Ag-Chem Equipment Company, Inc.

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Ag-Chem Equipment Company, Inc.

5720 Smetana Drive
Minnetonka, Minnesota 55343-9688
(612) 933-9006
Fax: (612) 933-7432

Public Company
Employees: 1,393
Sales: $234 million (1995)
Stock Exchanges: NASDAQ
SICs: 3523 Farm Machinery & Equipment; 3559 Special Industry Machinery Not Elsewhere Classified

Ag-Chem Equipment Company, Inc. is the leader in a specialized market niche of heavy agricultural equipment used in applying liquid and dry fertilizer, crop protection products, and biosolids to fields. The company manufactures and markets high flotation, self-propelled, off-road chassis and product application systems. The main customers for the equipment are professional chemical application businesses rather than the individual farmer.

Ag-Chem, unlike many other agricultural equipment makers, survived the extreme ups and downs of American agriculture in the last half of the 20th century.

From Distributor to Manufacturer: 1960s and 1970s

Ag-Chem Equipment Company, Inc. was established in 1963 as a distributor of specialized spray equipment for agricultural use. The company found itself at a crossroad in 1967, when its major supplier announced that a large agriculture equipment company would begin distributing its line as well. The product line of Hahn, Inc. brought in 95 percent of Ag-Chem sales at the time. Ag-Chem founder A. E. McQuinn responded to the dilemma with a lawsuit against Hahn, and he began transforming his distribution company into a manufacturing business.

Ag-Chem raised $254,000 in capital and produced its first major product, a pull-type field sprayer, in 1968; planning for a new manufacturing facility began that same year. In 1969, Ag-Chem introduced its first self-propelled sprayer, the Ag-Gator, which sold in the $6,500 to $10,000 price range. The product received high marks from customers for its reliability. Ag-Chem also became a publicly-owned company in 1969, with the sale of 100,000 shares of common stock. Sales of Ag-Chem produced products increased by 70 percent over 1968 to $300,000 and rose another 55 percent in 1970.

Ag-Chem completed the transition from distributor to manufacturer in 1971. Company founder, McQuinn was a hands-on manager in those early days of manufacturing, according to a 1973 Corporate Report Minnesota article. His concentrated cost-control and marketing efforts brought the new manufacturing business to profitability by its third production year.

The company marked the beginning of its second decade in business with another new product, the Terra-Gatora forerunner of the high-flotation equipment destined to be a corner-stone for the company. Sales for 1973 reached $3.3 million. Thriving in the strong agricultural market, Ag-Chem made its first acquisition in 1974. AgTec, Inc., a former subsidiary of Stokely-Van Camp, manufactured spray application equipment used in orchards, gardens, groves, and vineyards. A completed plant expansion more than doubled the size of its Jackson, Minnesota, manufacturing facility. Sales for 1974, nearly double the previous years, climbed to $6.4 million. The lawsuit against Hahn, Inc. was finally settled in 1974 and was ruled in favor of Ag-Chem.

Ag-Chems growth rate accelerated rapidly in the mid-1970s. Sales for 1976 jumped 51.9 percent $17.1 million, and profits grew by 32.6 percent. The company employed 350 people at its Jackson plant. Jerr Boschee, in a November 1976 article in Corporate Report Minnesota, called Ag-Chems growth phenomenal. But a severe drought in the upper Midwest began to put a damper on sales.

Ag-Chem\s agricultural equipment products also did some growing during the mid-1970s. The company began manufacturing application equipment which could treat as much as a 1,000 acres in a single day. Ag-Chem was also laying the groundwork for expansion of its business areas. In 1977, the company entered the industrial market with sludgethe byproduct of sewage treatmentapplication equipment. An international marketing effort was put in place and sales were made to customers in Europe and the Mideast in 1976. The first major foreign sale, to the U.S.S.R., came in 1980. Ag-Chem appeared on Corporate Report Minnesota s annual list of the states top 100 publicly-traded companies for the first time in 1980 and celebrated its 14th consecutive year of sales growth.

Fortune Falls and Rises with the Agricultural Economy in the 1980s

The United States farm economy was severely depressed from 1981 to 1986. With farmers holding off on equipment purchases, the farm equipment industry stumbled. Major U.S. manufacturers were faced with consolidations, takeovers by foreign companies, and the elimination of established product lines. Ag-Chem continued to dominate its markets in 1981 is spite of deteriorating economic conditions. Sales of $31.8 million were only slightly higher than the previous year, but earnings per share actually increased by 49 percent, aided by the implementation of company-wide cost controls and reduction of inventories and short-term debt. The company continued to push forward, acquiring a water tank manufacturer in 1983 and introducing new models in its agricultural equipment line. The industrial division experienced steady growth, supplying equipment to municipalities and the mining industry. But the agricultural depression hit Ag-Chem too: continuous years of growth and profit ended.

