Letter To Stockholders
We are pleased to report that AGCO increased earnings in a very difficult
year. At a time when others struggled to reduce their losses, your Company
was able to continue the implementation of its strategic plan, while increasing
our earnings per share by 64%.
In spite of record farm subsidies in the United States, the agricultural recession continued in 2001. Feeling pressured, farmers deferred equipment purchases in favor of paying down debt. Livestock diseases early in the year in Europe impacted negatively on the stability of that market, and in South America, market growth in Brazil was partially offset by declines in Argentina. The Asia-Pacific market for equipment sales improved slightly, but the much-needed increase in commodity exports to Asia never materialized.
In total, global market industry sales improved slightly over the year 2000. And, with the easing of competitive pressures, AGCO enjoyed improved opportunities in 2001. Nevertheless, real-farm income did not improve, and the impact of commodity surpluses, coupled with the lack of increases in commodity exports, continued the downward trend of the farm equipment industry.
Operating Strategies
Result In Increased Earnings:
From the outset of 2001, management has focused on improving earnings
in a stable market. Net sales for the year 2001 were $2.5 billion, or
9% greater, than the prior year largely due to our acquisition of Ag-Chem
in April of 2001. Earnings, excluding restructuring expenses and an extraordinary
loss, were $31.5 million, $0.46 per share, compared to our 2000 results
of $0.28 per share. This earnings improvement is indicative of the cost
reduction programs that were successfully implemented during the year,
as well as the selective, focused sales strategies utilized throughout
the world. Gross margins improved by 1.0% of sales in 2001 as a result
of these actions. The Company generated free cash flow of $185.5 million
and our debt-to-capital ratio was 43.6%, which we expect to reduce below
40% by the end of 2002.
Facility Rationalization
Reduced Costs:
After altering production schedules at the outset of the farm recession
in 1998, and further scaling down the overhead burden at many locations,
AGCO established a long-term plan to improve earnings in a down market.
Part of this plan was facility consolidation and maximization. To that
end, in 2001, the Hesston facility resumed full production, now charged
with the production responsibilities formerly undertaken by plants closed
in Coldwater, Ohio, Lockney, Texas, and Independence, Missouri. The steep
learning curve of the start up of this facility, however, coupled with
a parts shortage, prevented us from satisfying the demand in the first
half of the year.
Our plant rationalization plans also extended into South America, where tractor production in Argentina was merged into the Canoas, Brazil factory. This combined common platform operation is designed to lower costs, while simultaneously improving quality.
Combine production in Argentina was shifted to our plant in Santa Rosa, Brazil. This production was coupled with new technology and design from our European combine operations in Denmark, and, again, a common product platform was also introduced for combines. This facility is now a leading source for combines globally and has not only introduced new products to a variety of markets, but also has done so with substantially improved margins. These rationalization efforts, grounded in common platform design, successfully reduced both internal overhead costs and total product costs, while, also, encouraging new product development for new markets and improved operating margins for the Company.
For example, specific models were introduced into North America with improved margins and performance characteristics. These units made significant gains throughout the year, as measured in increased sales, market shares and profitability. The initial start up costs for these changes were absorbed in 2000, allowing future years to benefit from the full advantages of these new strategies.
FENDT Exceeds Expectations
In North America:
The continued expansion of the famous FENDT tractors in North America
exceeded our expectations, yielding increased market share through the
development of our exclusive dealer network. The unique technology of
this product continues to surpass all competitors. With outstanding performance,
exceptional fuel economy, and the lowest cost of operation, the FENDT
family of tractors quickly won over North American farmers, leaving few
to wonder why the brand dominates the German market.
New AGCO Brand Tractor
Introduced:
A major milestone for AGCO was the introduction of the AGCO brand tractor
in the summer, replacing both the AGCO Allis and the AGCO White tractors
that have had such a long history in the industry. The Allis and White
dealer networks were merged into a single force for the AGCO brand, and
the product was widely acknowledged as a superior full-featured tractor
aimed more directly at our targeted consumer. This single brand approach
in North America reduces marketing and production costs, while solidifying
our dealer organization.
With this new entry came a clearer delineation of our brand-marketing strategy in North America, whereby dealers can offer products to various market segments without diminishing a specific brand identity. For instance, FENDT continues to target the high-tech, premium-featured product market and is clearly recognized today as being without peer. The AGCO brand will include a range of full-featured products aimed at the broad, general performance market. The Massey Ferguson brand will feature the economy and reliability that are widely identified with this significant market segment. This brand strategy minimizes inventory and reduces marketing and manufacturing costs, a combination that provides a more competitive product for our customers and improved margins for our stockholders.
In Europe, we introduced several new products under the FENDT brand. We also launched the full range of Massey Ferguson tractor models, updated with significant operational and quality improvements. Technology advances in the planter products and hay tools were also introduced throughout the year – further evidence of AGCO’s commitment to providing equipment that improves farm productivity and net financial return.
Ag-Chem Acquisition Leads
To
Formation of New Sprayer Division:
Of considerable importance in 2001, AGCO acquired the Ag-Chem company
in a stock and cash purchase transaction. Ag-Chem is a leading designer,
manufacturer, and distributor of large high-tech sprayers for the application
of fertilizer and chemicals. Other products include a self-propelled bio-waste
system to dispose of animal waste as part of an environmental management
system.
