benefit pension plans, net of taxes: | | | | | | | | | | | | | | | | | | | | | |
Prior service credit arising during year | — | | | — | | | — | | | — | | | 0.3 | | | — | | | — | | | 0.3 | | | — | | | 0.3 | | | |
Net loss recognized due to settlement | — | | | — | | | — | | | — | | | 0.3 | | | — | | | — | | | 0.3 | | | — | | | 0.3 | | | |
Net actuarial loss arising during year | — | | | — | | | — | | | — | | | (32.7) | | | — | | | — | | | (32.7) | | | — | | | (32.7) | | | |
Amortization of prior service cost included in net periodic pension cost | — | | | — | | | — | | | — | | | 2.1 | | | — | | | — | | | 2.1 | | | — | | | 2.1 | | | |
Amortization of net actuarial losses included in net periodic pension cost | — | | | — | | | — | | | — | | | 13.1 | | | — | | | — | | | 13.1 | | | — | | | 13.1 | | | |
Deferred gains and losses on derivatives, net | — | | | — | | | — | | | — | | | — | | | — | | | (1.2) | | | (1.2) | | | — | | | (1.2) | | | |
Change in cumulative translation adjustment | — | | | — | | | — | | | — | | | — | | | (197.5) | | | — | | | (197.5) | | | (4.3) | | | (201.8) | | | |
Balance, December 31, 2020 | 74,962,231 | | | 0.8 | | | 30.9 | | | 4,759.1 | | | (313.3) | | | (1,495.0) | | | (2.5) | | | (1,810.8) | | | 38.0 | | | 3,018.0 | | | |
Net income | — | | | — | | | — | | | 897.0 | | | — | | | — | | | — | | | — | | | 4.5 | | | 901.5 | | | |
Payment of dividends to shareholders | — | | | — | | | — | | | (358.5) | | | — | | | — | | | — | | | — | | | — | | | (358.5) | | | |
Issuance of restricted stock | 8,912 | | | — | | | 1.3 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1.3 | | | |
Issuance of stock awards | 362,034 | | | — | | | (29.5) | | | — | | | — | | | — | | | — | | | — | | | — | | | (29.5) | | | |
SSARs exercised | 60,339 | | | — | | | (5.4) | | | — | | | — | | | — | | | — | | | — | | | — | | | (5.4) | | | |
Stock compensation | — | | | — | | | 26.1 | | | — | | | — | | | — | | | — | | | — | | | — | | | 26.1 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Distribution to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3.6) | | | (3.6) | | | |
Sale of noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10.6) | | | (10.6) | | | |
Purchases and retirement of common stock | (952,204) | | | (0.1) | | | (19.5) | | | (115.4) | | | — | | | — | | | — | | | — | | | — | | | (135.0) | | | |
Defined benefit pension plans, net of taxes: | | | | | | | | | | | | | | | | | | | | | |
Prior service credit arising during year | — | | | — | | | — | | | — | | | 10.0 | | | — | | | — | | | 10.0 | | | — | | | 10.0 | | | |
Net loss recognized due to settlement | — | | | — | | | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | | | — | | | 0.1 | | | |
Net loss recognized due to curtailment | — | | | — | | | — | | | — | | | 6.3 | | | — | | | — | | | 6.3 | | | — | | | 6.3 | | | |
Net actuarial gain arising during year | — | | | — | | | — | | | — | | | 53.6 | | | — | | | — | | | 53.6 | | | — | | | 53.6 | | | |
Amortization of prior service cost included in net periodic pension cost | — | | | — | | | — | | | — | | | 0.6 | | | — | | | — | | | 0.6 | | | — | | | 0.6 | | | |
Amortization of net actuarial losses included in net periodic pension cost | — | | | — | | | — | | | — | | | 12.3 | | | — | | | — | | | 12.3 | | | — | | | 12.3 | | | |
Deferred gains and losses on derivatives, net | — | | | — | | | — | | | — | | | — | | | — | | | 2.1 | | | 2.1 | | | — | | | 2.1 | | | |
Change in cumulative translation adjustment | — | | | — | | | — | | | — | | | — | | | (45.1) | | | — | | | (45.1) | | | (0.4) | | | (45.5) | | | |
Balance, December 31, 2021 | 74,441,312 | | | $ | 0.7 | | | $ | 3.9 | | | $ | 5,182.2 | | | $ | (230.4) | | | $ | (1,540.1) | | | $ | (0.4) | | | $ | (1,770.9) | | | $ | 27.9 | | | $ | 3,443.8 | | | |
See accompanying notes to Consolidated Financial Statements.
AGCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | |
Net income | $ | 901.5 | | | $ | 419.8 | | | $ | 122.8 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | 220.7 | | | 212.5 | | | 210.9 | |
Impairment charges | — | | | 20.0 | | | 176.6 | |
Amortization of intangibles | 61.1 | | | 59.5 | | | 61.1 | |
| | | | | |
Stock compensation expense | 27.4 | | | 37.6 | | | 41.3 | |
| | | | | |
Equity in net earnings of affiliates, net of cash received | (1.9) | | | (43.7) | | | — | |
Deferred income tax (benefit) provision | (117.9) | | | 3.4 | | | 15.1 | |
| | | | | |
Other | 20.5 | | | (7.4) | | | 6.9 | |
Changes in operating assets and liabilities, net of effects from purchase of businesses: | | | | |
Accounts and notes receivable, net | (207.7) | | | (90.5) | | | 63.8 | |
Inventories, net | (762.6) | | | 119.7 | | | (216.3) | |
Other current and noncurrent assets | (268.0) | | | (49.8) | | | (14.4) | |
Accounts payable | 292.2 | | | (59.1) | | | 35.7 | |
Accrued expenses | 241.2 | | | 185.3 | | | 114.5 | |
Other current and noncurrent liabilities | 253.7 | | | 89.2 | | | 77.9 | |
Total adjustments | (241.3) | | | 476.7 | | | 573.1 | |
Net cash provided by operating activities | 660.2 | | | 896.5 | | | 695.9 | |
Cash flows from investing activities: | | | | | |
Purchases of property, plant and equipment | (269.8) | | | (269.9) | | | (273.4) | |
Proceeds from sale of property, plant and equipment | 6.3 | | | 1.9 | | | 4.9 | |
Purchase of businesses, net of cash acquired | (22.6) | | | (2.8) | | | — | |
| | | | | |
Sale of, distributions from (investments in) unconsolidated affiliates, net | 13.1 | | | 29.1 | | | (3.1) | |
Other | (15.4) | | | — | | | — | |
Net cash used in investing activities | (288.4) | | | (241.7) | | | (271.6) | |
Cash flows from financing activities: | | | | | |
Proceeds from indebtedness | 2,497.6 | | | 1,195.6 | | | 2,082.7 | |
Repayments of indebtedness | (2,501.4) | | | (1,045.6) | | | (2,191.1) | |
Purchases and retirement of common stock | (135.0) | | | (55.0) | | | (130.0) | |
| | | | | |
Payment of dividends to stockholders | (358.5) | | | (48.0) | | | (48.0) | |
Payment of minimum tax withholdings on stock compensation | (34.9) | | | (19.8) | | | (28.1) | |
Payment of debt issuance costs | (3.8) | | | (1.4) | | | (0.5) | |
| | | | | |
(Distributions to) investments by noncontrolling interests, net | (3.5) | | | (3.1) | | | 1.6 | |
| | | | | |
Net cash (used in) provided by financing activities | (539.5) | | | 22.7 | | | (313.4) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (62.3) | | | 8.8 | | | (4.2) | |
(Decrease) increase in cash, cash equivalents and restricted cash | (230.0) | | | 686.3 | | | 106.7 | |
Cash, cash equivalents and restricted cash, beginning of year | 1,119.1 | | | 432.8 | | | 326.1 | |
Cash, cash equivalents and restricted cash, end of year | $ | 889.1 | | | $ | 1,119.1 | | | $ | 432.8 | |
See accompanying notes to Consolidated Financial Statements.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations and Summary of Significant Accounting Policies
Business
AGCO Corporation and subsidiaries (“AGCO” or the “Company”) is a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. The Company sells a full range of agricultural equipment, including tractors, combines, hay tools, sprayers, forage equipment, seeding and tillage equipment, implements, and grain storage and protein production systems. The Company’s products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names including: Challenger®, Fendt®, GSI®, Massey Ferguson® and Valtra®. The Company distributes most of its products through a combination of approximately 3,200 independent dealers and distributors as well as the Company utilizes associates and licensees to provide a distribution channel for its products. In addition, the Company provides retail financing through its finance joint ventures with CoöperatieveRabobank U.A., or “Rabobank.”
Basis of Presentation and Consolidation
The Company’s Consolidated Financial Statements represent the consolidation of all wholly-owned companies, majority-owned companies and joint ventures in which the Company has been determined to be the primary beneficiary. The Company consolidates a variable interest entity (“VIE”) if the Company determines it is the primary beneficiary. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE. The Company also consolidates all entities that are not considered VIEs if it is determined that the Company has a controlling voting interest to direct the activities that most significantly impact the joint venture or entity. The Company records investments in all other affiliate companies using the equity method of accounting when it has significant influence. Other investments, including those representing an ownership interest of less than 20%, are recorded at cost. All significant intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The estimates made by management primarily relate to accounts and notes receivable, inventories, deferred income tax valuation allowances, uncertain tax positions, goodwill and other identifiable intangible assets, and certain accrued liabilities, principally relating to reserves for volume discounts and sales incentives, warranty obligations, product liability and workers’ compensation obligations, and pensions and postretirement benefits.
The Company cannot predict the ongoing impact of the COVID-19 pandemic due to volatility in global economic and political environments, the cyclicality of market demand for its products, supply chain disruptions, possible workforce unavailability, exchange rate and commodity and protein price volatility and availability of financing, and their impact to the Company’s net sales, production volumes, costs and overall financial condition and available funding. The Company may be required to record impairment charges in the future with respect to noncurrent assets such as goodwill and other intangible assets and equity method investments, whose fair values may be negatively affected by the COVID-19 pandemic. The Company also may be required to write-down obsolete inventory due to decreased customer demand and sales orders. The Company monitors the collection of accounts receivable, as well as the operating results of its finance joint ventures around the world. In the event economic conditions were to deteriorate, the Company and its finance joint ventures may not collect accounts receivable at expected levels, and the operating results of its finance joint ventures may be negatively impacted, thus negatively impacting the Company's results of operations and financial condition. The Company also regularly assesses its compliance with debt covenants, cash flow hedging forecasts as compared to actual transactions, the fair value of pension assets, accounting for incentive and stock compensation accruals, revenue recognition and discount reserve setting as well as the realization of deferred tax assets in light of the COVID-19 pandemic.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated into United States currency in accordance with Accounting Standards Codification (“ASC”) 830, “Foreign Currency Matters.” Assets and liabilities are translated to United States dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are included in “Accumulated other comprehensive loss” in stockholders’ equity within the Company’s Consolidated Balance Sheets. Gains and losses, which result from foreign currency transactions, are included in the accompanying Consolidated Statements of Operations. The Company changed the functional currency of its wholly-owned subsidiary from the Argentinian peso to the U.S. dollar effective July 1, 2018.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents reported in the Consolidated Balance Sheets as of December 31, 2021, 2020 and 2019 and cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Cash(1) | $ | 833.0 | | | $ | 1,022.0 | | | $ | 412.3 | |
Cash equivalents(2) | 49.2 | | | 89.7 | | | 17.3 | |
Restricted cash(3) | 6.9 | | | 7.4 | | | 3.2 | |
Total | $ | 889.1 | | | $ | 1,119.1 | | | $ | 432.8 | |
____________________________________
(1) Consisted primarily of cash on hand and bank deposits.
(2) Consisted primarily of money market deposits, certificates of deposits and overnight investments. The Company considers all investments with an original maturity of three months or less to be cash equivalents.
(3) Consisted primarily of cash in escrow or held as guarantee to support specific requirements.
Accounts and Notes Receivable
Accounts and notes receivable arise from the sale of equipment and replacement parts to independent dealers, distributors or other customers. In the United States and Canada, amounts due from sales to dealers are immediately due upon a retail sale of the underlying equipment by the dealer with the exception of sales of grain storage and protein production systems as discussed further below. If not previously paid by the dealer in the United States and Canada, installment payments are required generally beginning after the interest-free period with the remaining outstanding equipment balance generally due within 12 months after shipment or delivery. These interest-free periods vary by product and generally range from one to 12 months. In limited circumstances, the Company provides sales terms, and in some cases, interest-free periods that are longer than 12 months for certain products. These are typically specified programs predominately in the United States and Canada, that allow for interest-free periods and due dates of up to 24 months for certain products depending on the year of the sale and the dealer or distributor’s ordering or sales volume during the preceding year. Interest generally is charged at or above prime lending rates on the outstanding receivable balances after shipment or delivery and after interest-free periods. Sales terms of some highly seasonal products provide for payment and due dates based on a specified date during the year regardless of the shipment date. Equipment sold to dealers in the United States and Canada is paid in full on average within 12 months of shipment. Sales of replacement parts generally are payable within 30 days of shipment, with terms for some larger, seasonal stock orders generally requiring payment within six months of shipment. Under normal circumstances, equipment may not be returned. In certain regions, with respect to most equipment sales, including the United States and Canada, the Company is obligated to repurchase equipment and replacement parts upon cancellation of a dealer or distributor contract. These obligations are required by national, state or provincial laws and require the Company to repurchase a dealer or distributor’s unsold inventory, including inventories for which the receivable already has been paid. Actual interest-free periods are shorter than described above because the equipment receivable from dealers or distributors in some countries, such as in the United States and Canada, is generally due immediately upon sale of the equipment to a retail customer as discussed above. Receivables can also be paid prior to terms specified in sales agreements. Under normal circumstances, interest is not forgiven and interest-free periods are not extended.
In other international markets, equipment sales generally are payable in full within 30 days to 180 days of shipment or delivery. Payment terms for some highly seasonal products have a specified due date during the year regardless of the shipment or delivery date. For sales in most markets outside of the United States and Canada, the Company generally does not charge
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
interest on outstanding receivables with its dealers and distributors. Sales of replacement parts generally are payable within 30 days to 90 days of shipment, with terms for some larger, seasonal stock orders generally payable within six months of shipment.
In certain markets, there is a time lag, which varies based on the timing and level of retail demand, between the date the Company records a sale and when the dealer sells the equipment to a retail customer.
Sales of grain storage and protein production systems both in the United States and in other countries generally are payable within 30 days of shipment. In certain countries, sales of such systems for which the Company is responsible for construction or installation may be contingent upon customer acceptance. Payment terms vary by market and product, with fixed payment schedules on all sales. When the Company is responsible for installation services, fixed payment schedules may include upfront deposits, progress payments and final payment upon customer acceptance.
The following summarizes by geographic region, as a percentage of the Company’s consolidated net sales, amounts with maximum interest-free periods as presented below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2021 | | North America | | South America | | Europe/ Middle East | | Asia/ Pacific/Africa | | Consolidated |
0 to 6 months | | $ | 1,909.7 | | | $ | 1,307.7 | | | $ | 6,217.6 | | | $ | 949.7 | | | $ | 10,384.7 | | | 93.2 | % |
7 to 12 months | | 739.7 | | | — | | | 4.1 | | | — | | | 743.8 | | | 6.7 | % |
13 to 24 months | | 9.8 | | | — | | | — | | | — | | | 9.8 | | | 0.1 | % |
| | | | | | | | | | | | |
| | $ | 2,659.2 | | | $ | 1,307.7 | | | $ | 6,221.7 | | | $ | 949.7 | | | $ | 11,138.3 | | | 100.0 | % |
The Company has an agreement to permit transferring, on an ongoing basis, a majority of its wholesale interest-bearing and non-interest bearing accounts receivable in North America, Europe and Brazil to its U.S., Canadian, European and Brazilian finance joint ventures. Qualified dealers may obtain additional financing through the Company’s U.S., Canadian, European and Brazilian finance joint ventures at the joint ventures’ discretion.
The Company provides various volume bonus and sales incentive programs with respect to its products. These sales incentive programs include reductions in invoice prices, reductions in retail financing rates, dealer commissions and dealer incentive allowances. In most cases, incentive programs are established and communicated to the Company’s dealers on a quarterly basis. The incentives are paid either at the time of the cash settlement of the receivable (which is generally at the time of retail sale), at the time of retail financing, at the time of warranty registration, or at a subsequent time based on dealer purchase volumes. The incentive programs are product-line specific and generally do not vary by dealer. The cost of sales incentives associated with dealer commissions and dealer incentive allowances is estimated based upon the terms of the programs and historical experience, is based on a percentage of the sales price, and estimates for sales incentives are made and recorded at the time of sale for expected incentive programs using the expected value method. These estimates are reassessed each reporting period and are revised in the event of subsequent modifications to incentive programs, as they are communicated to dealers. The related provisions and accruals are made on a product or product-line basis and are monitored for adequacy and revised at least quarterly in the event of subsequent modifications to the programs. Interest rate subsidy payments, which are a reduction in retail finance rates, are recorded in the same manner as dealer commissions and dealer incentive allowances. Volume discounts are estimated and recognized based on historical experience, and related reserves are monitored and adjusted based on actual dealer purchase volumes and the dealer’s progress towards achieving specified cumulative target levels. All incentive programs are recorded and presented as a reduction of revenue, due to the fact that the Company does not receive a distinct good or service in exchange for the consideration provided. In the United States and Canada, reserves for incentive programs related to accounts receivable not sold to Company’s U.S. and Canadian finance joint ventures are recorded as “accounts receivable allowances” within the Company’s Consolidated Balance Sheets due to the fact that the incentives are paid through a reduction of future cash settlement of the receivable. Globally, reserves for incentive programs that will be paid in cash or credit memos, as is the case with most of the Company’s volume discount programs, as well as sales with incentives associated with accounts receivable sold to its finance joint ventures, are recorded within “Accrued expenses” within the Company’s Consolidated Balance Sheets.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts and notes receivable are shown net of allowances for sales incentive discounts available to dealers and for doubtful accounts. Cash flows related to the collection of receivables are reported within “Cash flows from operating activities” within the Company’s Consolidated Statements of Cash Flows. Accounts and notes receivable allowances at December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Sales incentive discounts | $ | 8.0 | | | $ | 12.9 | |
Doubtful accounts | 32.6 | | | 36.4 | |
| $ | 40.6 | | | $ | 49.3 | |
The Company accounts for its provision for doubtful accounts in accordance with Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”).