Ag-Chem lost money in 1985 and 1986. Its locally traded over-the-counter stock sold for pennies a share. In 1987, the company closed its Salinas, Kansas, plant and consolidated production in Jackson: total company assets were reduced from $21.9 million to $11.6 million. According to the company, its cost cutting programs and the loyalty of employees and suppliers helped Ag-Chem survive the period.

The fortunes of the agricultural equipment industry shifted again in 1988. A drought and subsequent depletion of the grain surplus prompted the United States government to bring farm acreage idled by the Payment-In-Kind program back into production. Demand for equipment rebounded. Ag-Chems 1988 operating profits increased by 125 percent to $2.8 million, and revenues rose by 32 percent to $52.4 million. One reporter for the Minneapolis Star Tribune wrote in 1989, That downsizing, plus increased production efficiency, have produced the enormous increases the company is experiencing at the bottom line.

Ag-Chem stock prices rose to $7 per share by February 1989. With sixty-five percent of Ag-Chem stock being held by insidersChairman McQuinn alone held 55 percentinvestors had to vie for the approximately one million in shares being traded. The newly thriving business was forced to look for outside production assistance to meet consumer demand. Ag-Chem continued to be the leading manufacturer in its specialized niche and planned to stay there by introducing new and more powerful models for the successful Terra-Gator line and by again expanding plant capacity.

New Dimensions in Agriculture: The 1990s

Ag-Chem recorded a company high $6.1 million in net earnings in 1990. Sales and customer support offices had been opened across the United States and in Canada in an effort to expand its business area. Fertilizer dealers made up Ag-Chems largest customer group. Municipalities and private waste disposal contractors continued to be the primary purchasers in the industrial segment of the business.

In 1991, Ag-Chem purchased Lor-Al, Inc., a Minnesota-based competitor. Lor-Al had initiated a lawsuit for patent and trademark infringement against Ag-Chem in 1988. The acquisition ended the litigation and brought on board Lor-Als converted truck chassis line of applicators and 60 percent ownership of Soil Teq, Inc., a maker of site-specific application systems. Ag-Chem also paid Lor-Al $4.5 million in damages. Maintaining that it was undervalued, Ag-Chem repurchased some of its own stock in 1991. The Lor-Al settlement combined with nearly flat sales had an impact on net earnings for the year: they fell to $1.25 million.

The new Lor*Al Products, Inc. subsidiary lost money in 1992during the transition into Ag-Chems operationsand kept Ag-Chems earnings from fully rebounding. But the company surpassed the $100 million milestone in terms of sales. Engineering costs shot up in 1992 with the addition of the high-tech farming systems brought in with Soil Teq. New governmental regulations regarding disposal of biosolidssewage sludge, farm, and organic industrial wasteswere issued in 1992. The company expected sales of subsurface liquid injection equipment and dry sludge spreaders to rise, and said the biosolids reintroduced into the land improved soil fertility and provided other environmental benefits.

Company Perspectives:

We are a company made up of dedicated employees focused on customer satisfaction, quality, new product development, and long term growth. Our ability to operate profitably enables us to continue to develop new products that meet the ever-changing needs of our customers. We intend to build on our current leadership position through product innovation and reinvestment of profits in our business, while delivering the right products at the right time. We believe in success, and we know we succeed only if our customers do.

Ag-Chem became a hot though thinly traded stock, according to business writer Lee Egerstrom in the St. Paul Pioneer Press Dispatch, by the beginning of 1993. The price went from the $7 dollar to the $20 range in less than six months. The cyclical agricultural equipment business was in an upswing at the time, but Ag-Chem was also benefiting from environmental concerns. To reduce risks more farmers had begun to hire local chemical suppliers to apply their field chemicals, and in turn suppliers who purchased large application equipment were buying Ag-Chem stock.