Accompanying the Ag-Chem acquisition was ownership of their Soilteq division, which designs and merchandises site-specific farming systems to enhance crop yield and productivity. These systems are supported by global position system (GPS) technology and are on the leading edge of farm management. The Soilteq system will contribute to preserving the environment with a method of application certification that will eliminate concerns over excess pollutants contaminating the farm or nearby streams and rivers. With these products in hand, AGCO will be able to increase farm productivity even further and do so at a lower cost.
The Ag-Chem acquisition, which gave AGCO more than 50% share of the North American market for sprayers, was completed in late April after the peak selling season for Ag-Chem equipment. During the balance of the year, we integrated the business with existing AGCO operations, making Ag-Chem an even more cost-effective operation. Another cost-saving initiative was to combine the Spra-Coupe and Willmar sprayers, previously produced by AGCO at our Willmar, Minnesota facility, into the Ag-Chem Jackson, Minnesota operation. This consolidation of sprayer manufacturing and engineering into one facility lowered costs as we were able to close the Willmar plant as well as the Minnetonka, Minnesota general offices of Ag-Chem and an Ag-Chem production facility in Benson, Minnesota.
Additionally, the field parts and service facilities of Ag-Chem were closed and the parts distribution responsibilities for Ag-Chem products were integrated with the AGCO parts distribution facility at Batavia, Illinois. The result is a very centralized service organization. During the transition to this new organization, AGCO dealers in certain locations have been contracted to perform service repairs to Ag-Chem products in order to assure prompt and effective service support for all Ag-Chem customers.
Overall, the Ag-Chem acquisition led to the formation of the Sprayer Division within AGCO – a division that we now anticipate will mean additional revenue growth throughout the world.
Acquisition of Caterpillar
Track
Tractors Opens New Opportunities:
In December, we announced another major acquisition that we believe will
generate a new growth opportunity for AGCO. We agreed to purchase the
agricultural equipment business of Caterpillar, mainly a new range of
track tractors from 225 to 500 horsepower. Caterpillar has been in the
design, manufacture, and distribution of a range of track tractors, generally
focused on the broad-acre or corporate farm customer, for more than 15
years and has garnered a major share of this particular market segment.
The track tractor features the highest horsepower available to pull multiple
implements with minimal ground compaction. Such work is possible only
with the track system. The Caterpillar acquisition includes the design
of the new MT 700 and MT 800 series product; the production operations
at DeKalb, Illinois; supply and technology agreements with Caterpillar
for long-term manufacturing; and product development. The agreement also
includes the ownership of the Challenger brand name, the use of the CAT
logo on the Challenger track tractors, and the authorized distribution
of any AGCO products through the CAT dealer network, garnering AGCO unrestricted
market access throughout the world.
AGCO met with CAT dealers in early January and introduced them to an all-new, full line of farm equipment to be known as the Challenger brand. This new farm equipment brand is expected to include a range of combines, four-wheeled rubber tire tractors from 50 to 250 horsepower, and a line of hay tools. Other AGCO products such as planters, implements, sprayers, and the FENDT tractor are to be available upon specific request if not in conflict with existing dealers. The new Challenger brand will focus a complete line of farm equipment for the broad-acre, or corporate farm sector, of the world markets.
The Company introduced the marketing support plans, distribution strategy, and parts support systems, including technology support, for the track tractors and the new products presented by AGCO. The response from the CAT dealers was very encouraging and indicated wide support for the program. The agreement closed in March 2002, with anticipated sales of the track tractors to follow in the second quarter. We are very optimistic about this opportunity to manufacture another leading-edge technology product and our access to the CAT dealer network as a means to generate incremental sales, increase industry share, and improve operating margins.
Our Objective: Improve
Earnings In a Mature Industry:
The unexpected events of September 11 were a shock to our Company, just
as they were to many others. Fortunately, the negative impact to our sales
was minimal, thanks to the diversified markets we serve and the varied
products we offer. We believe that the events that established the coalition
of nations against terrorism will also promote increased commodity exports
and, perhaps, improved commodity pricing in the coming year.
AGCO has updated its business plans for the next few years and has focused on improving earnings in a mature industry. A very detailed business plan was generated in 2001 to supplement prior planning and to provide a roadmap to improve earnings to pre-1997 recessionary levels – without a major recovery in industry demand. This plan contains specific initiatives to reduce operating and product costs and to increase market share from prior acquisitions. The Company is totally focused on achieving these objectives within the 2004 timeframe and is confident the identified initiatives can be accomplished. Indeed, we do anticipate that we will continue to see the fruits of our labor.
All of us at AGCO take great pride in growing our business and securing the promising future we are confident we will achieve. In times of prosperity, as well as in times of trial, we feel privileged that our combined efforts strengthen an industry devoted to feeding all the people of the world. This sense of privilege perpetually steels our determination to succeed in a business that few others can make the claim improves the lives of so many through the labors of such a relative few.
Robert J. Ratliff
Chairman, President, and Chief Executive Officer
March 20, 2002