In the United States and Canada, sales incentives can be paid through future cash settlements of receivables and through credit memos to Company’s dealers or through reductions in retail financing rates paid to the Company’s finance joint ventures. Outside of the United States and Canada, sales incentives can be paid through cash or credit memos to the Company’s dealers or through reductions in retail financing rates paid to the Company’s finance joint ventures. The Company transfers certain accounts receivable under its accounts receivable sales agreements with its finance joint ventures and other financial institutions (see Note 4). The Company records such transfers as sales of accounts receivable when it is considered to have surrendered control of such receivables under the provisions of ASU 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” Cash payments made to the Company’s finance joint ventures for sales incentive discounts provided to dealers related to outstanding accounts receivables sold are recorded within “Accrued expenses.”
Inventories
Inventories are valued at the lower of cost or net realizable value, using the first-in, first-out method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At December 31, 2021 and 2020, the Company had recorded $202.6 million and $209.2 million, respectively, as an adjustment for surplus and obsolete inventories. These adjustments are reflected within “Inventories, net” within the Company’s Consolidated Balance Sheets.
Inventories, net at December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Finished goods | $ | 718.2 | | | $ | 641.3 | |
Repair and replacement parts | 697.8 | | | 652.3 | |
Work in process | 282.8 | | | 175.1 | |
Raw materials | 894.9 | | | 505.7 | |
Inventories, net | $ | 2,593.7 | | | $ | 1,974.4 | |
Cash flows related to the sale of inventories are reported within “Cash flows from operating activities” within the Company’s Consolidated Statements of Cash Flows.
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 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 $114.4 million and $91.2 million, respectively, of VAT tax credits, net of reserves, as of December 31, 2021 and 2020.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of two to 40 years for buildings and improvements, three to 15 years for machinery and equipment and three to ten years for furniture and fixtures. Expenditures for maintenance and repairs are primarily charged to expense as incurred.
Property, plant and equipment, net at December 31, 2021 and 2020 consisted of the following (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Land | $ | 141.0 | | | $ | 147.2 | |
Buildings and improvements | 875.9 | | | 899.7 | |
Machinery and equipment | 2,702.3 | | | 2,772.0 | |
Furniture and fixtures | 171.1 | | | 168.0 | |
Gross property, plant and equipment | 3,890.3 | | | 3,986.9 | |
Accumulated depreciation and amortization | (2,425.5) | | | (2,478.4) | |
Property, plant and equipment, net | $ | 1,464.8 | | | $ | 1,508.5 | |
Goodwill, Other Intangible Assets and Long-Lived Assets
The Company tests goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate that fair value of a reporting unit may be below its carrying value. A reporting unit is an operating segment or one level below an operating segment, for example, a component. The Company combines and aggregates two or more components of an operating segment as a single reporting unit if the components have similar economic characteristics. The Company’s reportable segments are not its reporting units.
Goodwill is evaluated annually as of October 1 for impairment using a qualitative assessment or a quantitative one-step assessment. If the Company elects to perform a qualitative assessment and determines the fair value of its reporting units more likely than not exceed the carrying value of their net assets, no further evaluation is necessary. For reporting units where the Company performs a one-step quantitative assessment, the Company compares the fair value of each reporting unit, which is determined based on a combination of a discounted cash flow valuation approach and a market multiple valuation approach, to its respective carrying value of net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value of net assets, the goodwill is not considered impaired. If the carrying value of net assets is higher than the fair value of the reporting unit, an impairment charge is recorded in the amount by which the carrying value exceeds the reporting unit’s fair value in accordance with ASU 2017-04.
The Company reviews its long-lived assets, which include intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation for recoverability is performed at a level where independent cash flows may be attributed to either an asset or asset group. If the Company determines that the carrying amount of an asset or asset group is not recoverable based on the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. The Company also evaluates the amortization periods assigned to its intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell.
The results of our goodwill and long-lived assets impairment analyses conducted as of October 1, 2021 indicated that no indicators of impairment existed and no reduction in the carrying amount of goodwill and long-lived assets was required.
The COVID-19 pandemic has adversely impacted the global economy as a whole since its inception. Based on macroeconomic conditions throughout 2020, the Company assessed its goodwill and other intangible assets for indications of impairment, and as of June 30, 2020, the Company concluded there were indicators of impairment during the three months ended June 30, 2020 related to one of its smaller reporting units, which was a 50%-owned tillage and seeding equipment joint venture. As a result, the entire goodwill balance of this reporting unit was impaired, and during the three months ended June 30,
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2020, the Company recorded a non-cash impairment charge of approximately $20.0 million as “Impairment charges” within the Company’s Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included within “Net (income) loss attributable to noncontrolling interests.” During the three months ended June 30, 2021, the Company sold its 50% interest in the joint venture.
The Company’s goodwill impairment analysis conducted as of October 1, 2020 indicated that no other indicators of impairment existed and no reduction in the carrying amount of goodwill and long-lived assets was required related to the Company’s other reporting units.
The Company’s goodwill impairment analysis conducted as of October 1, 2019, indicated that the carrying value of the net assets of the Company’s grain storage and protein production systems operations in Europe/Middle East was in excess of the fair value of the reporting unit, and therefore, the Company recorded a non-cash impairment charge of approximately $173.6 million within “Impairment charges” in the Company’s Consolidated Statements of Operations.
During the three months ended December 31, 2019, the Company also recorded a non-cash impairment charge of approximately $3.0 million within “Impairment charges” in the Company’s Consolidated Statements of Operations. The impairment charge related to certain long-lived assets associated with the Company’s grain storage and protein production systems operations within North America, due to the discontinuation of a certain brand name and related product, and customers.
The Company’s accumulated goodwill impairment is approximately $354.1 million related to impairment charges the Company recorded during 2019, 2012 and 2006 pertaining to its grain storage and protein production systems business in Europe/Middle East, its Chinese harvesting reporting unit and its former sprayer reporting unit, respectively. The Company’s grain storage and protein production systems Europe/Middle East reporting unit operates within the Europe/Middle East geographical reportable segment. The Chinese harvesting business operates within the Asia/Pacific/Africa geographical reportable segment and the former sprayer reporting unit operates within the North American geographical reportable segment.
Changes in the carrying amount of goodwill during the years ended December 31, 2021, 2020 and 2019 are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | | South America | | Europe/ Middle East | | Asia/ Pacific/Africa | | Consolidated |
Balance as of December 31, 2018 | $ | 611.1 | | | $ | 116.7 | | | $ | 649.6 | | | $ | 118.1 | | | $ | 1,495.5 | |
| | | | | | | | | |
Impairment charge | — | | | — | | | (173.6) | | | — | | | (173.6) | |
Sale of a joint venture | (5.1) | | | — | | | — | | | — | | | (5.1) | |
| | | | | | | | | |
Foreign currency translation | — | | | (4.5) | | | (12.7) | | | (1.3) | | | (18.5) | |
Balance as of December 31, 2019 | 606.0 | | | 112.2 | | | 463.3 | | | 116.8 | | | 1,298.3 | |
Acquisition | 7.2 | | | — | | | — | | | — | | | 7.2 | |
Impairment charge | (20.0) | | | — | | | — | | | — | | | (20.0) | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation | 0.2 | | | (24.7) | | | 38.0 | | | 7.5 | | | 21.0 | |
Balance as of December 31, 2020 | 593.4 | | | 87.5 | | | 501.3 | | | 124.3 | | | 1,306.5 | |
Acquisitions | 16.2 | | | — | | | 0.6 | | | — | | | 16.8 | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation | — | | | (5.8) | | | (32.4) | | | (4.3) | | | (42.5) | |
Balance as of December 31, 2021 | $ | 609.6 | | | $ | 81.7 | | | $ | 469.5 | | | $ | 120.0 | | | $ | 1,280.8 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company amortizes certain acquired identifiable intangible assets primarily on a straight-line basis over their estimated useful lives, which range from five to 50 years. The acquired intangible assets have a weighted average useful life as follows:
| | | | | | | | | | | |
Intangible Assets | | Weighted-Average Useful Life |
Patents and technology | | 11 years |
Customer relationships | | 13 years |
Trademarks and trade names | | 20 years |
Land use rights | | 45 years |
For the years ended December 31, 2021, 2020 and 2019, acquired intangible asset amortization was $60.9 million, $59.5 million and $61.1 million, respectively. The Company estimates amortization of existing intangible assets will be $57.5 million in 2022, $53.8 million in 2023, $52.5 million in 2024, $48.4 million in 2025, and $19.7 million in 2026.
The Company has previously determined that two of its trademarks have an indefinite useful life. The Massey Ferguson trademark has been in existence since 1952 and was formed from the merger of Massey-Harris (established in the 1890’s) and Ferguson (established in the 1930’s). The Massey Ferguson brand is currently sold in approximately 110 countries worldwide, making it one of the most widely sold tractor brands in the world. The Company also has identified the Valtra trademark as an indefinite-lived asset. The Valtra trademark has been in existence since the late 1990’s, but is a derivative of the Valmet trademark which has been in existence since 1951. The Valmet name transitioned to the Valtra name over a period of time in the marketplace. The Valtra brand is currently sold in approximately 60 countries around the world. Both the Massey Ferguson brand and the Valtra brand are primary product lines of the Company’s business, and the Company plans to use these trademarks for an indefinite period of time. The Company plans to continue to make investments in product development to enhance the value of these brands into the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of or that the Company believes would limit the useful lives of the trademarks. The Massey Ferguson and Valtra trademark registrations can be renewed at a nominal cost in the countries in which the Company operates.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Changes in the carrying amount of acquired intangible assets during 2021 and 2020 are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Trademarks and Trade Names | | Customer Relationships | | Patents and Technology | | Land Use Rights | | Total |
Gross carrying amounts: | | | | | | | | | |
Balance as of December 31, 2019 | $ | 199.3 | | | $ | 579.0 | | | $ | 151.1 | | | $ | 8.5 | | | $ | 937.9 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency translation | 6.7 | | | 6.4 | | | 6.9 | | | 0.6 | | | 20.6 | |
Balance as of December 31, 2020 | 206.0 | | | 585.4 | | | 158.0 | | | 9.1 | | | 958.5 | |
Acquisitions | 0.7 | | | 3.2 | | | 6.1 | | | — | | | 10.0 | |
Sale of business | (1.3) | | | (4.4) | | | (17.1) | | | — | | | (22.8) | |
Foreign currency translation | (5.5) | | | (10.8) | | | (6.3) | | | 0.2 | | | (22.4) | |
Balance as of December 31, 2021 | $ | 199.9 | | | $ | 573.4 | | | $ | 140.7 | | | $ | 9.3 | | | $ | 923.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Amortization | Trademarks and Trade Names | | Customer Relationships | | Patents and Technology | | Land Use Rights | | Total |
| | | | | | | | | |
Balance as of December 31, 2019 | $ | 83.3 | | | $ | 347.4 | | | $ | 88.7 | | | $ | 3.1 | | | $ | 522.5 | |
Amortization expense | 10.1 | | | 39.9 | | | 9.4 | | | 0.1 | | | 59.5 | |
| | | | | | | | | |
Foreign currency translation | 2.0 | | | 3.0 | | | 5.1 | | | 0.2 | | | 10.3 | |
Balance as of December 31, 2020 | 95.4 | | | 390.3 | | | 103.2 | | | 3.4 | | | 592.3 | |
Amortization expense | 10.8 | | | 37.4 | | | 12.5 | | | 0.2 | | | 60.9 | |
Sale of business | (1.3) | | | (4.4) | | | (15.2) | | | — | | | (20.9) | |
Foreign currency translation | (1.7) | | | (8.0) | | | (5.0) | | | 0.2 | | | (14.5) | |
Balance as of December 31, 2021 | $ | 103.2 | | | $ | 415.3 | | | $ | 95.5 | | | $ | 3.8 | | | $ | 617.8 | |
| | | | | | | | |
Indefinite-Lived Intangible Assets | | Trademarks and Trade Names |
| | |
Balance as of December 31, 2019 | | $ | 86.3 | |
Foreign currency translation | | 3.1 | |
Balance as of December 31, 2020 | | 89.4 | |
Foreign currency translation | | (2.7) | |
Balance as of December 31, 2021 | | $ | 86.7 | |
During the year ended December 31, 2021, the Company acquired approximately $16.3 million of functional intellectual property licenses associated with various component technology related to the Company’s products. The Company is amortizing these licenses over a period of five years, and recorded amortization expense of approximately $0.2 million during 2021, resulting in a remaining unamortized amount of approximately $16.1 million as of December 31, 2021, reflected within “Other assets” in the Company's Consolidated Balance Sheets.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accrued Expenses
Accrued expenses at December 31, 2021 and 2020 consisted of the following (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Reserve for volume discounts and sales incentives | $ | 602.3 | | | $ | 582.9 | |
Warranty reserves | 492.7 | | | 431.6 | |
Accrued employee compensation and benefits | 322.3 | | | 329.2 | |
Accrued taxes | 282.5 | | | 249.6 | |
Other | 362.4 | | | 323.4 | |
Balance at the end of the year | $ | 2,062.2 | | | $ | 1,916.7 | |
Warranty Reserves
The warranty reserve activity for the years ended December 31, 2021, 2020 and 2019 consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Balance at beginning of the year | $ | 521.8 | | | $ | 392.8 | | | $ | 360.9 | |
Acquisitions | — | | | 0.2 | | | — | |
Accruals for warranties issued during the year | 344.9 | | | 310.2 | | | 234.1 | |
Settlements made (in cash or in kind) during the year | (241.8) | | | (204.3) | | | (198.7) | |
Foreign currency translation | (32.4) | | | 22.9 | | | (3.5) | |
Balance at the end of the year | $ | 592.5 | | | $ | 521.8 | | | $ | 392.8 | |
The Company’s agricultural equipment products generally are under warranty against defects in materials 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 $99.8 million and $90.2 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheets as of December 31, 2021 and 2020, 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.”
Insurance Reserves
Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses primarily related to workers’ compensation and comprehensive general liability, product and vehicle liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred.
Revenue
The Company accounts for revenue recognition pursuant to ASU 2014-09, “Revenue from Contracts with Customers.” Revenue is recognized when the Company satisfies the performance obligation by transferring control over goods or services to a dealer, distributor or other customer. The amount of revenue recognized is measured as the consideration the Company expects to receive in exchange for those goods or services pursuant to a contract with the customer. A contract exists once the Company receives and accepts a purchase order under a dealer sales agreement, or once the Company enters into a contract with an end user. The Company does not recognize revenue in cases where collectability is not probable, and defers the recognition until collection is probable or payment is received.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company generates revenue from the manufacture and distribution of agricultural equipment and replacement parts. Sales of equipment and replacement parts, which represents a majority of the Company’s net sales, are recorded by the Company at the point in time when title and control have been transferred to an independent dealer, distributor or other customer. Title generally passes to the dealer or distributor upon shipment or specified delivery, and the risk of loss upon damage, theft or destruction of the equipment is the responsibility of the dealer, distributor or designated third-party carrier. The Company believes control passes and the performance obligation is satisfied at the point of the stated shipping or delivery term with respect to such sales.
As previously discussed, the amount of consideration the Company receives and the revenue recognized varies with certain sales incentives the Company offers to dealers and distributors. Estimates for sales incentives are made at the time of sale for expected incentive programs using the expected value method. These estimates are revised in the event of subsequent modification to the incentive program. All incentive programs are recorded and presented as a reduction of revenue, due to the fact that the Company does not receive a distinct good or service in exchange for the consideration provided.
Dealers or distributors may not return equipment or replacement parts while its contract with the Company is in force, except for under established promotional and annual replacement parts return programs. At the time of sale, the Company estimates the amount of returns based on the terms of promotional and annual return programs and anticipated returns in the future.
Sales and other related taxes are excluded from the transaction price. Shipping and handling costs associated with freight activities after the customer has obtained control are accounted for as fulfillment costs and are expensed and accrued at the time revenue is recognized in “Cost of goods sold” and “Selling, general and administrative expenses” in the Company’s Consolidated Statements of Operations.
As afforded under the practical expedient in ASU 2014-09, the Company does not adjust the amount of revenue to be recognized under a contract with a dealer, distributor or other customer for the time value of money when the difference between the receipt of payment and the recognition of revenue is less than one year.
Although, substantially all revenue is recognized at a point in time, a relatively insignificant amount of installation revenue associated with the sale of grain storage and protein production systems is recognized on an “over time” basis as discussed below. The Company also recognizes revenue “over time” with respect to extended warranty and maintenance contracts and certain precision technology services. Generally, almost all of the grain storage and protein production systems contracts with customers that relate to “over time” revenue recognition have contract durations of less than 12 months. Extended warranty, maintenance services contracts and certain precision technology services generally have contract durations of more than 12 months.
Grain Storage and Protein Production Systems Installation Revenue. In certain countries, the Company sells grain storage and protein production systems where the Company is responsible for construction and installation, and the sale is contingent upon customer acceptance. Under these conditions, the revenues are recognized over the term of the contract when the Company can objectively determine control has been transferred to the customer in accordance with agreed-upon specifications in the contract. For these contracts, the Company may be entitled to receive an advance payment, which is recognized as a contract liability for the amount in excess of the revenue recognized. The Company uses the input method using costs incurred to date relative to total estimated costs at completion to measure the progress toward satisfaction of the performance obligation. Revenues are recorded proportionally as costs are incurred. Costs include labor, material and overhead. The estimation of the progress toward completion is subject to various assumptions. As part of the estimation process, the Company reviews the length of time to complete the performance obligation, the cost of materials and labor productivity. If a significant change in one of the assumptions occurs, then the Company will recognize an adjustment under the cumulative catch-up method and the impact of the adjustment on the revenue recorded to date is recognized in the period the adjustment is identified.