Ag-Chems important midwest region was hit by severe flooding in 1993; Minnesota and Iowa markets made up 15 to 20 percent of the companys business. But Ag-Chem was not just waiting for the waters to recede. The company entered a new market that year. Ag-Chem introduced its RoGator line, a mass-produced post-emerge applicator which competed head-to-head with equipment produced by major manufacturers. The high-clearance row-crop applicator, which had been rushed to market, required improvements that cut into the companys yearly profits. Another of its business areas, the small AgTec division which manufactured orchard and row crop sprayers, had its best year on record. Ag-Chem expected the flooding would actually improve sales the next year as farmers worked to replace lost soil nutrients.

In 1994 Ag-Chem announced an alliance with Unisys Corp.s Electronic Systems Division to develop a navigational system for its site-specific chemical application technology. The SOILECTION variable-blend application system requires an acre-by-acre collection of soil samples. The soil is analyzed and detailed soil maps are created from the data generated. The system helps farmers determine the most effective mixture of fertilizers for specific crop and soil conditions and thereby reducing the amount of chemicals introduced to the environment and maximizing yields. Ag-Chem first used antennas to transmit information to its Terra-Gator applicators; the Unisys system would use satellites. A 1994 article in Minneapolis/St. Paul CityBusiness noted that the variable-release technology was the talk of the farm world, but the expensive systems had not yet taken off in the marketplace.

Ag-Chem sales reached $234 million in 1995; net earnings were up 33 percent to $11.4 million. It was the eighth consecutive year of record sales growth, which averaged out as an annual increase of 25 percent over the time period. International sales grew 97 percent, mainly due to the purchase of its Netherlands distributor. A two-year, $10.7 million expansion of the Jackson plant was concluded with the competition of a new research and development facility and additional manufacturing space. The company spent another $7 million on state-of-the-art manufacturing equipment. The Lor*Al facility where the converted truck chassis and variable release equipment was manufactured was also expanded.

Ag-Chem gained full ownership of the high-tech products and systems maker, Soil Teq, Inc., in 1996. Ag-Chem also announced plans for a new facility dedicated for the training of fertilizer dealers, equipment operators, and farmers in the site-specific agricultural technology. McQuinn said of the project, We offer the only system which incorporates all the elements necessary to fully practice site-specific farming. Key to the process is the education we provide, along with our data collection, processing, and management functions, which make variable input controls of seed, fertilizer, and ag chemicals a reality. According to its 1995 annual report the company had then spent nearly $3 million on software and hardware development on the system. In 1996, company won five of the technology awards given by the American Society of Agricultural Engineers, including one for a Lockheed Martin navigation system for its site-specific agriculture.

The Future

Ag-Chems future prosperity was clearly linked to U.S. agriculture. The company was a proven leader in its traditional product line of chemical application equipment. The industrial division had not produced substantial sales, but the company predicted that increased future sales would come as more industries became involved in land treatment. Although the company was committed to the advancement of site-specific agriculture, its market was still being developed. Ag-Chem survived the changing times of the late 20th century agricultural business; it remained to be seen what other changes were on the horizon for the industry and whether or not Ag-Chem was in step with them.

Principal Subsidiaries

Lor*Al Products, Inc. and Soil Teq, Inc.

Further Reading

Ag-Chem Equipment Co., Minneapolis/ St. Paul CityBusiness, March 18, 1994.

Ag-Chem Equipment Company Inc., Corporate Report Fact Book, 1996, p. 159.

Ag-Chem: On Higher Ground, Star Tribune (Minneapolis), June 29, 1993.

Boschee, Jerr, Can the Business Dollar Survive the Drought? Corporate Report Minnesota, November 1976, pp. 32-34, 53-54, 56.

Carideo, Anthony, Drought Plays a Boon to Ag-Chem, Star Tribune (Minneapolis), February 27, 1989.

Egerstrom, Lee, Ag-Chem Regroups, Considers Expanding, St. Paul Pioneer Press Dispatch, February 20, 1989.

, Farm Changes Boost Outlook for Ag-Chem, St. Paul Pioneer Press Dispatch, March 29, 1993.

Fredrickson, Tom, Eye in the Sky, Down on the Farm, Minneapolis/ St. Paul CityBusiness, July 8, 1994, pp. 1, 29.

Jones, Jim, Soviets Come to Edina in Hunt for Farm Gear, Minneapolis Star, June 3, 1977.

Maler, Kevin, Ag-Chem Snatches Up Office Space for $4.7 Million, Minneapolis/St. Paul CityBusiness, August 27, 1993.

A Strong Hand, Corporate Report Minnesota, October 1973, p. 25.

Kathleen Peippo