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AGCO > SEC Filings for AGCO > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for AGCO CORP /DE


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
Our operations are subject to the cyclical nature of the agricultural industry. Sales of our equipment have been and are expected to continue to be affected by changes in net cash farm income, farm land values, weather conditions, demand for agricultural commodities, commodity prices and general economic conditions. We record sales when we sell equipment and replacement parts to our independent dealers, distributors or other customers. To the extent possible, 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 manufacturing operations and to minimize our investment in inventory. Retail sales by dealers to farmers are highly seasonal and are a function of the timing of the planting and harvesting seasons. As a result, our net sales have historically been the lowest in the first quarter and have increased in subsequent quarters.

RESULTS OF OPERATIONS
For the three months ended September 30, 2012, we generated net income of $94.5 million, or $0.96 per share, compared to net income of $84.4 million, or $0.87 per share, for the same period in 2011. For the nine months ended September 30, 2012, we generated net income of $419.6 million, or $4.25 per share, compared to net income of $298.1 million, or $3.04 per share, for the same period in 2011.

Net sales during the three and nine months ended September 30, 2012 were $2,295.0 million and $7,258.8 million, respectively, which were approximately 9.3% and 16.0% higher than both the three and nine months ended September 30, 2011, respectively, due to sales growth in all of our geographical segments as well as the favorable impact of acquisitions, partially offset by the unfavorable impact of currency translation.

Income from operations for the three months ended September 30, 2012 was $139.6 million, compared to $114.3 million in the three months ended September 30, 2011. Income from operations was $574.3 million for the first nine months of 2012 compared to $424.6 million for the same period in 2011. The increase in income from operations during the nine months ended September 30, 2012 was a result of the benefits of acquisitions, an increase in net sales and improved gross margins resulting from price increases, higher production levels, a better sales mix and material cost control initiatives, partially offset by higher market development expenses.

Income from operations in our Europe/Africa/Middle East ("EAME") region decreased in the three months ended September 30, 2012 and increased in the first nine months of 2012 compared to the same periods in 2011. The decrease in the three months ended September 30, 2012 was primarily due to lower production volumes, a weaker mix of products, the negative impact of currency translation and the impact of start-up costs related to the opening of our new Fendt assembly facility in Germany. The increase in income from operations in the first nine months of 2012 was primarily due to higher sales and production volumes and a better product mix, partially offset by the negative impact of currency translation. In the South America region, income from operations increased in the three and nine months ended September 30, 2012 compared to the same periods in 2011. The increase in income from operations was primarily due to higher sales volumes and improved margins from cost control efforts. Income from operations in North America was higher in the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to the positive impact of acquisitions, higher net sales and cost control initiatives. Income from operations in our Asia/Pacific region decreased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 due to additional market development costs in China which were partially offset by acquisition benefits and improved gross margins.

Industry Unit Retail Sales
In North America, industry unit retail sales of tractors for the first nine months of 2012 increased by approximately 7% compared to the first nine months of 2011, with increases in compact, utility and high horsepower tractors. Record farm income in 2011 and continued favorable farm economics resulted in the strength in retail sales of high horsepower tractors. Improvement in the dairy and livestock sectors has contributed to higher industry unit retail sales of utility tractors. Industry unit retail sales of combines for the first nine months of 2012 decreased by approximately 8% compared to the first nine months of 2011, primarily due to the timing of industry production and high levels of demand experienced in 2011.

In Western Europe, industry unit retail sales of tractors were relatively flat and industry unit retail sales of combines increased approximately 3% for the first nine months of 2012 compared to the first nine months of 2011. Better crop fundamentals are sustaining demand in the key Western European markets of Germany, France and the United Kingdom while demand has weakened in Southern Europe, Scandinavia and Finland.


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

South American industry unit retail sales of tractors in the first nine months of 2012 decreased approximately 2% compared to the elevated levels in the same period in 2011. Industry unit retail sales of combines for the first nine months of 2012 were approximately 9% lower than the first nine months of 2011. Drought impacted the early harvests in southern Brazil and Argentina in the first half of 2012, resulting in weaker demand in these markets. Despite the adverse weather conditions earlier in the year, overall industry demand in South America remains at a high level primarily due to improved crop conditions, attractive government financing programs in Brazil and favorable crop prices.

STATEMENTS OF OPERATIONS
Net sales for the three months ended September 30, 2012 were $2,295.0 million compared to $2,099.1 million for the same period in 2011. Net sales for the first nine months of 2012 were $7,258.8 million compared to $6,255.4 million for the same period in 2011. Acquisitions positively impacted net sales by approximately $218.2 million, or 10.4%, in the three months ended September 30, 2012 and by $673.4 million, or 10.8%, in the first nine months of 2012. Foreign currency translation negatively impacted net sales by approximately $231.0 million, or 11.0%, in the three months ended September 30, 2012 and by $572.6 million, or 9.2%, in the first nine months of 2012.