Extended Warranty Contracts. The Company sells separately priced extended warranty contracts and maintenance contracts, which extends coverage beyond the base warranty period, or covers maintenance over a specified period. Revenue is recognized for the extended warranty contract on a straight-line basis, which the Company believes approximates the costs expected to be incurred in satisfying the obligations, over the extended warranty period. The extended warranty period ranges from one to five years. Payment is received or revenue is deferred for free contracts at the inception of the extended warranty contract or maintenance contract, which is recognized as a contract liability for the amount in excess of the revenue recognized. The revenue associated with the sale of extended warranty contracts is not significant.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Precision Technology Services Revenue. The Company sells a combination of precision technology products and services. When the bundled package of technology products and services is sold, the portion of the consideration received related to the services component is recognized over time as the Company satisfies the future performance obligation. Revenue is recognized for the hardware component when control is transferred to the dealer or distributor. Payment is received or revenue is deferred for free subscriptions at inception of the precision technology subscription period, which is recognized as a contract liability for the amount in excess of the revenue recognized. The revenue associated with the sale of precision technology services is not significant. The costs of the software directly associated with the installation and functionality of precision technology products and services, including amortization and hosting costs, are reflected within "Cost of goods sold" and "Engineering expenses" within the Company's Consolidated Statements of Operations.
See Note 16 for additional information regarding the Company’s sources of revenue and associated contract liabilities and performance obligations.
Stock Incentive Plans
Stock compensation expense was recorded as follows (in millions). Refer to Note 10 for additional information regarding the Company’s stock incentive plans during 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Cost of goods sold | $ | 1.0 | | | $ | 1.1 | | | $ | 1.7 | |
Selling, general and administrative expenses | 26.6 | | | 36.8 | | | 40.0 | |
Total stock compensation expense | $ | 27.6 | | | $ | 37.9 | | | $ | 41.7 | |
Research and Development Expenses
Research and development expenses are expensed as incurred and are included in “Engineering expenses” in the Company’s Consolidated Statements of Operations.
Advertising Costs
The Company expenses all advertising costs as incurred. Cooperative advertising costs normally are expensed at the time the revenue is earned. Advertising expenses for the years ended December 31, 2021, 2020 and 2019 totaled approximately $54.2 million, $45.3 million and $42.3 million, respectively.
Shipping and Handling Expenses
All shipping and handling fees charged to customers are included as a component of net sales, and are associated with freight activities after the customer has obtained control. Shipping and handling costs are accounted for as fulfillment costs and are expensed and accrued at the time revenue is recognized within “Cost of goods sold,” with the exception of certain handling costs included in “Selling, general and administrative expenses” in the amount of $43.6 million, $38.0 million and $38.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Interest Expense, Net
Interest expense, net for the years ended December 31, 2021, 2020 and 2019 consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Interest expense | $ | 25.4 | | | $ | 24.9 | | | $ | 28.8 | |
Interest income | (18.7) | | | (9.9) | | | (8.9) | |
| $ | 6.7 | | | $ | 15.0 | | | $ | 19.9 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 6 for additional information regarding the Company’s income taxes.
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 stock-settled stock appreciation rights (“SSARs”) and the vesting of performance share awards and restricted stock units using the treasury stock method when the effects of such assumptions are dilutive.
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 during the years ended December 31, 2021, 2020 and 2019 is as follows (in millions, except per share data):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Basic net income per share: | | | | | |
Net income attributable to AGCO Corporation and subsidiaries | $ | 897.0 | | | $ | 427.1 | | | $ | 125.2 | |
Weighted average number of common shares outstanding | 75.2 | | | 75.0 | | | 76.2 | |
Basic net income per share attributable to AGCO Corporation and subsidiaries | $ | 11.93 | | | $ | 5.69 | | | $ | 1.64 | |
Diluted net income per share: | | | | | |
Net income attributable to AGCO Corporation and subsidiaries | $ | 897.0 | | | $ | 427.1 | | | $ | 125.2 | |
Weighted average number of common shares outstanding | 75.2 | | | 75.0 | | | 76.2 | |
Dilutive SSARs, performance share awards and restricted stock units | 0.5 | | | 0.6 | | | 0.8 | |
Weighted average number of common shares and common share equivalents outstanding for purposes of computing diluted net income per share | 75.7 | | | 75.6 | | | 77.0 | |
Diluted net income per share attributable to AGCO Corporation and subsidiaries | $ | 11.85 | | | $ | 5.65 | | | $ | 1.63 | |
There were no SSARs outstanding for the year ended December 31, 2021 that had an antidilutive impact. SSARs to purchase approximately 0.3 million shares and 0.2 million shares of the Company’s common stock for the years ended December 31, 2020 and 2019, respectively, were outstanding but not included in the calculation of weighted average common and common equivalent shares outstanding because they had an antidilutive impact.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Comprehensive Income (Loss)
The Company reports comprehensive income (loss), defined as the total of net income (loss) and all other non-owner changes in equity, and the components thereof in its Consolidated Statements of Stockholders’ Equity and Consolidated Statements of Comprehensive Income. The components of other comprehensive income (loss) and the related tax effects for the years ended December 31, 2021, 2020 and 2019 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| AGCO Corporation and Subsidiaries | | Noncontrolling Interests |
| 2021 | | 2021 |
| Before-tax Amount | | Income Taxes | | After-tax Amount | | After-tax Amount |
Defined benefit pension plans | $ | 110.1 | | | $ | (27.2) | | | $ | 82.9 | | | $ | — | |
Net gain on derivatives | 2.5 | | | (0.4) | | | 2.1 | | | — | |
Foreign currency translation adjustments | (45.1) | | | — | | | (45.1) | | | (0.4) | |
Total components of other comprehensive income | $ | 67.5 | | | $ | (27.6) | | | $ | 39.9 | | | $ | (0.4) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| AGCO Corporation and Subsidiaries | | Noncontrolling Interests |
| 2020 | | 2020 |
| Before-tax Amount | | Income Taxes | | After-tax Amount | | After-tax Amount |
Defined benefit pension plans | $ | (19.3) | | | $ | 2.4 | | | $ | (16.9) | | | $ | — | |
Net loss on derivatives | (1.5) | | | 0.3 | | | (1.2) | | | — | |
Foreign currency translation adjustments | (197.5) | | | — | | | (197.5) | | | (4.3) | |
Total components of other comprehensive loss | $ | (218.3) | | | $ | 2.7 | | | $ | (215.6) | | | $ | (4.3) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| AGCO Corporation and Subsidiaries | | Noncontrolling Interests |
| 2019 | | 2019 |
| Before-tax Amount | | Income Taxes | | After-tax Amount | | After-tax Amount |
Defined benefit pension plans | $ | (13.4) | | | $ | (0.6) | | | $ | (14.0) | | | $ | — | |
Net loss on derivatives | (3.1) | | | 0.4 | | | (2.7) | | | — | |
Foreign currency translation adjustments | (23.1) | | | — | | | (23.1) | | | 2.5 | |
Total components of other comprehensive loss | $ | (39.6) | | | $ | (0.2) | | | $ | (39.8) | | | $ | 2.5 | |
Derivatives
The Company uses foreign currency contracts to hedge the foreign currency exposure of certain receivables and payables. The contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. These contracts are classified as non-designated derivative instruments. The Company also enters into foreign currency contracts designated as cash flow hedges of expected sales. The Company’s foreign currency contracts mitigate risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged. The notional amounts of the foreign currency contracts do not represent amounts exchanged by the parties and, therefore, are not a measure of the Company’s risk. The amounts exchanged are calculated on the basis of the notional amounts and other terms of the contracts. The credit and market risks under these contracts are not considered to be significant.
The Company’s interest expense is, in part, sensitive to the general level of interest rates, and the Company manages its exposure to interest rate risk through the mix of floating rate and fixed rate debt. From time to time, the Company enters into interest rate swap agreements in order to manage the Company’s exposure to interest rate fluctuations.
The Company uses non-derivative and, periodically, derivative instruments to hedge a portion of the Company’s net investment in foreign operations against adverse movements in exchange rates.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s gross profit is sensitive to the cost of steel and other raw materials. From time to time, the Company enters into derivative instruments to hedge a portion of its commodity purchases against adverse movements in commodity prices.
The Company’s hedging policy prohibits it from entering into any foreign currency contracts for speculative trading purposes. See Note 11 for additional information regarding the Company’s derivative instruments and hedging activities.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” The amendments in this update provide optional expedients and exceptions for applying Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. In January 2021, the FASB issued ASU 2021-01, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The amendments in these updates are effective for all entities as of March 12, 2020 through December 31, 2022. The Company has adopted this guidance and the adoption did not have a material impact on the Company's results of operations, financial condition and cash flows.
The Company adopted the following pronouncements, none of which had a material impact to the Company’s results of operations, financial condition and cash flows.
•ASU 2019-12 – “Simplifying the Accounting for Income Taxes” was adopted as of January 1, 2021.
•ASU 2020-01 – “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)” was adopted as of January 1, 2021.
•ASU 2020-08 – “Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs” was adopted as of January 1, 2021.
New Accounting Pronouncements to be Adopted
In June 2016, the FASB issued ASU 2016-13, which requires measurement and recognition of expected versus incurred credit losses for financial assets held. 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 who 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, will likely 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 will likely impact the Company’s “Investment in affiliates” and “Equity in net earnings of affiliates.” The Company’s finance joint ventures are currently 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 results of operations, financial condition and cash flows.
Additionally, the Company will adopt the following pronouncement, 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”
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Acquisitions
On January 01, 2022 the Company acquired Appareo Systems, LLC (“Appareo”) for approximately $61.4 million, net of cash acquired of approximately $0.5 million, as well as indebtedness payable to the Company's former 50% joint venture with Appareo of approximately $0.9 million. Appareo is headquartered in Fargo, North Dakota and specializes in the research, development, design, and manufacture of tangible technology focused on communication, monitoring, sensing, tracking and controlling devices and systems used in the agricultural and aviation industries as well as other off-road businesses. 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 December 01, 2021, the Company acquired Creatives Sites Media, Inc. (“CSM”) for approximately $5.7 million. CSM is headquartered in Bloomington, Illinois and creates and designs customized mobile-enabled technology applications and websites. The acquired net assets were insignificant. The Company recorded approximately $5.7 million of goodwill associated with the acquisition. The associated goodwill has been included in the Company’s North American geographical reportable segment.
On September 10, 2021, the Company acquired Farm Robotics and Automation S.L. (“Faromatics”) for approximately €4.6 million (or approximately $5.5 million) net of approximately €0.1 million (or approximately $0.1 million) of cash and €0.8 million (or approximately $0.9 million) of escrowed cash which could be payable by the Company within 18 months of the acquisition date. Faromatics is headquartered in Barcelona, Spain, and manufactures and sells ChickenBoy®, the world's first ceiling-suspended robot that monitors broiler chickens and helps farmers increase animal welfare and farm productivity. The Company recorded approximately €4.4 million (or approximately $5.2 million) of technology and approximately €1.8 million (or approximately $2.2 million) of goodwill associated with the acquisition. The associated goodwill has been included in the Company’s North American and Europe/Middle East geographical reportable segments.
On August 13, 2021, the Company acquired Headsight, LLC (“Headsight”) for approximately $16.8 million. Headsight is headquartered in Bremen, Indiana and manufactures header height sensors used in corn and grain harvesting operations. The Company recorded approximately $4.8 million of customer relationship, technology and trademark identifiable intangible assets and approximately $8.9 million of goodwill associated with the acquisition. The associated goodwill has been included in the Company’s North American geographical reportable segment.
The acquired identifiable intangible assets of Headsight and Faromatics as of the date of their respective acquisitions during 2021 are summarized in the following table (in millions):
| | | | | | | | | | | | | | |
Intangible Asset | | Amount | | Weighted-Average Useful Life |
Customer relationships | | $ | 3.2 | | | 7 years |
Technology | | 6.1 | | 10 - 15 years |
Trademarks | | 0.7 | | 7 years |
| | $ | 10.0 | | | |
The Company allocated the purchase price of the assets acquired and liabilities assumed of the CSM, Faromatics and Headsight acquisitions based on estimates of their fair values of their respective acquisition dates. The acquired net assets related to these acquisitions generally consisted of accounts receivable, inventories, lease right-of-use assets and liabilities, property, plant and equipment, accounts payable and accrued expenses. Proforma financial information related to these acquisitions was not material to the Company's results of operations.
On September 10, 2020, the Company acquired 151 Research, Inc. for approximately $2.8 million. 151 Research develops intelligent security, remote monitoring and management and enhanced imaging solutions for grain storage operations. The acquired net assets were insignificant. The Company recorded goodwill of approximately $7.2 million associated with the acquisition. In addition, the Company agreed to further contingent consideration related to the acquisition and recorded a liability of approximately $4.4 million to reflect estimated achievement of agreed-upon targets as of the acquisition date. During 2021, the Company paid approximately $0.5 million of contingent consideration and updated the estimated achievement of related agreed-upon targets, resulting in a reversal of approximately $3.3 million of the liability. The remaining $0.8 million of contingent consideration as of December 31, 2021, included approximately $0.2 million of positive foreign currency translation impacts.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Restructuring Expenses
The Company has announced and initiated actions over the course of several years to rationalize employee headcount at various manufacturing facilities and various administrative offices located in Europe, South America, Africa, China and the United States, as well as the rationalization of its grain storage and protein production system operations. These rationalizations were taken to reduce costs in response to fluctuating global market demand. During 2021, the Company recorded severance and related costs associated with these rationalizations in connection with the termination of approximately 150 employees.
The components of the restructuring expenses are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee Severance | | Facility Closure Costs | | Write-down of Property, Plant and Equipment | | Other Related Closure Costs | | Loss on Sale of Joint Venture | | Total |
Balance as of December 31, 2018 | | $ | 7.1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 7.1 | |
2019 provision | | 5.6 | | | 0.5 | | | 1.5 | | | — | | | 2.1 | | | 9.7 | |
Less: Non-cash expense | | — | | | — | | | (1.5) | | | — | | | (2.1) | | | (3.6) | |
Cash expense | | 5.6 | | | 0.5 | | | — | | | — | | | — | | | 6.1 | |
2019 provision reversal | | (0.7) | | | — | | | — | | | — | | | — | | | (0.7) | |
2019 cash activity | | (6.8) | | | (0.5) | | | — | | | — | | | — | | | (7.3) | |
Foreign currency translation | | (0.4) | | | — | | | — | | | — | | | — | | | (0.4) | |
Balance as of December 31, 2019 | | 4.8 | | | — | | | — | | | — | | | — | | | 4.8 | |
2020 provision | | 11.3 | | | 4.5 | | | 2.5 | | | 1.8 | | | — | | | 20.1 | |
Less: Non-cash expense | | — | | | — | | | (2.5) | | | — | | | — | | | (2.5) | |
Cash expense | | 11.3 | | | 4.5 | | | — | | | 1.8 | | | — | | | 17.6 | |
2020 provision reversal | | (0.4) | | | — | | | — | | | — | | | — | | | (0.4) | |
2020 cash activity | | (4.5) | | | (0.6) | | | — | | | — | | | — | | | (5.1) | |
Foreign currency translation | | (0.1) | | | — | | | — | | | — | | | — | | | (0.1) | |
Balance as of December 31, 2020 | | 11.1 | | | 3.9 | | | — | | | 1.8 | | | — | | | 16.8 | |
2021 provision | | 18.4 | | | — | | | 0.2 | | | 1.5 | | | — | | | 20.1 | |
Less: Non-cash expense | | — | | | — | | | (0.2) | | | — | | | — | | | (0.2) | |
Cash expense | | 18.4 | | | — | | | — | | | 1.5 | | | — | | | 19.9 | |
2021 provision reversal | | (2.2) | | | — | | | — | | | (0.1) | | | (2.5) | | | (4.8) | |
2021 cash activity | | (12.3) | | | (3.9) | | | — | | | (2.9) | | | 2.5 | | | (16.6) | |
Foreign currency translation | | (0.5) | | | — | | | — | | | (0.1) | | | — | | | (0.6) | |
Balance as of December 31, 2021 | | $ | 14.5 | | | $ | — | | | $ | — | | | $ | 0.2 | | | $ | — | | | $ | 14.7 | |
During the three months ended December 31, 2019, the Company exited and sold its 50% interest in its USC, LLC joint venture to its joint venture partner for approximately $5.1 million. The operations of the joint venture were part of the Company's grain storage and production system operations, and the decision to sell the joint venture was as a result of the overall rationalization of the business. The Company recorded a loss of approximately $2.1 million associated with the sale, which was reflected within “Restructuring expenses” in the Company’s Consolidated Statements of Operations. As a result of the final payments received from the former joint venture partner related to the sale during 2021 the Company recorded a gain of approximately $2.5 million, also reflected within “Restructuring expenses” in the Company’s Condensed Consolidated Statements of Operations.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. 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 December 31, 2021 and 2020, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.3 billion and $1.5 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 receivables 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, and 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 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.
In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world. As of December 31, 2021 and 2020, the cash received from these arrangements was approximately $215.4 million and $199.9 million, respectively.
Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Consolidated Statements of Operations, were approximately $24.5 million, $24.1 million and $42.4 million during 2021, 2020 and 2019, 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 December 31, 2021 and 2020, these finance joint ventures had approximately $82.1 million and $85.2 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.
5. Investments in Affiliates
Investments in affiliates as of December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Finance joint ventures | $ | 359.2 | | | $ | 395.3 | |
Manufacturing joint ventures | 31.0 | | | 31.8 | |
Other affiliates | 23.3 | | | 15.6 | |
| $ | 413.5 | | | $ | 442.7 | |
The Company's finance joint ventures provide retail financing and wholesale financing to its dealers. The majority of the assets of the Company’s finance joint ventures represent finance receivables. The majority of the liabilities represent notes payable and accrued interest. Under the various joint venture agreements, Rabobank or its affiliates provide financing to the joint venture companies. AGCO has a 49% interest in the Company’s finance joint ventures (Note 14).
The Company’s manufacturing joint ventures consist of Groupement International De Mecanique Agricole SA (“GIMA”) (a joint venture with a third-party manufacturer to purchase, design and manufacture components for agricultural equipment in France) and a joint venture with a third-party manufacturer to manufacture protein production equipment in China. The other joint ventures represent investments in farm equipment manufacturers, an electronic and software system manufacturer, precision agriculture technology providers, distributors and licensees.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s equity in net earnings of affiliates for the years ended December 31, 2021, 2020 and 2019 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Finance joint ventures | $ | 64.4 | | | $ | 45.0 | | | $ | 41.5 | |
Manufacturing and other joint ventures | 1.2 | | | 0.5 | | | 1.0 | |
| $ | 65.6 | | | $ | 45.5 | | | $ | 42.5 | |
Summarized combined financial information of the Company’s finance joint ventures as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 were as follows (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
Total assets | $ | 7,863.6 | | | $ | 8,033.4 | |
Total liabilities | 7,130.5 | | | 7,226.7 | |
Partners’ equity | 733.1 | | | 806.7 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Revenues | $ | 411.1 | | | $ | 402.2 | | | $ | 417.6 | |
Costs | 228.1 | | | 274.0 | | | 299.9 | |
Income before income taxes | $ | 183.0 | | | $ | 128.2 | | | $ | 117.7 | |
At December 31, 2021 and 2020, the Company’s receivables from affiliates were approximately $55.1 million and $47.5 million, respectively. The receivables from affiliates are reflected within “Accounts and notes receivable, net” within the Company’s Consolidated Balance Sheets.
The portion of the Company’s retained earnings balance that represents undistributed retained earnings of equity method investees was approximately $365.6 million and $375.5 million as of December 31, 2021 and 2020, respectively. During 2021, the Company received dividends of approximately $84.4 million from certain finance joint ventures. Approximately $22.7 million of these dividends were a return of investment in excess of earnings related to a certain finance joint venture.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Income Taxes
The sources of income before income taxes and equity in net earnings of affiliates were as follows for the years ended December 31, 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
United States | $ | 46.8 | | | $ | (73.4) | | | $ | (53.1) | |
Foreign | 897.5 | | | 635.4 | | | 314.2 | |
Income before income taxes and equity in net earnings of affiliates | $ | 944.3 | | | $ | 562.0 | | | $ | 261.1 | |
The provision for income taxes by location of the taxing jurisdiction for the years ended December 31, 2021, 2020 and 2019 consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Current: | | | | | |
United States | $ | 3.4 | | | $ | 4.1 | | | $ | (4.4) | |
Foreign | 222.9 | | | 180.2 | | | 170.1 | |
| 226.3 | | | 184.3 | | | 165.7 | |
Deferred: | | | | | |
United States | (70.0) | | | 1.3 | | | 1.3 | |
Foreign | (47.9) | | | 2.1 | | | 13.8 | |
| (117.9) | | | 3.4 | | | 15.1 | |
| $ | 108.4 | | | $ | 187.7 | | | $ | 180.8 | |
The Company’s income tax provision as of December 31, 2021 includes the benefit of the reversals of approximately $67.8 million and $55.6 million related to valuation allowances previously established against the Company’s net deferred tax assets in the United States and Brazil, respectively. The Company recorded the reversal of a portion of the United States valuation allowance during the three months ended June 30, 2021, and the reversal of a portion of its Brazilian valuation allowance during the three months ended December 31, 2021. Improvements in income in the United States and Brazil during 2020 and 2021, along with updated future projected income levels, supported the reversal of both valuation allowances during those respective periods in 2021. During the three months ended September 30, 2019, the Company recorded a non-cash deferred income tax charge of approximately $53.7 million to establish a valuation allowance against its Brazilian net deferred income tax assets.
Swiss tax reform was enacted during 2019 and eliminated certain preferential tax items as well as implemented new tax rates at both the federal and cantonal levels. During the three months ended December 31, 2019, the Company recognized a one-time income tax gain of approximately $21.8 million associated with the changing of Swiss federal and cantonal tax rates as well as recognition of a deferred tax asset associated with the estimated value of a tax basis step-up of the Company’s Swiss subsidiary’s assets.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of income taxes computed at the United States federal statutory income tax rate (21% for 2021, 2020, and 2019) to the provision for income taxes reflected in the Company’s Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Provision for income taxes at United States federal statutory rate | $ | 198.3 | | | $ | 118.0 | | | $ | 54.8 | |
State and local income taxes, net of federal income tax effects | 2.2 | | | (3.5) | | | (2.5) | |
Taxes on foreign income which differ from the United States statutory rate | 16.2 | | | 13.9 | | | 6.7 | |
Tax effect of permanent differences | (6.4) | | | 13.4 | | | 63.9 | |
Change in valuation allowance | (130.8) | | | 16.3 | | | 84.6 | |
Change in tax contingency reserves | 36.6 | | | 37.2 | | | 3.2 | |
Research and development tax credits | (7.4) | | | (9.0) | | | (7.1) | |
Impacts related to changes in tax laws | — | | | — | | | (21.8) | |
Other | (0.3) | | | 1.4 | | | (1.0) | |
| $ | 108.4 | | | $ | 187.7 | | | $ | 180.8 | |
The significant components of the deferred tax assets and liabilities at December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Deferred Tax Assets: | | | |
Net operating loss carryforwards | $ | 69.5 | | | $ | 62.9 | |
Sales incentive discounts | 40.1 | | | 50.8 | |
Inventory valuation reserves | 33.6 | | | 35.9 | |
Pensions and postretirement health care benefits | 18.5 | | | 55.8 | |
Warranty and other reserves | 102.9 | | | 126.3 | |
Research and development tax credits | 3.8 | | | 12.9 | |
Foreign tax credits | 9.4 | | | 5.9 | |
Other | 14.0 | | | 10.4 | |
Total gross deferred tax assets | 291.8 | | | 360.9 | |
Valuation allowance | (47.4) | | | (181.0) | |
Total deferred tax assets | 244.4 | | | 179.9 | |
Deferred Tax Liabilities: | | | |
Tax over book depreciation and amortization | 159.3 | | | 167.5 | |
Investment in affiliates | 24.4 | | | 33.1 | |
Other | 8.3 | | | 14.1 | |
Total deferred tax liabilities | 192.0 | | | 214.7 | |
Net deferred tax assets (liabilities) | $ | 52.4 | | | $ | (34.8) | |
Amounts recognized in Consolidated Balance Sheets: | | | |
| | | |
Deferred tax assets - noncurrent | $ | 169.3 | | | $ | 77.6 | |
| | | |
Deferred tax liabilities - noncurrent | (116.9) | | | (112.4) | |
| $ | 52.4 | | | $ | (34.8) | |
As reflected in the preceding table, the Company recorded a net deferred tax asset of $52.4 million as of December 31, 2021 and a net deferred tax liability of $34.8 million as of December 31, 2020, and had a valuation allowance against its gross deferred tax assets of approximately $47.4 million and $181.0 million as of December 31, 2021 and 2020, respectively.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company maintains a valuation allowance to reserve a portion of its net deferred tax assets in the United States and certain foreign jurisdictions. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets may not be realized. The Company assessed the likelihood that its deferred tax assets would be recovered from estimated future taxable income and the current economic climate, as well as available tax planning strategies, and determined that all adjustments to the valuation allowance were appropriate. The Company believes it is more likely than not that it will realize its remaining net deferred tax assets, net of the valuation allowance, in future years.
The Company had net operating loss carryforwards of $235.6 million as of December 31, 2021, with expiration dates as follows: 2022 - $14.2 million; 2023 - $23.9 million; 2024 and thereafter - $51.0 million and unlimited - $146.5 million. The net operating loss carryforwards of $235.6 million are entirely in tax jurisdictions outside of the United States. The amount of the Company's U.S. state net operating loss carryforwards is not material.
The Company paid income taxes of $247.3 million, $181.4 million and $144.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company recognizes income tax benefits from uncertain tax positions only when there is a more than 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities based on the technical merits of the positions. At December 31, 2021 and 2020, the Company had $246.4 million and $227.9 million, respectively, of unrecognized income tax benefits, all of which would affect the Company’s effective tax rate if recognized. At December 31, 2021 and 2020, the Company had approximately $40.1 million and $57.1 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. The Company accrued approximately $4.8 million and $7.1 million of interest and penalties related to unrecognized tax benefits in its provision for income taxes during 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had accrued interest and penalties related to unrecognized tax benefits of $32.7 million and $39.4 million, respectively.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits as of and during the years ended December 31, 2021 and 2020 is as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Gross unrecognized income tax benefits at the beginning of the year | $ | 227.9 | | | $ | 210.7 | |
Additions for tax positions of the current year | 43.0 | | | 32.0 | |
Additions for tax positions of prior years | 8.4 | | | 9.4 | |
| | | |
Reductions for tax positions of prior years for: | | | |
Changes in judgments | 3.2 | | | 9.1 | |
Settlements during the year | (19.1) | | | (52.9) | |
Lapses of applicable statute of limitations | (0.6) | | | (0.2) | |
Foreign currency translation and other | (16.4) | | | 19.8 | |
Gross unrecognized income tax benefits at the end of the year | $ | 246.4 | | | $ | 227.9 | |
The reconciliation of gross unrecognized income tax benefits above for 2021 and 2020 excludes certain indirect favorable effects that relate to other tax jurisdictions of approximately $70.2 million and $64.1 million, respectively. The change in certain indirect favorable effects between 2021 and 2020 includes approximately $9.9 million related to additions and reductions for tax positions of current and prior years, changes in judgments and lapses of statutes of limitations. In addition, the gross unrecognized income tax benefits as of December 31, 2021 exclude certain deposits made in a foreign jurisdiction of approximately $6.7 million associated with an ongoing audit.
The Company and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. The Company and its subsidiaries are routinely examined by tax authorities in these jurisdictions. As of December 31, 2021, a number of income tax examinations in foreign jurisdictions, as well as the United States, were ongoing. It is possible that certain of these ongoing examinations may be resolved within 12 months. Due to the potential for resolution of federal, state and foreign examinations, and the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized income tax benefits balance may materially change within the next 12 months. In certain foreign jurisdictions, there are either statutory expirations or the Company’s settlement expectations such that approximately
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
$40.1 million could be concluded within the next 12 months. Although there are ongoing examinations in various federal and state jurisdictions, the 2017 through 2021 tax years generally remain subject to examination in the United States by applicable authorities. In the Company’s significant foreign jurisdictions, primarily the United Kingdom, France, Germany, Switzerland, Finland and Brazil, the 2016 through 2021 tax years generally remain subject to examination by their respective tax authorities. In Brazil, the Company is contesting disallowed deductions related to amortization of certain goodwill amounts (see Note 12).
7. Indebtedness
Long-term debt consisted of the following at December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Senior term loan due 2022 | $ | — | | | $ | 184.0 | |
Credit facility, expires 2023 | — | | | 277.9 | |
1.002% Senior term loan due 2025 | 283.7 | | | 306.7 | |
Senior term loans due between 2023 and 2028(1) | 445.9 | | | 806.0 | |
| | | |
| | | |
| | | |
| | | |
0.800% Senior Notes Due 2028 | 680.8 | | | — | |
Other long-term debt | 7.7 | | | 10.5 | |
Debt issuance costs | (4.8) | | | (2.5) | |
| 1,413.3 | | | 1,582.6 | |
| | | |
Less: Senior term loans due 2021, net of debt issuance costs | — | | | (323.6) | |
Current portion of other long-term debt | (2.1) | | | (2.3) | |
Total long-term indebtedness, less current portion | $ | 1,411.2 | | | $ | 1,256.7 | |
____________________________________
(1) Maturity dates are reflected as of December 31, 2021.
At December 31, 2021, the aggregate scheduled maturities of long-term debt, excluding the current portion of long-term debt, are as follows (in millions):
| | | | | |
2023 | $ | 281.7 | |
2024 | 2.3 | |
2025 | 355.1 | |
2026 | 59.7 | |
Thereafter | 712.4 | |
| $ | 1,411.2 | |
Cash payments for interest were approximately $23.8 million, $23.6 million and $26.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Current Indebtedness
0.800% Senior Notes Due 2028
On October 6, 2021, the Company issued €600.0 million (or approximately $680.8 million as of December 31, 2021) 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 senior 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.
During October 2021, the Company used the proceeds received from the senior notes to repay its €150.0 million (or approximately $173.4 million as of October 8, 2021) senior term loan due 2022, $370.0 million related to its multi-currency revolving credit facility, and two of its 2016 senior term loans due October 2021 with an aggregate amount outstanding of
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
€192.0 million (or approximately $223.8 million as of October 19, 2021). In August 2021, prior to the issuance of the senior notes, the Company repaid two of its 2018 senior term loans due August 2021 with an aggregate amount of €72.0 million (or approximately $85.5 million as of August 1, 2021).
Credit Facility
In October 2018, the Company entered into a multi-currency revolving credit facility of $800.0 million. The maturity date of the credit facility is 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. 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. As mentioned previously, on October 15, 2021, the Company repaid $370.0 million of its multicurrency revolving credit facility as a result of the issuance of our 0.800% senior notes due 2028. As of December 31, 2021 and 2020, 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 $800.0 million multi-currency revolving credit facility to include incremental term loans (“2020 term loans”) that allow the Company to borrow an aggregate principal amount of €235.0 million and $267.5 million, respectively (or an aggregate amount of approximately $534.1 million as of December 31, 2021). 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 is April 8, 2022. Interest accrues on amounts outstanding under the 2020 term loans, at the Company’s option, at either (1) LIBOR plus a margin based on the Company’s credit rating ranging from 1.125% to 2.125% until April 8, 2021 and ranging from 1.375% to 2.375% thereafter, 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 based on the Company’s credit rating ranging from 0.125% to 1.375% until April 8, 2021 and ranging from 0.375% to 1.375% thereafter. The 2020 term loans contain 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. On April 15, 2020, the Company borrowed €117.5 million and $133.8 million of 2020 term loans. The Company simultaneously repaid €100.0 million (or approximately $108.7 million) of its revolving credit facility from the borrowings received. There were no other borrowings on the 2020 term loans subsequent to 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 amount of approximately $276.0 million as of February 16, 2021). As of December 31, 2021, the Company had the ability to borrow approximately €117.5 million and $133.7 million of 2020 term loans (or an aggregate amount of approximately $267.0 million).
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 for loans denominated in other currencies after December 31, 2021. The rates reflected in the Company’s credit facility were designed to accommodate the discontinuation of LIBOR-based rates, and a shift to the “Secured Overnight Financing Rate” (“SOFR”) or a base rate, and, as such, the Company does not believe that moving to the other rates will have a materially adverse effect on the Company’s results of operations. 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 $283.7 million as of December 31, 2021) 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
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
a group of another seven related term loan agreements. Of the 2016 term loans, an aggregate amount of €56.0 million (or approximately $61.1 million) was repaid upon maturity of two term loan agreements in October 2019. Additionally, as mentioned previously, the Company repaid €192.0 million (or approximately $223.8 million as of October 19, 2021) upon maturity of two of its 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, the Company had indebtedness of €393.0 million (or approximately $445.9 million as of December 31, 2021) through a group of eight remaining related term loan agreements. As of February 1, 2022, as a result of a further repayment discussed previously, the Company had indebtedness of €320.5 million (or approximately $361.0 million) 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 December 31, 2021, 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 0.90% to 1.25% and maturity dates between August 2023 and August 2025. The term loans contain covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends, and are subject to acceleration in the event of default.
Former Indebtedness
Senior Term Loan Due 2022
In October 2018, the Company entered in a term loan agreement with Rabobank in the amount of €150.0 million. The Company was permitted to prepay the term loan before its maturity date of October 28, 2022. Interest was payable on the term loan quarterly in arrears at an annual rate, equal to the EURIBOR plus a margin ranging from 0.875% to 1.875% based on the Company’s credit rating. The Company had to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio. As mentioned previously, during October 2021, the Company repaid its senior term loan of €150.0 million (or approximately $173.4 million as of October 8, 2021) with the proceeds from its 0.800% senior notes due 2028.
Short-Term Borrowings
As of December 31, 2021 and 2020, the Company had short-term borrowings due within one year of approximately $90.8 million and $33.8 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 December 31, 2021 and 2020, outstanding letters of credit totaled $14.6 million and $14.4 million, respectively.
8. Employee Benefit Plans
The Company sponsors defined benefit pension plans covering certain employees, principally in the United Kingdom, the United States, Germany, Switzerland, Finland, France, Norway and Argentina. The Company also provides certain postretirement health care and life insurance benefits for certain employees, principally in the United States and Brazil.
The Company also maintains an Executive Nonqualified Pension Plan (“ENPP”) that provides certain senior executives with retirement income for a period of 15 years or up to a lifetime annuity, if certain requirements are met. Benefits under the ENPP vest if the participant has attained age 50 and has at least ten years of service (including five years as a participant in the ENPP), but are not payable until the participant reaches age 65. The lifetime annuity benefit generally is available only to vested participants who retire on or after reaching age 65 and was eliminated during 2021 for participants reaching age 65 subsequent to December 31, 2022. The ENPP is an unfunded, nonqualified defined benefit pension plan.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net annual pension costs for the years ended December 31, 2021, 2020 and 2019 for the Company’s defined benefit pension plans and ENPP are set forth below (in millions):
| | | | | | | | | | | | | | | | | | | | |
Pension benefits | | 2021 | | 2020 | | 2019 |
Service cost | | $ | 15.0 | | | $ | 16.2 | | | $ | 15.5 | |
Interest cost | | 12.6 | | | 16.5 | | | 20.7 | |
Expected return on plan assets | | (31.3) | | | (28.4) | | | (28.1) | |
Amortization of net actuarial losses | | 16.5 | | | 15.5 | | | 14.3 | |
Amortization of prior service cost | | 0.7 | | | 2.1 | | | 1.6 | |
Net loss recognized due to settlement | | 0.1 | | | 0.2 | | | 0.5 | |
Curtailment gain (1) | | (1.2) | | | — | | | — | |
| | | | | | |
Net annual pension cost | | $ | 12.4 | | | $ | 22.1 | | | $ | 24.5 | |
___________________________________
(1) During 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 lifetime annuity feature for participants reaching age 65 subsequent to December 31, 2022. This amendment resulted in a curtailment gain as well as a net prior service credit.
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 Consolidated Statements of Operations.
The weighted average assumptions used to determine the net annual pension costs for the Company’s defined benefit pension plans and ENPP for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
All plans: | | | | | |
Weighted average discount rate | 1.5 | % | | 2.0 | % | | 2.8 | % |
Weighted average expected long-term rate of return on plan assets | 3.9 | % | | 4.1 | % | | 4.6 | % |
Rate of increase in future compensation | 1.5%-5.0% | | 1.8%-5.0% | | 1.8%-5.0% |
U.S.-based plans: | | | | | |
Weighted average discount rate | 2.75 | % | | 3.45 | % | | 4.35 | % |
Weighted average expected long-term rate of return on plan assets(1) | 5.0 | % | | 5.0 | % | | 5.5 | % |
Rate of increase in future compensation(2) | 5.0 | % | | 5.0 | % | | 5.0 | % |
___________________________________
(1) Applicable for U.S. funded, qualified plans.
(2) Applicable for U.S. unfunded, nonqualified plan.
For the Company’s Swiss cash balance plan, the interest crediting rate of 1.0% for both 2021 and 2020 was set equal to the current annual minimum rate set by the government for the mandatory portion of the account balance. Above mandatory amounts have an interest crediting rate of 0.25% for 2021 and 0.0% for 2020.
Net annual postretirement benefit costs, and the weighted average discount rate used to determine them, for the years ended December 31, 2021, 2020 and 2019 are set forth below (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | |
Postretirement benefits | | 2021 | | 2020 | | 2019 |
Service cost | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | |
Interest cost | | 0.9 | | | 1.2 | | | 1.3 | |
Amortization of net actuarial losses | | 0.1 | | | 0.1 | | | — | |
Amortization of prior service cost | | 0.1 | | | 0.1 | | | 0.1 | |
| | | | | | |
Net annual postretirement benefit cost | | $ | 1.2 | | | $ | 1.5 | | | $ | 1.5 | |
Weighted average discount rate | | 3.8 | % | | 4.5 | % | | 5.2 | % |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables set forth reconciliations of the changes in benefit obligation, plan assets and funded status as of December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension and ENPP Benefits | | Postretirement Benefits |
Change in benefit obligation | | 2021 | | 2020 | | 2021 | | 2020 |
Benefit obligation at beginning of year | | $ | 1,033.7 | | | $ | 917.3 | | | $ | 26.4 | | | $ | 29.4 | |
Service cost | | 15.0 | | | 16.2 | | | 0.1 | | | 0.1 | |
Interest cost | | 12.6 | | | 16.5 | | | 0.9 | | | 1.2 | |
Plan participants’ contributions | | 1.4 | | | 1.3 | | | — | | | — | |
Actuarial losses (gains) | | (70.7) | | | 86.8 | | | (3.7) | | | (1.1) | |
| | | | | | | | |
Amendments | | (13.6) | | | (0.3) | | | 0.4 | | | — | |
Curtailment | | (9.7) | | | — | | | — | | | — | |
Settlements | | (0.2) | | | (0.3) | | | — | | | — | |
Benefits paid | | (47.2) | | | (44.6) | | | (1.3) | | | (1.5) | |
| | | | | | | | |
Foreign currency exchange rate changes | | (16.5) | | | 40.8 | | | (0.2) | | | (1.7) | |
Benefit obligation at end of year | | $ | 904.8 | | | $ | 1,033.7 | | | $ | 22.6 | | | $ | 26.4 | |
|
| | Pension and ENPP Benefits | | Postretirement Benefits |
Change in plan assets | | 2021 | | 2020 | | 2021 | | 2020 |
Fair value of plan assets at beginning of year | | $ | 808.6 | | | $ | 711.0 | | | $ | — | | | $ | — | |
Actual return on plan assets | | 27.7 | | | 76.6 | | | — | | | — | |
Employer contributions | | 36.0 | | | 32.4 | | | 1.3 | | | 1.5 | |
Plan participants’ contributions | | 1.4 | | | 1.3 | | | — | | | — | |
Benefits paid | | (47.2) | | | (44.6) | | | (1.3) | | | (1.5) | |
Settlements | | (0.2) | | | (0.3) | | | — | | | — | |
| | | | | | | | |
Foreign currency exchange rate changes | | (10.7) | | | 32.2 | | | — | | | — | |
Fair value of plan assets at end of year | | $ | 815.6 | | | $ | 808.6 | | | $ | — | | | $ | — | |
Funded status | | $ | (89.2) | | | $ | (225.1) | | | $ | (22.6) | | | $ | (26.4) | |
Unrecognized net actuarial losses (gains) | | 291.7 | | | 385.1 | | | (1.1) | | | 2.6 | |
Unrecognized prior service cost | | 7.1 | | | 20.1 | | | 3.2 | | | 2.9 | |
Accumulated other comprehensive loss | | (298.8) | | | (405.2) | | | (2.1) | | | (5.5) | |
Net amount recognized | | $ | (89.2) | | | $ | (225.1) | | | $ | (22.6) | | | $ | (26.4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized in Consolidated Balance Sheets: | | | | | | | | |
Other long-term asset | | $ | 109.4 | | | $ | 13.2 | | | $ | — | | | $ | — | |
Other current liabilities | | (7.1) | | | (6.7) | | | (1.5) | | | (1.4) | |
Accrued expenses | | (3.6) | | | (3.2) | | | — | | | — | |
Pensions and postretirement health care benefits (noncurrent) | | (187.9) | | | (228.4) | | | (21.1) | | | (25.0) | |
Net amount recognized | | $ | (89.2) | | | $ | (225.1) | | | $ | (22.6) | | | $ | (26.4) | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the activity in accumulated other comprehensive loss related to the Company’s ENPP and defined pension and postretirement benefit plans during the years ended December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Before-Tax Amount | | Income Tax | | After-Tax Amount |
Accumulated other comprehensive loss as of December 31, 2019 | | $ | (393.2) | | | $ | (96.8) | | | $ | (296.4) | |
Prior service credit arising during the year | | 0.3 | | | — | | | 0.3 | |
Net loss recognized due to settlement | | 0.3 | | | — | | | 0.3 | |
| | | | | | |
Net actuarial loss arising during the year | | (37.8) | | | (5.1) | | | (32.7) | |
Amortization of prior service cost | | 2.2 | | | 0.1 | | | 2.1 | |
Amortization of net actuarial losses | | 15.7 | | | 2.6 | | | 13.1 | |
Accumulated other comprehensive loss as of December 31, 2020 | | $ | (412.5) | | | $ | (99.2) | | | $ | (313.3) | |
Prior service credit arising during the year | | 13.1 | | | 3.1 | | | 10.0 | |
Net loss recognized due to settlement | | 0.1 | | | — | | | 0.1 | |
Net loss recognized due to curtailment | | 8.5 | | | 2.2 | | | 6.3 | |
Net actuarial gain arising during the year | | 71.0 | | | 17.4 | | | 53.6 | |
Amortization of prior service cost | | 0.8 | | | 0.2 | | | 0.6 | |
Amortization of net actuarial losses | | 16.6 | | | 4.3 | | | 12.3 | |
Accumulated other comprehensive loss as of December 31, 2021 | | $ | (302.4) | | | $ | (72.0) | | | $ | (230.4) | |
The unrecognized net actuarial losses included in accumulated other comprehensive loss related to the Company’s defined benefit pension plans and ENPP as of December 31, 2021 and 2020 are set forth below (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Unrecognized net actuarial losses | $ | 291.7 | | | $ | 385.1 | |
The decrease in unrecognized net actuarial losses between years primarily resulted from higher discount rates at December 31, 2021 compared to December 31, 2020, as well as a result of the amendment to the Company's ENPP as previously discussed. The unrecognized net actuarial losses will be impacted in future periods by actual asset returns, discount rate changes, currency exchange rate fluctuations, actual demographic experience and certain other factors. For some of the Company’s defined benefit pension plans, these losses, to the extent they exceed 10% of the greater of the plan’s liabilities or the fair value of assets (“the gain/loss corridor”), will be amortized on a straight-line basis over the periods discussed as follows. For the Company’s U.S. salaried, U.S. hourly and U.K. defined benefit pension plans, the population covered is predominantly inactive participants, and losses related to those plans, to the extent they exceed the gain/loss corridor, will be amortized over the average remaining lives of those participants while covered by the respective plan. For the Company’s ENPP, the population is predominantly active participants, and losses related to the plan will be amortized over the average future working lifetime of the active participants expected to receive benefits. As of December 31, 2021, the average amortization periods were as follows:
| | | | | | | | | | | | | | | | | |
| ENPP | | U.S. Plans | | U.K. Plan |
Average amortization period of losses related to defined benefit pension plans | 7 years | | 14 years | | 19 years |
The following table summarizes the unrecognized prior service cost related to the Company’s defined benefit pension plans as of December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Unrecognized prior service cost | $ | 7.1 | | | $ | 20.1 | |
The decrease in the unrecognized prior service cost between years is due primarily to the amortization of unrecognized prior service cost related to prior plan amendments. The decrease also reflects the 2021 plan amendment to the Company's
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ENPP, as previously discussed. The amortization of unrecognized prior service cost during 2020 also included the initial amortization impacts of an amendment to the Company’s ENPP during 2019.
The following table summarizes the unrecognized net actuarial (gains) losses included in the Company’s accumulated other comprehensive loss related to the Company’s U.S. and Brazilian postretirement health care benefit plans as of December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Unrecognized net actuarial (gains) losses(1) | $ | (1.1) | | | $ | 2.6 | |
___________________________________
(1) Includes a gain of approximately $0.2 million and a loss of $1.0 million, respectively, related to the Company’s U.S. postretirement benefit plans.
The unrecognized net actuarial gains related to the Company’s U.S. and Brazilian postretirement benefit plans was primarily due to liability gain due to the experience of the plans and assumption changes as of December 31, 2021 as compared to December 31, 2020. The unrecognized net actuarial gains or losses will be impacted in future periods by discount rate changes, actual demographic experience, actual health care inflation and certain other factors. These gains or losses, to the extent they exceed the gain/loss corridor, will be amortized on a straight-line basis over the average remaining service period of active employees expected to receive benefits, or the average remaining lives of inactive participants, covered under the postretirement benefit plans. As of December 31, 2021, the average amortization period was 10 years for the Company’s U.S. postretirement benefit plans.
As of December 31, 2021 and 2020, the net prior service cost related to the Company’s Brazilian postretirement health care benefit plans was as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
Net prior service cost | $ | 3.2 | | | $ | 2.9 | |
The following table summarizes the fair value of plan assets, aggregate projected benefit obligation and accumulated benefit obligation as of December 31, 2021 and 2020 for defined benefit pension plans, ENPP and other postretirement plans with accumulated benefit obligations in excess of plan assets (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
All plans: | | | |
Fair value of plan assets | $ | 43.4 | | | $ | 41.6 | |
Projected benefit obligation | 264.1 | | | 306.2 | |
Accumulated benefit obligation | 246.6 | | | 269.4 | |
U.S.-based plans and ENPP: | | | |
Fair value of plan assets | $ | 4.9 | | | $ | 5.1 | |
Projected benefit obligation | 130.9 | | | 157.4 | |
Accumulated benefit obligation | 125.4 | | | 135.4 | |
The amounts for 2021 and 2020 disclosed above do not include the fair value of plan assets, the projected benefit obligation or the accumulated benefit obligation related to the Company’s U.K. plan. The Company’s U.K. plan’s fair value of plan assets was in excess of the plan’s accumulated benefit obligation as of December 31, 2021 and 2020.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company’s accumulated comprehensive loss as of December 31, 2021 and 2020 reflects a reduction in equity related to the following items (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
All plans:(1) | | | |
Reduction in equity, net of taxes of $72.0 and $98.6 at December 31, 2021 and 2020, respectively | $ | 300.9 | | | $ | 410.8 | |
GIMA joint venture:(2) | | | |
Reduction in equity, net of taxes of $0.5 and $0.6 at December 31, 2021 and 2020, respectively | 1.5 | | | 1.7 | |
______________________________________
(1) Primarily related to the Company’s U.K. pension plan.
(2) These amounts represented 50% of GIMA’s unrecognized net actuarial losses and unrecognized prior service cost associated with its pension plan. In addition, GIMA recognized a net actuarial loss due to settlements of approximately $0.1 million in 2020.
The Company’s defined benefit pension obligation has been reflected based on the manner in which its defined benefit plans are being administered. The obligation and resulting liability is calculated employing both actuarial and legal assumptions. These assumptions include, but are not limited to, future inflation, the return on pension assets, discount rates, life expectancy and potential salary increases. There are also assumptions related to the manner in which individual benefit plan benefits are calculated, some of which are legal in nature and include, but are not limited to, member eligibility, years of service and the uniformity of both guaranteed minimum pension benefits and member normal retirement ages for men and women. Some of these assumptions also are subject to the outcome of certain legal cases, which are currently unknown. In the event that any of these assumptions or the administration approach are proven to be different from the Company’s current interpretations and approach, there could be material increases in the Company’s defined benefit pension obligation and the related amounts and timing of future contributions to be paid by the Company.
The weighted average assumptions used to determine the benefit obligation for the Company’s defined benefit pension plans and ENPP as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
All plans: | | | |
Weighted average discount rate | 1.9 | % | | 1.5 | % |
Rate of increase in future compensation | 1.50%-5.0% | | 1.50%-5.0% |
U.S.-based plans: | | | |
Weighted average discount rate | 3.05 | % | | 2.75 | % |
Rate of increase in future compensation(1) | 4.25 | % | | 5.0 | % |
____________________________________
(1) Applicable for U.S. unfunded, nonqualified plan.
The weighted average discount rate used to determine the benefit obligation for the Company’s postretirement benefit plans for the years ended December 31, 2021 and 2020 was 4.1% and 3.8%, respectively.
For the years ended December 31, 2021, 2020 and 2019, the Company used a globally consistent methodology to set the discount rate in the countries where its largest benefit obligations exist. In the United States, the United Kingdom and the Euro Zone, the Company constructed a hypothetical bond portfolio of high-quality corporate bonds and then applied the cash flows of the Company’s benefit plans to those bond yields to derive a discount rate. The bond portfolio and plan-specific cash flows vary by country, but the methodology in which the portfolio is constructed is consistent. In the United States, the bond portfolio is large enough to result in taking a “settlement approach” to derive the discount rate, in which high-quality corporate bonds are assumed to be purchased and the resulting coupon payments and maturities are used to satisfy the Company’s U.S. pension plans’ projected benefit payments. In the United Kingdom and the Euro Zone, the discount rate is derived using a “yield curve approach,” in which an individual spot rate, or zero coupon bond yield, for each future annual period is developed to discount each future benefit payment and, thereby, determine the present value of all future payments. The Company uses a spot yield curve to determine the discount rate applicable in the United Kingdom to measure the U.K. pension plan’s service cost and interest cost. Under the settlement and yield curve approaches, the discount rate is set to equal the single discount rate that produces the same present value of all future payments.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For measuring the expected U.S. postretirement benefit obligation at December 31, 2021, the Company assumed a 6.8% health care cost trend rate for 2022 decreasing to 5.0% by 2029. For measuring the expected U.S. postretirement benefit obligation at December 31, 2020, the Company assumed a 7.0% health care cost trend rate for 2021 decreasing to 5.0% by 2029. For measuring the Brazilian postretirement benefit plan obligation at December 31, 2021, the Company assumed a 9.96% health care cost trend rate for 2022, decreasing to 4.28% by 2033. For measuring the Brazilian postretirement benefit plan obligation at December 31, 2020, the Company assumed a 9.96% health care cost trend rate for 2021, decreasing to 4.28% by 2032.
The Company currently estimates its minimum contributions and benefit payments to its U.S.-based underfunded defined benefit pension plans and unfunded ENPP for 2022 will aggregate approximately $5.0 million. The Company currently estimates its minimum contributions for underfunded plans and benefit payments for unfunded plans for 2022 to its non-U.S.-based defined benefit pension plans will aggregate approximately $31.3 million, of which approximately $21.1 million relates to its U.K. pension plan. The Company currently estimates its benefit payments for 2022 to its U.S.-based postretirement health care and life insurance benefit plans will aggregate approximately $1.5 million and its benefit payments for 2022 to its Brazilian postretirement health care benefit plans will aggregate less than $0.1 million.
During 2021, approximately $47.4 million of benefit payments were made related to the Company’s defined benefit pension plans and ENPP. At December 31, 2021, the aggregate expected benefit payments for the Company’s defined benefit pension plans and ENPP are as follows (in millions):
| | | | | |
2022 | $ | 53.2 | |
2023 | 51.6 | |
2024 | 51.8 | |
2025 | 52.2 | |
2026 | 52.5 | |
2027 through 2031 | 279.1 | |
| $ | 540.4 | |
During 2021, approximately $1.3 million of benefit payments were made related to the Company’s U.S. and Brazilian postretirement benefit plans. At December 31, 2021, the aggregate expected benefit payments for the Company’s U.S. and Brazilian postretirement benefit plans are as follows (in millions):
| | | | | |
2022 | $ | 1.5 | |
2023 | 1.6 | |
2024 | 1.6 | |
2025 | 1.6 | |
2026 | 1.6 | |
2027 through 2031 | 7.5 | |
| $ | 15.4 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investment Strategy and Concentration of Risk
The weighted average asset allocation of the Company’s U.S. pension benefit plans as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
Asset Category | | 2021 | | 2020 |
Equity securities | | 14 | % | | 36 | % |
Fixed income securities | | 75 | % | | 57 | % |
Other investments | | 11 | % | | 7 | % |
Total | | 100 | % | | 100 | % |
The weighted average asset allocation of the Company’s non-U.S. pension benefit plans as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
Asset Category | | 2021 | | 2020 |
Equity securities | | 14 | % | | 41 | % |
Fixed income securities | | 80 | % | | 53 | % |
Other investments | | 6 | % | | 6 | % |
Total | | 100 | % | | 100 | % |
The Company categorizes its pension plan assets into one of three levels based on the assumptions used in valuing the asset. See Note 13 for a discussion of the fair value hierarchy as per the guidance in ASC 820, “Fair Value Measurements” (“ASC 820”). The Company’s valuation techniques are designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses the following valuation methodologies to measure the fair value of its pension plan assets:
•Equity Securities: Equity securities are valued on the basis of the closing price per unit on each business day as reported on the applicable exchange. Equity funds are valued using the net asset value of the fund, which is based on the fair value of the underlying securities.
•Fixed Income: Fixed income securities are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the net asset value of the fund, which is based on the fair value of the underlying securities.
•Cash: These investments primarily consist of short-term investment funds which are valued using the net asset value.
•Alternative Investments: These investments are reported at fair value as determined by the general partner of the alternative investment. The “market approach” valuation technique is used to value investments in these funds. The funds typically are open-end funds as they generally offer subscription and redemption options to investors. The frequency of such subscriptions or redemptions is dictated by each fund’s governing documents. The amount of liquidity provided to investors in a particular fund generally is consistent with the liquidity and risk associated with the underlying portfolio (i.e., the more liquid the investments in the portfolio, the greater the liquidity provided to investors). Liquidity of individual funds varies based on various factors and may include “gates,” “holdbacks” and “side pockets” imposed by the manager of the fund, as well as redemption fees that may also apply. Investments in these funds typically are valued utilizing the net asset valuations provided by their underlying investment managers, general partners or administrators. The funds consider subscription and redemption rights, including any restrictions on the disposition of the interest, in its determination of the fair value.
•Insurance Contracts: Insurance contracts are valued using current prevailing interest rates.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of the Company’s pension assets as of December 31, 2021 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
Equity securities: | | | | | | | |
Global equities | $ | 102.5 | | | $ | 18.2 | | | $ | 84.3 | | | $ | — | |
| | | | | | | |
| | | | | | | |
U.S. large cap equities | 5.6 | | | 5.6 | | | — | | | — | |
| | | | | | | |
Total equity securities | 108.1 | | | 23.8 | | | 84.3 | | | — | |
Fixed income: | | | | | | | |
Aggregate fixed income | 615.9 | | | 615.9 | | | — | | | — | |
| | | | | | | |
Total fixed income share(1) | 615.9 | | | 615.9 | | | — | | | — | |
Alternative investments: | | | | | | | |
Private equity fund | 3.5 | | | — | | | — | | | 3.5 | |
Hedge funds measured at net asset value(4) | 41.7 | | | — | | | — | | | — | |
Total alternative investments(2) | 45.2 | | | — | | | — | | | 3.5 | |
Miscellaneous funds(3) | 40.2 | | | — | | | — | | | 40.2 | |
Cash and equivalents measured at net asset value(4) | 6.2 | | | — | | | — | | | — | |
Total assets | $ | 815.6 | | | $ | 639.7 | | | $ | 84.3 | | | $ | 43.7 | |
______________________________________
(1) 50% of "fixed income" securities are in government treasuries; 20% are in foreign securities; 13% are in investment-grade corporate bonds; 8% are in high-yield securities; 6% are in other various fixed income securities and 3% are in asset-backed and mortgage-backed securities.
(2) 42% of “alternative investments” are in relative value funds; 28% are in long-short equity funds; 14% are in event-driven funds; 8% are in credit funds; and 8% are distributed in hedged and non-hedged funds.
(3) “Miscellaneous funds” is comprised of insurance contracts in Finland, Norway and Switzerland.
(4) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.
The following is a reconciliation of Level 3 assets as of December 31, 2021 (in millions):
| | | | | | | | | | | | | | | | | |
| Total | | Alternative Investments | | Miscellaneous Funds |
Beginning balance as of December 31, 2020 | $ | 38.7 | | | $ | 2.1 | | | $ | 36.6 | |
Actual return on plan assets: | | | | | |
(a) Relating to assets still held at reporting date | 3.3 | | | 1.4 | | | 1.9 | |
(b) Relating to assets sold during period | — | | | — | | | — | |
Purchases, sales and /or settlements | 4.7 | | | — | | | 4.7 | |
| | | | | |
Foreign currency exchange rate changes | (3.0) | | | — | | | (3.0) | |
Ending balance as of December 31, 2021 | $ | 43.7 | | | $ | 3.5 | | | $ | 40.2 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of the Company’s pension assets as of December 31, 2020 is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
Equity securities: | | | | | | | |
Global equities | $ | 235.3 | | | $ | 156.5 | | | $ | 78.8 | | | $ | — | |
Non-U.S. equities | 4.7 | | | 4.7 | | | — | | | — | |
U.K. equities | 65.2 | | | 65.2 | | | — | | | — | |
U.S. large cap equities | 5.2 | | | 5.2 | | | — | | | — | |
U.S. small cap equities | 3.9 | | | 3.9 | | | — | | | — | |
| | | | | | | |
Total equity securities | 314.3 | | | 235.5 | | | 78.8 | | | — | |
Fixed income: | | | | | | | |
Aggregate fixed income | 162.9 | | | 162.9 | | | — | | | — | |
International fixed income | 249.5 | | | 249.5 | | | — | | | — | |
Total fixed income share(1) | 412.4 | | | 412.4 | | | — | | | — | |
Alternative investments: | | | | | | | |
Private equity fund | 2.1 | | | — | | | — | | | 2.1 | |
Hedge funds measured at net asset value(4) | 38.5 | | | — | | | — | | | — | |
Total alternative investments(2) | 40.6 | | | — | | | — | | | 2.1 | |
Miscellaneous funds(3) | 36.6 | | | — | | | — | | | 36.6 | |
Cash and equivalents measured at net asset value(4) | 4.7 | | | — | | | — | | | — | |
Total assets | $ | 808.6 | | | $ | 647.9 | | | $ | 78.8 | | | $ | 38.7 | |
_______________________________________
(1) 44% of “fixed income” securities are in investment-grade corporate bonds; 20% are in government treasuries; 11% are in high-yield securities; 10% are in foreign securities; 6% are in asset-backed and mortgage-backed securities; and 9% are in other various fixed income securities.
(2) 42% of “alternative investments” are in relative value funds; 25% are in long-short equity funds; 14% are in event-driven funds; 5% are distributed in hedged and non-hedged funds; and 14% are in credit funds.
(3) “Miscellaneous funds” is comprised of insurance contracts in Finland, Norway and Switzerland.
(4) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.
The following is a reconciliation of Level 3 assets as of December 31, 2020 (in millions):
| | | | | | | | | | | | | | | | | |
| Total | | Alternative Investments | | Miscellaneous Funds |
Beginning balance as of December 31, 2019 | $ | 33.1 | | | $ | 2.3 | | | $ | 30.8 | |
Actual return on plan assets: | | | | | |
(a) Relating to assets still held at reporting date | 0.1 | | | (0.2) | | | 0.3 | |
(b) Relating to assets sold during period | — | | | — | | | — | |
Purchases, sales and /or settlements | 2.4 | | | — | | | 2.4 | |
| | | | | |
Foreign currency exchange rate changes | 3.1 | | | — | | | 3.1 | |
Ending balance as of December 31, 2020 | $ | 38.7 | | | $ | 2.1 | | | $ | 36.6 | |
All tax-qualified pension fund investments in the United States are held in the AGCO Corporation Master Pension Trust. The Company’s global pension fund strategy is to diversify investments across broad categories of equity and fixed income securities with appropriate use of alternative investment categories to minimize risk and volatility. The primary investment objective of the Company’s pension plans is to secure participant retirement benefits. As such, the key objective in the pension plans’ financial management is to promote stability and, to the extent appropriate, growth in funded status.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The investment strategy for the plans’ portfolio of assets balances the requirement to generate returns with the need to control risk. The asset mix is recognized as the primary mechanism to influence the reward and risk structure of the pension fund investments in an effort to accomplish the plans’ funding objectives. The overall investment strategies and target allocations of retirement fund investments for the Company’s U.S.-based pension plans and the non-U.S. based pension plans are as follows:
| | | | | | | | | | | |
| U.S. Pension Plans | | Non-U.S. Pension Plans(1) |
Overall investment strategies:(2) | | | |
Assets for the near-term benefit payments | 80.0 | % | | 82.5 | % |
Assets for longer-term growth | 20.0 | % | | 17.5 | % |
Total | 100.0 | % | | 100.0 | % |
| | | |
Target allocations: | | | |
Equity securities | 17.0 | % | | 12.5 | % |
Fixed income securities | 75.0 | % | | 82.5 | % |
Alternative investments | 3.0 | % | | 5.0 | % |
Cash and cash equivalents | 5.0 | % | | — | % |
Total | 100.0 | % | | 100.0 | % |
_______________________________________
(1) The majority of the Company’s non-U.S. pension fund investments are related to the Company’s pension plan in the United Kingdom.
(2) The overall U.S. and non-U.S. pension funds invest in a broad diversification of asset types.
The Company has noted that over very long periods, this mix of investments would achieve an average return on its U.S.-based pension plans of approximately 4.87%. In arriving at the choice of an expected return assumption of 4.25% for its U.S. plans for the year ended December 31, 2022, the Company has tempered this historical indicator with lower expectations for returns and changes to investments in the future as well as the administrative costs of the plans. The Company has noted that over very long periods, this mix of investments would achieve an average return on its non-U.S. based pension plans of approximately 2.50%. In arriving at the choice of an expected return assumption of 2.25% for its U.K.-based plans for the year ended December 31, 2022, the Company has tempered this historical indicator with lower expectations for returns and changes to investments in the future as well as the administrative costs of the plans.
Equity securities primarily include investments in large-cap and small-cap companies located across the globe. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities, agency mortgages, asset-backed securities and government securities. Alternative and other assets include investments in hedge fund of funds that follow diversified investment strategies. To date, the Company has not invested pension funds in its own stock and has no intention of doing so in the future.
Within each asset class, careful consideration is given to balancing the portfolio among industry sectors, geographies, interest rate sensitivity, dependence on economic growth, currency and other factors affecting investment returns. The assets are managed by professional investment firms, who are bound by precise mandates and are measured against specific benchmarks. Among asset managers, consideration is given, among others, to balancing security concentration, issuer concentration, investment style and reliance on particular active investment strategies.
The Company participates in a small number of multiemployer plans in the Netherlands and Sweden. The Company has assessed and determined that none of the multiemployer plans which it participates in are individually, or in the aggregate, significant to the Company’s Consolidated Financial Statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contributions over the remainder of the multiemployer plans’ contract periods.
The Company maintains separate defined contribution plans covering certain employees and executives, primarily in the United States, the United Kingdom and Brazil. Under the plans, the Company contributes a specified percentage of each eligible employee’s compensation. The Company contributed approximately $16.9 million, $15.4 million and $15.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Stockholders’ Equity
Common Stock
At December 31, 2021, the Company had 150,000,000 authorized shares of common stock with a par value of $0.01 per share, with approximately 74,441,312 shares of common stock outstanding and approximately 4,000,968 shares reserved for issuance under the Company’s 2006 Long-Term Incentive Plan (the “Plan”) (See Note 10).
Share Repurchase Program
In August and November 2021, the Company entered into two accelerated share repurchase ("ASR") agreements with financial institutions to repurchase an aggregate of $135.0 million of shares of its common stock. The Company received approximately 952,204 shares associated with these transactions as of December 31, 2021. On January 19, 2022, the Company received additional 113,824 shares upon final settlement of its November 2021 ASR agreement. In February and March 2020, the Company entered into two ASR agreements with financial institutions to repurchase an aggregate of $55.0 million of shares of its common stock. The Company received approximately 970,141 shares in these transactions as of December 31, 2020. All shares received under the ASR agreements 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 our Consolidated Balance Sheets.
As of December 31, 2021, the remaining amount authorized to be repurchased under board-approved share repurchase authorizations was approximately $110.0 million, which has no expiration date.
Dividends
The Company’s Board of Directors has declared and the Company has paid cash dividends per common share during the following years:
| | | | | | | | | | | | | | | | | |
| 2021(1)(2) | | 2020(2) | | 2019(2) |
Dividends declared and paid per common share | $ | 4.74 | | | $ | 0.63 | | | $ | 0.63 | |
____________________________________
(1) The Company’s Board of Directors declared and the Company has paid quarterly cash dividends of $0.20 per common share beginning in the second quarter of 2021, from $0.16 per common share in the first quarter of 2021. On January 20, 2022, the Company's Board of Directors approved a quarterly dividend of $0.20 per common share outstanding commencing in the first quarter of 2022. In addition, the Company's Board of Directors also declared and the Company paid a special cash dividend of $4.00 per common share during 2021 totaling approximately $301.5 million.
(2) The Company’s Board of Directors declared and the Company has paid quarterly cash dividends of $0.16 per common share beginning in the second quarter of 2019, from $0.15 per common share in the first quarter of 2019, through the first quarter of 2021.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accumulated Other Comprehensive Loss
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 years ended December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | Cumulative Translation Adjustment | | Deferred Net Gains (Losses) on Derivatives | | Total |
Accumulated other comprehensive loss, December 31, 2019 | $ | (296.4) | | | $ | (1,297.5) | | | $ | (1.3) | | | $ | (1,595.2) | |
Other comprehensive (loss) income before reclassifications | (32.1) | | | (197.5) | | | 5.1 | | | (224.5) | |
Net losses (gains) reclassified from accumulated other comprehensive loss | 15.2 | | | — | | | (6.3) | | | 8.9 | |
Other comprehensive loss, net of reclassification adjustments | (16.9) | | | (197.5) | | | (1.2) | | | (215.6) | |
Accumulated other comprehensive loss, December 31, 2020 | (313.3) | | | (1,495.0) | | | (2.5) | | | (1,810.8) | |
Other comprehensive income (loss) before reclassifications | 70.0 | | | (45.1) | | | 5.1 | | | 30.0 | |
Net losses (gains) reclassified from accumulated other comprehensive income (loss) | 12.9 | | | — | | | (3.0) | | | 9.9 | |
Other comprehensive income (loss), net of reclassification adjustments | 82.9 | | | (45.1) | | | 2.1 | | | 39.9 | |
Accumulated other comprehensive loss, December 31, 2021 | $ | (230.4) | | | $ | (1,540.1) | | | $ | (0.4) | | | $ | (1,770.9) | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table sets forth reclassification adjustments out of accumulated other comprehensive loss by component attributed to AGCO Corporation and its subsidiaries for the years ended December 31, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Loss Components | | Amount Reclassified from Accumulated Other Comprehensive Loss | | Affected Line Item within the Consolidated Statements of Operations |
| Year ended December 31, 2021(1) | | Year ended December 31, 2020(1) | |
Derivatives: | | | | | | |
Net losses (gains) on foreign currency contracts | | $ | 11.4 | | | $ | (6.4) | | | Cost of goods sold |
Net gains on commodity contracts | | (17.2) | | | — | | | Cost of goods sold |
| | | | | | |
Reclassification before tax | | (5.8) | | | (6.4) | | | |
| | 2.8 | | | 0.1 | | | Income tax provision |
Reclassification net of tax | | $ | (3.0) | | | $ | (6.3) | | | |
| | | | | | |
Defined benefit pension plans: | | | | | | |
Amortization of net actuarial losses | | $ | 16.6 | | | $ | 15.7 | | | Other expense, net(2) |
Amortization of prior service cost | | 0.8 | | | 2.2 | | | Other expense, net(2) |
Reclassification before tax | | 17.4 | | | 17.9 | | | |
| | (4.5) | | | (2.7) | | | Income tax provision |
Reclassification net of tax | | $ | 12.9 | | | $ | 15.2 | | | |
| | | | | | |
Net losses reclassified from accumulated other comprehensive loss | | $ | 9.9 | | | $ | 8.9 | | | |
____________________________________
(1) (Gains) losses included within the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020, respectively.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost. See Note 8 to the Company’s Consolidated Financial Statements.
10. Stock Incentive Plan
Under the Plan, up to 10,000,000 shares of AGCO’s common stock may be issued. As of December 31, 2021, of the 10,000,000 shares reserved for issuance under the Plan, approximately 4,000,968 shares remained available for grant, assuming the maximum number of shares are earned related to the performance award grants discussed below. The Plan allows the Company, under the direction of the Board of Directors’ Compensation Committee, to make grants of performance shares, stock appreciation rights, restricted stock units and restricted stock awards to employees, officers and non-employee directors of the Company.
Long-Term Incentive Plan and Related Performance Awards
The Company’s primary long-term incentive plan is a performance share plan that provides for awards of shares of the Company’s common stock based on achieving financial targets, such as targets for return on invested capital, operating margins, return on net assets and revenue growth, as determined by the Company’s Board of Directors. The stock awards under the Plan are earned over a performance period, and the number of shares earned is determined based on annual cumulative or average results for the specified period, depending on the measurement. Performance periods for the Company’s primary long-term incentive plan are consecutive and overlapping three-year cycles, and performance targets are set at the beginning of each cycle. The primary long-term incentive plan provides for participants to earn 33% to 200% of the target awards depending on the actual performance achieved, with no shares earned if performance is below the established minimum target. Awards earned under the Plan are paid in shares of common stock at the end of each three-year performance period. The percentage level achievement is determined annually or over the three-year cycle in aggregate, with the ultimate award that is earned determined based upon the average of the three annual percentages. The 2021 grant of performance award shares is subject to a total
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
shareholder return modifier. The compensation expense associated with these awards 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.
During 2021, the Company granted 281,310 performance awards related to varying performance periods. Compensation expense recorded during 2021, 2020 and 2019 with respect to awards granted was based upon the fair value as of the grant date. For the 2021 awards that included a market condition, the Company measured the fair value using a Monte Carlo simulation. The weighted average grant-date fair value of performance awards granted under the Plan during 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Weighted average grant-date fair value | | $ | 123.33 | | | $ | 70.84 | | | $ | 61.01 | |
Performance award transactions during 2021 were as follows and are presented as if the Company were to achieve its maximum levels of performance under the plan:
| | | | | |
Shares awarded but not earned at January 1 | 582,952 | |
Shares awarded | 281,310 | |
Shares forfeited | (40,350) | |
Shares earned | (309,198) | |
Shares awarded but not earned at December 31 | 514,714 | |
Based on the level of performance achieved as of December 31, 2021, 330,174 shares were earned under the related performance period, including 97,818 shares earned as of December 31, 2020 related to certain retirees and other individuals. 330,174 shares were issued in February 2022, net of 125,363 shares that were withheld for taxes related to the earned awards. The Plan allows for the participant to have the option of forfeiting a portion of the shares awarded in lieu of a cash payment contributed to the participant’s tax withholding to satisfy the participant’s statutory minimum federal, state and employment taxes which would be payable at the time of grant. In addition, assuming the maximum target levels of performance achieved, there were 59,182 shares earned as of December 31, 2021 related to certain retirees and other individuals that will be issued at the end of the relevant performance periods based on the ultimate level of performance achieved with respect to those periods.
As of December 31, 2021, 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 $20.6 million, and the weighted average period over which it is expected to be recognized is approximately one and one-half years. This estimate is based on the current projected levels of performance of outstanding awards. The compensation cost not yet recognized could be higher or lower based on actual achieved levels of performance.
Restricted Stock Units
During the year ended December 31, 2021, the Company granted 92,848 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 2020 grant of RSUs to certain executives has a three-year cliff vesting requirement subject to adjustment based on a total shareholders return metric relative to the Company's defined peer group. The compensation expense associated with all RSU awards is being amortized ratably over the requisite service period for the awards that are expected to vest. The weighted average grant-date fair value of the RSUs granted under the Plan during the years ended December 31, 2021, 2020 and 2019 were $113.91, $70.83 and $61.01, respectively. RSU transactions during the year ended December 31, 2021 were as follows:
| | | | | |
Shares awarded but not vested at January 1 | 143,287 | |
Shares awarded | 92,848 | |
Shares forfeited | (9,797) | |
Shares vested | (67,110) | |
Shares awarded but not vested at December 31 | 159,228 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A majority of the 67,110 shares vested with respect to RSU awards during 2021 were issued in January 2021. 3,830 shares earned during 2021 related to certain retirees. During January 2022, 44,991 RSUs shares were issued, net of 23,726 shares that were withheld for taxes. The Plan allows for the participant to have the option of forfeiting a portion of the shares awarded in lieu of a cash payment contributed to the participant's tax withholding to satisfy the participant's statutory minimum federal, state and employment taxes which would be payable at the time of grant. As of December 31, 2021, the total compensation cost related to the unvested RSUs not yet recognized was approximately $8.5 million, and the weighted average period over which it is expected to be recognized is approximately one and one-half years.
Stock-settled Appreciation Rights
Certain executives and key managers were eligible to receive grants of SSARs through the year ended December 31, 2020. The Company did not grant any SSARs during the year ended December 31, 2021. The SSARs provide a participant with the right to receive the aggregate appreciation in stock price over the market price of the Company’s common stock at the date of grant, payable in shares of the Company’s common stock. The participant may exercise his or her SSARs at any time after the grant is vested but no later than seven years after the date of grant. The SSARs vest ratably over a four-year period from the date of grant. SSAR awards made to certain executives and key managers under the Plan are made with the base price equal to the price of the Company’s common stock on the date of grant. The Company recorded stock compensation expense of approximately $0.8 million, $1.9 million and $2.4 million associated with SSAR awards during 2021, 2020 and 2019, respectively. The compensation expense associated with these awards is being amortized ratably over the vesting period. The Company estimated the fair value of the grants using the Black-Scholes option pricing model.
The weighted average grant-date fair value of SSAR awards granted under the Plan and the weighted average assumptions under the Black-Scholes option model were as follows for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | |
| |
| 2020 | | 2019 |
Weighted average grant-date fair value | $ | 12.31 | | | $ | 11.34 | |
Weighted average assumptions under Black-Scholes option model: | | | |
Expected life of awards (years) | 3.0 | | 3.0 |
Risk-free interest rate | 1.5 | % | | 2.6 | % |
Expected volatility | 24.1 | % | | 24.2 | % |
Expected dividend yield | 0.9 | % | | 1.0 | % |
SSAR transactions during the year ended December 31, 2021 were as follows:
| | | | | |
SSARs outstanding at January 1 | 403,150 | |
SSARs granted | — | |
SSARs exercised | (194,661) | |
SSARs canceled or forfeited | (13,878) | |
SSARs outstanding at December 31 | 194,611 | |
SSAR price ranges per share: | |
Granted | $ | — | |
Exercised | 43.88 - 73.14 |
Canceled or forfeited | 46.58 - 73.14 |
Weighted average SSAR exercise prices per share: | |
Granted | $ | — | |
Exercised | 64.41 | |
Canceled or forfeited | 68.51 | |
Outstanding at December 31 | 68.33 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2021, the weighted average remaining contractual life of SSARs outstanding was approximately four years. As of December 31, 2021, the total compensation cost related to unvested SSARs not yet recognized was approximately $0.8 million and the weighted-average period over which it is expected to be recognized is approximately one and one-half years.
The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | SSARs Outstanding | | SSARs Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Exercisable as of December 31, 2021 | | Weighted Average Exercise Price |
$46.58 - $63.47 | | 80,523 | | | 3.51 | | $ | 61.91 | | | 38,923 | | | $ | 60.91 | |
$72.74 - $73.14 | | 114,088 | | | 4.41 | | $ | 72.86 | | | 35,013 | | | $ | 72.99 | |
| | | | | | | | | | |
| | 194,611 | | | | | | | 73,936 | | | $ | 66.63 | |
The total fair value of SSARs vested during 2021 was approximately $1.5 million. There were 120,675 SSARs that were not vested as of December 31, 2021. The total intrinsic value of outstanding and exercisable SSARs as of December 31, 2021 was $9.3 million and $3.7 million, respectively. The total intrinsic value of SSARs exercised during 2021 was approximately $13.6 million.
The excess tax benefit realized for tax deductions in the United States related to the exercise of SSARs, vesting of RSU awards and vesting of performance awards under the Plan was approximately $3.3 million for the year ended December 31, 2021. The excess tax benefit realized for tax deductions in the United States related to the exercise of SSARs and vesting of RSU awards and vesting of performance awards under the Plan was approximately $2.5 million for the year ended December 31, 2020. The excess tax benefit realized for tax deductions in the United States related to the exercise of SSARs and vesting of RSU awards and vesting of performance awards under the Plan was approximately $2.7 million for the year ended December 31, 2019. The Company realized an insignificant tax benefit from the exercise of SSARs, vesting of performance awards and vesting of RSU awards in certain foreign jurisdictions during the years ended December 31, 2021, 2020 and 2019.
On January 20, 2022, the Company granted 137,283 performance award shares (subject to the Company achieving future target levels of performance) and 91,583 RSUs under the Plan. The 2022 grant of performance award shares is subject to a total shareholder return modifier.
Director Restricted Stock Grants
Pursuant to the Plan, all non-employee directors receive annual restricted stock grants of the Company’s common stock. All restricted stock grants made to the Company’s directors are restricted as to transferability for a period of one year. In the event a director departs from the Company’s Board of Directors, the non-transferability period expires immediately. The plan allows each director to have the option of forfeiting a portion of the shares awarded in lieu of a cash payment contributed to the participant’s tax withholding to satisfy the statutory minimum federal, state and employment taxes that would be payable at the time of grant. The 2021 grant was made on April 22, 2021 and equated to 9,117 shares of common stock, of which 7,899 shares of common stock were issued, after shares were withheld for taxes. The Company recorded stock compensation expense of approximately $1.4 million during 2021 associated with these grants.
11. Derivative Instruments and Hedging Activities
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
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
statements of foreign subsidiaries into United States dollars may be partially hedged from time to time. 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, LIBOR or other applicable benchmark interest rates such as SOFR upon the discontinuation of LIBOR. 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 is exposed to commodity risk from steel and other raw material purchases where a portion of the contractual purchase price is linked to a variable rate based on publicly available market data. From time to time, the Company enters into cash flow hedges to mitigate its exposure to variability in commodity prices.
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.
All derivatives are recognized on the Company’s 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 categorizes its derivative assets and liabilities into one of three levels based on the assumptions used in valuing the asset or liability. See Note 13 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 would 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.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During 2021, 2020 and 2019, the Company designated certain foreign currency contracts as cash flow hedges of expected future sales and purchases. The Company did not have any derivatives that were designated as cash flow hedges related to foreign currency contracts as of December 31, 2021. The total notional value of derivatives that were designated as cash flow hedges was $395.8 million as of December 31, 2020.
Steel Commodity Contracts
In December 2020, 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 $31.9 million and $14.7 million as of December 31, 2021 and 2020, respectively.
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 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Recognized in Net Income | | |
| 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 Consolidated Statements of Operations Containing Hedge Gains (Losses) |
2021 | | | | | | | |
Foreign currency contracts | $ | (7.4) | | | Cost of goods sold | | $ | (10.2) | | | $ | 8,566.0 | |
Commodity contracts(1) | 12.5 | | | Cost of goods sold | | 13.2 | | | $ | 8,566.0 | |
Total | $ | 5.1 | | | | | $ | 3.0 | | | |
2020 | | | | | | | |
Foreign currency contracts | $ | 4.6 | | | Cost of goods sold | | $ | 6.3 | | | $ | 7,092.2 | |
Commodity contracts(1) | 0.5 | | | Cost of goods sold | | — | | | $ | 7,092.2 | |
Total | $ | 5.1 | | | | | $ | 6.3 | | | |
2019 | | | | | | | |
Foreign currency contracts | $ | (2.6) | | | Cost of goods sold | | $ | 0.1 | | | $ | 7,057.1 | |
| | | | | | | |
| | | | | | | |
(1) The outstanding contracts as of December 31, 2021 range in maturity through July 2022.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the activity in accumulated other comprehensive loss related to the derivatives held by the Company during the years ended December 31, 2021, 2020 and 2019 (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Before-Tax Amount | | Income Tax | | After-Tax Amount |
Accumulated derivative net gains as of December 31, 2018 | | $ | 1.6 | | | $ | 0.2 | | | $ | 1.4 | |
Net changes in fair value of derivatives | | (3.0) | | | (0.4) | | | (2.6) | |
Net gains reclassified from accumulated other comprehensive loss into income | | (0.1) | | | — | | | (0.1) | |
Accumulated derivative net losses as of December 31, 2019 | | $ | (1.5) | | | $ | (0.2) | | | $ | (1.3) | |
Net changes in fair value of derivatives | | 4.9 | | | (0.2) | | | 5.1 | |
Net gains reclassified from accumulated other comprehensive loss into income | | (6.4) | | | (0.1) | | | (6.3) | |
Accumulated derivative net losses as of December 31, 2020 | | $ | (3.0) | | | $ | (0.5) | | | $ | (2.5) | |
Net changes in fair value of derivatives | | 8.3 | | | 3.2 | | | 5.1 | |
Net gains reclassified from accumulated other comprehensive loss into income | | (5.8) | | | (2.8) | | | (3.0) | |
Accumulated derivative net losses as of December 31, 2021(1) | | $ | (0.5) | | | $ | (0.1) | | | $ | (0.4) | |
(1) As of December 31, 2021, approximately $0.2 million of derivative realized net losses and approximately $1.5 million of derivative realized net gains, before taxes, remain in accumulated other comprehensive loss related to foreign currency contracts and commodity contracts, respectively, associated with inventory that 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 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 $281.3 million as of December 31, 2021) 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):
| | | | | | | | | | | |
| Notional Amount as of |
| December 31, 2021 | | December 31, 2020 |
Cross currency swap contract | $ | 300.0 | | | $ | 300.0 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the after-tax impact of changes in the fair value of the instrument designated as a net investment hedge (in millions):
| | | | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in Accumulated Other Comprehensive Loss for the Years Ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Foreign currency denominated debt | $ | — | | | $ | 1.7 | | | $ | 2.5 | |
Cross currency swap contract | 11.0 | | | (25.5) | | | 9.3 | |
Derivative Transactions Not Designated as Hedging Instruments
During 2021, 2020 and 2019, 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 December 31, 2021 and 2020, the Company had outstanding foreign currency contracts with a notional amount of approximately $3,681.9 million and $3,326.6 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended |
| Classification of Gain (Loss) | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
Foreign currency contracts | Other expense, net | | $ | 54.8 | | | $ | 3.7 | | | $ | 20.4 | |
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.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below sets forth the fair value of derivative instruments as of December 31, 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives as of December 31, 2020 | | Liability Derivatives as of December 31, 2020 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivative instruments designated as hedging instruments: | | | | | | | |
Foreign currency contracts | Other current assets | | $ | 1.0 | | | Other current liabilities | | $ | 4.5 | |
Commodity contracts | Other current assets | | 0.5 | | | Other current liabilities | | — | |
| | | | | | | |
Cross currency swap contract | Other noncurrent assets | | 1.5 | | | Other noncurrent liabilities | | — | |
Derivative instruments not designated as hedging instruments: | | | | | | | |
Foreign currency contracts | Other current assets | | 12.3 | | | Other current liabilities | | 22.2 | |
Total derivative instruments | | | $ | 15.3 | | | | | $ | 26.7 | |
12. Commitments and Contingencies
The future payments required under the Company’s significant commitments, excluding indebtedness, as of December 31, 2021 are as follows (in millions):
Interest payments on indebtedness – As of December 31, 2021, the Company had interest payments of approximately $15.1 million due during the year ended December 31, 2022. Interest payments generally do not vary materially year to year. Indebtedness amounts reflect the principal amount of the Company's senior term loan, senior notes, credit facility and certain short-term borrowings, gross of any debt issuance costs. Refer to Note 7 of the Consolidated Financial Statements for additional information regarding indebtedness.
Unconditional purchase obligations – As of December 31, 2021, the Company had approximately $131.1 million of outstanding purchase obligations payable during the year ended December 31, 2022. These obligations generally do not vary materially year to year.
Other short-term and long-term obligations – As of December 31, 2021, the Company had approximately $40.1 million of income tax liabilities related to uncertain income tax provisions connected with ongoing income tax audits in various jurisdictions that it expects to pay or settle within the next 12 months. These liabilities and related income tax audits are subject to statutory expiration. Additionally, the Company had approximately $37.8 million of estimated future minimum contribution requirements under its U.S. and non-U.S. defined benefit pension and postretirement plans due during the year ended December 31, 2022. Refer to Notes 6 and 8 of the Consolidated Financial Statements for additional information regarding the Company's uncertain tax positions and pension and postretirement plans, respectively. These obligations comprise a majority of the Company's other short-term and long-term obligations.
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 might be incurred on the resale of this equipment will not materially impact the Company’s financial position or results of operations, due to the fair value of the underlying equipment.
At December 31, 2021, the Company has outstanding guarantees of indebtedness owed to related and third parties of approximately $25.2 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 guarantees indebtedness owed to certain of its finance joint ventures if dealers
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 December 31, 2021, the Company had accrued approximately $23.3 million of outstanding guarantees of minimum 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 the guarantee is approximately $160.7 million.
Other
At December 31, 2021, the Company had outstanding designated and non-designated foreign exchange contracts with a gross notional amount of approximately $3,681.9 million. The outstanding contracts as of December 31, 2021 range in maturity through October 2022. The Company also had outstanding designated steel commodity contracts with a gross notional amount of approximately $31.9 million that range in maturity through July 2022 (see Note 11).
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 reviewed the sale of such receivables and determined that these facilities should be accounted for 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 December 31, 2021, not including interest and penalties, was approximately 131.5 million Brazilian reais (or approximately $23.6 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, is material to its business or financial statements as a whole, including its results of operations and financial condition.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. 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. See Note 8 for a discussion of the valuation methods used to measure the fair value of the Company’s pension plan assets.
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 11 for a discussion of the Company’s derivative instruments and hedging activities.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 are summarized below (in millions):
| | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Level 1 | Level 2 | Level 3 | Total |
Derivative assets | $ | — | | $ | 27.8 | | $ | — | | $ | 27.8 | |
Derivative liabilities | — | | 7.1 | | — | | 7.1 | |
| | | | |
| | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Level 1 | Level 2 | Level 3 | Total |
Derivative assets | $ | — | | $ | 15.3 | | $ | — | | $ | 15.3 | |
Derivative liabilities | — | | 26.7 | | — | | 26.7 | |
| | | | |
| | | | |
| | | | |
Cash and cash equivalents, accounts and notes receivable, net and accounts payable are valued at their carrying amounts in the Company’s Consolidated Balance Sheets, due to the immediate or short-term maturity of these financial instruments.
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 December 31, 2021, the estimated fair value of the Company's 0.800% senior notes due 2028, based on listed market values, was approximately €595.1 million (or approximately $675.2 million as of December 31, 2021), compared to the carrying value of €600.0 million (or approximately $680.8 million as of December 31, 2021). See Note 7 for additional information on the Company’s long-term debt.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Related Party Transactions
Rabobank, a financial institution based in the Netherlands, is a 51% owner in the Company’s finance joint ventures, which are located in the United States, Canada, Europe, Brazil, Argentina and Australia. Rabobank is also the principal agent and participant in the Company’s revolving credit facility (see Note 7). The majority of the assets of the Company’s finance joint ventures represents finance receivables. The majority of the liabilities represents notes payable and accrued interest. Under the various joint venture agreements, Rabobank or its affiliates provide financing to the joint venture companies, primarily through lines of credit. During 2021, the Company did not make additional investments in its finance joint ventures. During 2020, the Company made a total of approximately $1.9 million of additional investments in its finance joint venture in the Netherlands. During 2019, the Company did not make additional investments in its finance joint ventures. During 2021, the Company received approximately $84.4 million dividends from certain of its finance joint ventures. During 2020, the Company did not receive dividends from its finance joint ventures. During 2019, the Company received approximately $40.5 million dividends from certain of its finance joint ventures.
The Company’s finance joint ventures provide retail financing and wholesale financing to its dealers. The terms of the financing arrangements offered to the Company’s dealers are similar to arrangements the finance joint ventures provide to unaffiliated third parties. In addition, the Company transfers, on an ongoing basis, a majority of its wholesale receivables in North America, Europe and Brazil to its U.S., Canadian, European and Brazilian finance joint ventures (see Note 4). The Company maintains a remarketing agreement with its U.S. finance joint venture and has outstanding guarantees of minimum residual values that may be owed to its finance joint ventures in the U.S. and Canada upon the expiration of certain eligible operating leases and has guarantees with its other finance joint ventures which were not material (see Note 12). In addition, as part of sales incentives provided to end users, the Company may from time to time subsidize interest rates of retail financing provided by its finance joint ventures. The cost of those programs is recognized at the time of sale to the Company’s dealers (see Note 1).
The Company has a minority equity interest in Tractors and Farm Equipment Limited (“TAFE”), which manufactures and sells Massey Ferguson-branded equipment primarily in India, and also supplies tractors and components to the Company for sale in other markets. On October 15, 2020, TAFE repurchased 461,000 shares of its common stock from the Company for approximately $33.9 million, resulting in an approximate remaining 20.7% ownership interest. Mallika Srinivasan, who is the Chairman and Managing Director of TAFE, is currently a member of the Company’s Board of Directors. As of December 31, 2021, TAFE beneficially owned 12,150,152 shares of the Company’s common stock, not including shares of the Company’s common stock received by Ms. Srinivasan for service as a director. The Company and TAFE are parties to an agreement pursuant to which, among other things, TAFE has agreed not to purchase in excess of 12,150,152 shares of the Company’s common stock, subject to certain adjustments, and the Company has agreed to annually nominate a TAFE representative to its Board of Directors. During 2021, 2020 and 2019, the Company purchased approximately $137.6 million, $78.9 million and $92.7 million, respectively, of tractors and components from TAFE. During 2021, 2020 and 2019, the Company sold approximately $1.4 million, $1.3 million and $1.5 million, respectively, of parts to TAFE. The Company received dividends from TAFE of approximately $2.0 million, $1.8 million and $2.0 million during 2021, 2020 and 2019, respectively.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. 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 years ended December 31, 2021, 2020 and 2019 based on the Company’s reportable segments are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years Ended December 31, | | North America | | South America | | Europe/Middle East | | Asia/Pacific/Africa | | Consolidated |
2021 | | | | | | | | | | |
Net sales | | $ | 2,659.2 | | | $ | 1,307.7 | | | $ | 6,221.7 | | | $ | 949.7 | | | $ | 11,138.3 | |
Income from operations | | 238.1 | | | 132.2 | | | 755.4 | | | 113.9 | | | 1,239.6 | |
Depreciation | | 60.8 | | | 26.5 | | | 116.5 | | | 16.9 | | | 220.7 | |
Assets | | 1,328.1 | | | 922.7 | | | 2,348.7 | | | 610.6 | | | 5,210.1 | |
Capital expenditures | | 41.2 | | | 32.5 | | | 184.6 | | | 11.5 | | | 269.8 | |
2020 | | | | | | | | | | |
Net sales | | $ | 2,175.0 | | | $ | 873.8 | | | $ | 5,366.9 | | | $ | 734.0 | | | $ | 9,149.7 | |
Income from operations | | 193.7 | | | 29.3 | | | 585.3 | | | 62.1 | | | 870.4 | |
Depreciation | | 61.3 | | | 25.8 | | | 110.5 | | | 14.9 | | | 212.5 | |
Assets | | 1,051.9 | | | 687.6 | | | 2,238.7 | | | 536.2 | | | 4,514.4 | |
Capital expenditures | | 42.2 | | | 18.8 | | | 201.8 | | | 7.1 | | | 269.9 | |
2019 | | | | | | | | | | |
Net sales | | $ | 2,191.8 | | | $ | 802.2 | | | $ | 5,328.8 | | | $ | 718.6 | | | $ | 9,041.4 | |
Income (loss) from operations | | 121.6 | | | (39.4) | | | 638.2 | | | 43.4 | | | 763.8 | |
Depreciation | | 61.6 | | | 32.4 | | | 102.7 | | | 14.2 | | | 210.9 | |
Assets | | 1,125.6 | | | 758.0 | | | 2,187.7 | | | 430.2 | | | 4,501.5 | |
Capital expenditures | | 52.1 | | | 32.9 | | | 173.5 | | | 14.9 | | | 273.4 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation from the segment information to the consolidated balances for income from operations and total assets is set forth below (in millions):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Segment income from operations | $ | 1,239.6 | | | $ | 870.4 | | | $ | 763.8 | |
Corporate expenses | (135.2) | | | (134.7) | | | (129.0) | |
Amortization of intangibles | (61.1) | | | (59.5) | | | (61.1) | |
Stock compensation expense | (26.6) | | | (36.8) | | | (40.0) | |
Impairment charges | — | | | (20.0) | | | (176.6) | |
Restructuring expenses | (15.3) | | | (19.7) | | | (9.0) | |
Consolidated income from operations | $ | 1,001.4 | | | $ | 599.7 | | | $ | 348.1 | |
| | | | | |
Segment assets | $ | 5,210.1 | | | $ | 4,514.4 | | | $ | 4,501.5 | |
Cash and cash equivalents | 889.1 | | | 1,119.1 | | | 432.8 | |
| | | | | |
Investments in affiliates | 413.5 | | | 442.7 | | | 380.2 | |
Deferred tax assets, other current and noncurrent assets | 996.4 | | | 665.9 | | | 645.2 | |
Intangible assets, net | 392.2 | | | 455.6 | | | 501.7 | |
Goodwill | 1,280.8 | | | 1,306.5 | | | 1,298.3 | |
Consolidated total assets | $ | 9,182.1 | | | $ | 8,504.2 | | | $ | 7,759.7 | |
Property, plant and equipment, right-of-use lease assets and amortizable intangible assets by country as of December 31, 2021 and 2020 was as follows (in millions):
| | | | | | | | | | | |
| 2021 | | 2020 |
United States | $ | 499.1 | | | $ | 541.2 | |
Germany | 446.7 | | | 456.6 | |
Finland | 189.5 | | | 191.4 | |
Brazil | 144.9 | | | 150.4 | |
France | 133.2 | | | 137.6 | |
Italy | 112.7 | | | 129.0 | |
China | 91.6 | | | 98.9 | |
Denmark | 84.7 | | | 101.9 | |
Other | 222.0 | | | 232.8 | |
| $ | 1,924.4 | | | $ | 2,039.8 | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. 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 consideration precedes the Company’s performance with respect to precision technology services and where the performance obligation is satisfied over time.
Significant changes in the balance of contract liabilities for the years ended December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | | | | | |
| | | | |
| | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Balance at beginning of period | | | $ | 172.0 | | | $ | 104.0 | |
| | | | | |
Advance consideration received | | | 227.8 | | | 192.7 | |
| | | | | |
Revenue recognized during the period for extended warranty contracts, maintenance services and technology services | | | (64.0) | | | (46.6) | |
Revenue recognized during the period related to grain storage and protein production systems | | | (103.5) | | | (85.6) | |
| | | | | |
| | | | | |
Foreign currency translation | | | (6.1) | | | 7.5 | |
Balance as of December 31 | | | $ | 226.2 | | | $ | 172.0 | |
The contract liabilities are classified as either “Other current liabilities” and "Other noncurrent liabilities" or “Accrued expenses” in the Company’s Consolidated Balance Sheets. In 2021, the Company recognized approximately $80.7 million of revenue that was recorded as a contract liability at the beginning of 2021. In 2020, the Company recognized approximately $44.0 million of revenue that was recorded as a contract liability at the beginning of 2020.
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 December 31, 2021 are $73.2 million in 2022, $62.5 million in 2023, $35.4 million in 2024, $16.9 million in 2025 and $7.6 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.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Disaggregated Revenue
Net sales for the year ended December 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 | | $ | 2,116.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,116.2 | |
Canada | | 436.7 | | | — | | | — | | | — | | | 436.7 | |
Germany | | — | | | — | | | 1,332.0 | | | — | | | 1,332.0 | |
France | | — | | | — | | | 1,129.1 | | | — | | | 1,129.1 | |
United Kingdom and Ireland | | — | | | — | | | 635.3 | | | — | | | 635.3 | |
Finland and Scandinavia | | — | | | — | | | 836.3 | | | — | | | 836.3 | |
Other Europe | | — | | | — | | | 2,104.6 | | | — | | | 2,104.6 | |
South America | | — | | | 1,294.8 | | | — | | | — | | | 1,294.8 | |
Middle East and Algeria | | — | | | — | | | 184.4 | | | — | | | 184.4 | |
Africa | | — | | | — | | | — | | | 152.3 | | | 152.3 | |
Asia | | — | | | — | | | — | | | 436.5 | | | 436.5 | |
Australia and New Zealand | | — | | | — | | | — | | | 360.9 | | | 360.9 | |
Mexico, Central America and Caribbean | | 106.3 | | | 12.9 | | | — | | | — | | | 119.2 | |
| | $ | 2,659.2 | | | $ | 1,307.7 | | | $ | 6,221.7 | | | $ | 949.7 | | | $ | 11,138.3 | |
| | | | | | | | | | |
Major products: | | | | | | | | | | |
Tractors | | $ | 940.4 | | | $ | 664.6 | | | $ | 4,338.2 | | | $ | 443.7 | | | $ | 6,386.9 | |
Replacement parts | | 379.1 | | | 131.8 | | | 1,070.5 | | | 106.5 | | | 1,687.9 | |
Grain storage and protein production systems | | 534.9 | | | 140.1 | | | 174.0 | | | 227.1 | | | 1,076.1 | |
Combines, application equipment and other machinery | | 804.8 | | | 371.2 | | | 639.0 | | | 172.4 | | | 1,987.4 | |
| | $ | 2,659.2 | | | $ | 1,307.7 | | | $ | 6,221.7 | | | $ | 949.7 | | | $ | 11,138.3 | |
| | | | | | | | | | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net sales for the year ended December 31, 2020 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 | | $ | 1,763.2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,763.2 | |
Canada | | 325.9 | | | — | | | — | | | — | | | 325.9 | |
Germany | | — | | | — | | | 1,280.6 | | | — | | | 1,280.6 | |
France | | — | | | — | | | 1,080.2 | | | — | | | 1,080.2 | |
United Kingdom and Ireland | | — | | | — | | | 557.8 | | | — | | | 557.8 | |
Finland and Scandinavia | | — | | | — | | | 698.5 | | | — | | | 698.5 | |
Other Europe | | — | | | — | | | 1,613.1 | | | — | | | 1,613.1 | |
South America | | — | | | 865.4 | | | — | | | — | | | 865.4 | |
Middle East and Algeria | | — | | | — | | | 136.7 | | | — | | | 136.7 | |
Africa | | — | | | — | | | — | | | 58.3 | | | 58.3 | |
Asia | | — | | | — | | | — | | | 373.1 | | | 373.1 | |
Australia and New Zealand | | — | | | — | | | — | | | 302.6 | | | 302.6 | |
Mexico, Central America and Caribbean | | 85.9 | | | 8.4 | | | — | | | — | | | 94.3 | |
| | $ | 2,175.0 | | | $ | 873.8 | | | $ | 5,366.9 | | | $ | 734.0 | | | $ | 9,149.7 | |
| | | | | | | | | | |
Major products: | | | | | | | | | | |
Tractors | | $ | 692.0 | | | $ | 469.8 | | | $ | 3,814.3 | | | $ | 296.1 | | | $ | 5,272.2 | |
Replacement parts | | 338.4 | | | 84.0 | | | 936.1 | | | 87.2 | | | 1,445.7 | |
Grain storage and protein production systems | | 471.0 | | | 82.8 | | | 122.2 | | | 226.0 | | | 902.0 | |
Combines, application equipment and other machinery | | 673.6 | | | 237.2 | | | 494.3 | | | 124.7 | | | 1,529.8 | |
| | $ | 2,175.0 | | | $ | 873.8 | | | $ | 5,366.9 | | | $ | 734.0 | | | $ | 9,149.7 | |
| | | | | | | | | | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net sales for the year ended December 31, 2019 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 | | $ | 1,787.4 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,787.4 | |
Canada | | 302.0 | | | — | | | — | | | — | | | 302.0 | |
Germany | | — | | | — | | | 1,194.3 | | | — | | | 1,194.3 | |
France | | — | | | — | | | 1,097.6 | | | — | | | 1,097.6 | |
United Kingdom and Ireland | | — | | | — | | | 561.9 | | | — | | | 561.9 | |
Finland and Scandinavia | | — | | | — | | | 772.8 | | | — | | | 772.8 | |
Other Europe | | — | | | — | | | 1,629.0 | | | — | | | 1,629.0 | |
South America | | — | | | 789.7 | | | — | | | — | | | 789.7 | |
Middle East and Algeria | | — | | | — | | | 73.2 | | | — | | | 73.2 | |
Africa | | — | | | — | | | — | | | 116.2 | | | 116.2 | |
Asia | | — | | | — | | | — | | | 344.7 | | | 344.7 | |
Australia and New Zealand | | — | | | — | | | — | | | 257.7 | | | 257.7 | |
Mexico, Central America and Caribbean | | 102.4 | | | 12.5 | | | — | | | — | | | 114.9 | |
| | $ | 2,191.8 | | | $ | 802.2 | | | $ | 5,328.8 | | | $ | 718.6 | | | $ | 9,041.4 | |
| | | | | | | | | | |
Major products: | | | | | | | | | | |
Tractors | | $ | 662.4 | | | $ | 447.7 | | | $ | 3,772.0 | | | $ | 300.6 | | | $ | 5,182.7 | |
Replacement parts | | 310.2 | | | 88.2 | | | 874.8 | | | 74.6 | | | 1,347.8 | |
Grain storage and protein production systems | | 547.9 | | | 79.5 | | | 172.8 | | | 234.6 | | | 1,034.8 | |
Combines, application equipment and other machinery | | 671.3 | | | 186.8 | | | 509.2 | | | 108.8 | | | 1,476.1 | |
| | $ | 2,191.8 | | | $ | 802.2 | | | $ | 5,328.8 | | | $ | 718.6 | | | $ | 9,041.4 | |
| | | | | | | | | | |
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Leases
The Company leases certain land, buildings, machinery, equipment, vehicles and office and computer equipment under finance and operating leases. The Company accounts for these leases pursuant to ASU 2016-02, “Leases”. Under the standard, lessees are required to record an asset (ROU asset or finance lease asset) and a lease liability. ROU assets represent the Company’s right to use an underlying asset during the lease term while lease liabilities represent the Company’s obligation to make lease payments during the lease term. The standard allows for two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases result in the recognition of a single lease expense on a straight-line basis over the lease term whereas finance leases result in an accelerated expense. ASU 2016-02 also contains guidance regarding the identification of embedded leases in service and supply contracts, as well as the identification of lease and nonlease components of an arrangement. All leases greater than 12 months result in the recognition of an ROU asset and liability at the lease commencement date based on the present value of the lease payments over the lease term. The present value of the lease payments is calculated using the applicable weighted-average discount rate. The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company estimates an applicable incremental borrowing rate. The incremental borrowing rate is estimated using the currency denomination of the lease, the contractual lease term and the Company’s applicable borrowing rate.
The Company does not recognize an ROU asset or lease liability with respect to operating leases with an initial term of 12 months or less and recognizes expense on such leases on a straight-line basis over the lease term. The Company accounts for lease components separately from nonlease components other than for real estate and office equipment. The Company evaluated its supplier agreements for the existence of leases and determined these leases comprised an insignificant portion of its supplier agreements. As such, these leases were not material to the Company’s Consolidated Balance Sheets. The Company has certain leases that contain one or more options to terminate or renew that can extend the lease term up to 15 years. Options that the company is reasonably certain to exercise are included in the lease term. The depreciable life of ROU assets and leasehold improvements are limited by the expected lease term. The Company has certain lease agreements that include variable rental payments that are adjusted periodically for inflation based on the index rate as defined by the applicable government authority. Generally, the Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
Total lease assets and liabilities at December 31, 2021 and 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
Lease Assets | | Classification | | As of December 31, 2021 | | As of December 31, 2020 |
Operating ROU assets | | Right-of-use lease assets | | $ | 154.1 | | | $ | 165.1 | |
Finance lease assets | | Property, plant and equipment, net(1) | | 10.6 | | | 15.1 | |
Total lease assets | | | | $ | 164.7 | | | $ | 180.2 | |
| | | | | | |
Lease Liabilities | | Classification | | As of December 31, 2021 | | As of December 31, 2020 |
Current: | | | | | | |
Operating | | Accrued expenses | | $ | 42.3 | | | $ | 43.5 | |
Finance | | Other current liabilities | | 3.8 | | | 3.0 | |
| | | | | | |
Noncurrent: | | | | | | |
Operating | | Operating lease liabilities | | 115.5 | | | 125.9 | |
Finance | | Other noncurrent liabilities | | 6.0 | | | 9.8 | |
Total lease liabilities | | | | $ | 167.6 | | | $ | 182.2 | |
____________________________________
(1) Finance lease assets are recorded net of accumulated depreciation of $7.8 million and $15.6 million as of December 31, 2021 and 2020, respectively.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total lease costs for 2021 and 2020 are set forth below (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Classification | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Operating lease cost | | Selling, general and administrative expenses | | $ | 59.0 | | | $ | 54.0 | |
Variable lease cost | | Selling, general and administrative expenses | | 1.0 | | | 1.7 | |
Short-term lease cost | | Selling, general and administrative expenses | | 18.7 | | | 11.0 | |
Finance lease cost: | | | | | | |
Amortization of lease assets | | Depreciation expense(1) | | 2.4 | | | 3.7 | |
Interest on lease liabilities | | Interest expense, net | | 0.3 | | | 0.6 | |
Total lease cost | | | | $ | 81.4 | | | $ | 71.0 | |
____________________________________
(1) Depreciation expense was included in both cost of goods sold and selling, general and administrative expenses.
Lease payment amounts for operating and finance leases with remaining terms greater than one year as of December 31, 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
| | | | | | Operating Leases | | Finance Leases |
| | | | | | | | |
| | | | | | | | |
2022 | | | | | | $ | 45.7 | | | $ | 4.0 | |
2023 | | | | | | 36.2 | | | 0.9 | |
2024 | | | | | | 24.5 | | | 0.6 | |
2025 | | | | | | 17.3 | | | 0.4 | |
2026 | | | | | | 12.3 | | | 0.2 | |
Thereafter | | | | | | 39.1 | | | 6.3 | |
Total lease payments | | | | | | 175.1 | | | 12.4 | |
Less: imputed interest(1) | | | | | | (17.3) | | | (2.5) | |
| | | | | | | | |
Present value of lease liabilities | | | | | | $ | 157.8 | | | $ | 9.9 | |
____________________________________
(1) Calculated using the implicit interest rate for each lease.
Lease payment amounts for operating and finance leases with remaining terms greater than one year as of December 31, 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 |
| | | | | | Operating Leases | | Finance Leases |
2021 | | | | | | $ | 47.6 | | | $ | 3.3 | |
2022 | | | | | | 37.7 | | | 1.4 | |
2023 | | | | | | 28.6 | | | 1.1 | |
2024 | | | | | | 18.9 | | | 0.8 | |
2025 | | | | | | 13.6 | | | 0.6 | |
Thereafter | | | | | | 44.5 | | | 9.1 | |
Total lease payments | | | | | | 190.9 | | | 16.3 | |
Less: imputed interest(1) | | | | | | (21.5) | | | (3.5) | |
| | | | | | | | |
Present value of lease liabilities | | | | | | $ | 169.4 | | | $ | 12.8 | |
____________________________________
(1) Calculated using the implicit interest rate for each lease.
AGCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the weighted-average remaining lease term and weighted-average discount rate:
| | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
Weighted-average remaining lease term: | | | | |
Operating leases | | 7 years | | 7 years |
Finance leases | | 12 years | | 15 years |
| | | | |
Weighted-average discount rate: | | | | |
Operating leases | | 3.1 | % | 3.5 | % |
Finance leases | | 2.4 | % | 2.7 | % |
The following table summarizes the supplemental cash flow information for 2021 and 2020 (in millions):
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 59.8 | | | $ | 54.1 | |
Operating cash flows from finance leases | | 0.2 | | | 0.4 | |
Financing cash flows from finance leases | | 2.6 | | | 3.8 | |
| | | | |
Leased assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 50.6 | | | $ | 30.8 | |
Finance leases | | 0.9 | | | 0.9 | |