The following table sets forth, for the three and nine months ended September 30, 2012, the impact to net sales of acquisitions by geographical segment (in millions, except percentages):

                                        Three Months Ended
                                          September 30,                                 Change Due to Acquisitions
                                        2012          2011       % Change from 2011            $               %
North America                       $    632.2     $   417.7             51.4  %       $         130.9        31.3 %
South America                            479.9         515.7             (6.9 )%                  21.5         4.2 %
Europe/Africa/Middle East              1,060.5       1,092.4             (2.9 )%                  30.0         2.7 %
Asia/Pacific                             122.4          73.3             67.0  %                  35.8        48.8 %
                                    $  2,295.0     $ 2,099.1              9.3  %       $         218.2        10.4 %



                                        Nine Months Ended
                                          September 30,                                 Change Due to Acquisitions
                                        2012          2011       % Change from 2011            $               %
North America                       $  1,932.1     $ 1,171.9             64.9  %       $         414.6        35.4 %
South America                          1,343.8       1,423.0             (5.6 )%                  77.7         5.5 %
Europe/Africa/Middle East              3,667.2       3,465.6              5.8  %                  94.2         2.7 %
Asia/Pacific                             315.7         194.9             62.0  %                  86.9        44.6 %
                                    $  7,258.8     $ 6,255.4             16.0  %       $         673.4        10.8 %

The following table sets forth, for the three and nine months ended September 30, 2012, the impact to net sales of currency translation by geographical segment, calculated as the difference in net sales for the three and nine months ended September 30, 2012 at actual 2012 exchange rates versus 2011 exchange rates (in millions, except percentages):

                                     Three Months Ended                                Change Due to Currency
                                       September 30,                 Change                  Translation
                                     2012          2011           $           %             $              %
North America                    $    632.2     $   417.7     $  214.5     51.4  %   $       (2.9 )      (0.7 )%
South America                         479.9         515.7        (35.8 )   (6.9 )%         (106.5 )     (20.7 )%
Europe/Africa/Middle East           1,060.5       1,092.4        (31.9 )   (2.9 )%         (117.7 )     (10.8 )%
Asia/Pacific                          122.4          73.3         49.1     67.0  %           (3.9 )      (5.3 )%
                                 $  2,295.0     $ 2,099.1     $  195.9      9.3  %   $     (231.0 )     (11.0 )%


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
                                  (continued)

                                     Nine Months Ended                                  Change Due to Currency
                                       September 30,                 Change                   Translation
                                     2012          2011            $           %             $              %
North America                    $  1,932.1     $ 1,171.9     $   760.2     64.9  %   $      (15.1 )      (1.3 )%
South America                       1,343.8       1,423.0         (79.2 )   (5.6 )%         (224.4 )     (15.8 )%
Europe/Africa/Middle East           3,667.2       3,465.6         201.6      5.8  %         (325.5 )      (9.4 )%
Asia/Pacific                          315.7         194.9         120.8     62.0  %           (7.6 )      (3.9 )%
                                 $  7,258.8     $ 6,255.4     $ 1,003.4     16.0  %   $     (572.6 )      (9.2 )%

Regionally, net sales in North America increased during the three and nine months ended September 30, 2012 compared to the same periods in 2011 as a result of our acquisition of GSI Holdings Corp. and improved industry demand. The most significant increases in sales, excluding acquisitions, were in high horsepower tractors, sprayers and hay equipment. The recent drought in the United States has negatively impacted sales in our grain storage and protein production businesses in North America. In the EAME region, excluding the negative impact of foreign currency, net sales increased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 as a result of increased sales in Germany, France, the United Kingdom and Russia, partially offset by declines in certain Southern European markets and Finland. Excluding the negative impact of foreign currency translation, net sales in South America increased during the three and nine months ended September 30, 2012 primarily due to higher sales of high horsepower tractors and combines in Brazil, along with the positive impact of acquisitions. In the Asia/Pacific segment, net sales increased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily as a result of sales growth in Australia, New Zealand and China and the positive impact of acquisitions. We estimate that worldwide average price increases during the three and nine months ended September 30, 2012 were approximately 3.5% and 3.3%, respectively. Consolidated net sales of tractors and combines, which comprised approximately 64% of our net sales in the three and nine months ended September 30, 2012, decreased approximately 5% in the three months ended September 30, 2012 and increased approximately 1% in the first nine months of 2012, compared to the same periods in 2011. Unit sales of tractors and combines decreased approximately 4% and increased approximately 2% during the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. The difference between the unit sales increase or decrease and the increase in net sales was primarily the result of foreign currency translation, pricing and sales mix changes.

The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items in our Condensed Consolidated Statements of Operations (in millions, except percentages):

                                                          Three Months Ended September 30,
                                                         2012                         2011
                                                                 % of                       % of
                                                    $         Net Sales        $        Net Sales (1)
Gross profit                                   $    491.0         21.4 %   $ 407.8            19.4 %
Selling, general and
administrative expenses                             262.8         11.5 %     221.2            10.5 %
Engineering expenses                                 76.4          3.3 %      67.5             3.2 %
Amortization of intangibles                          12.2          0.5 %       4.8             0.2 %
Income from operations                         $    139.6          6.1 %   $ 114.3             5.4 %

(1) Rounding may impact the summation of amounts.


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of
                                   Operations
                                  (continued)

                                                              Nine Months Ended September 30,
                                                           2012                            2011
                                                                  % of                            % of
                                                    $         Net Sales (1)         $         Net Sales (1)
Gross profit                                   $ 1,595.4            22.0 %     $ 1,252.0          20.0  %
Selling, general and
administrative expenses                            756.7            10.4 %         622.4          10.0  %
Engineering expenses                               227.5             3.1 %         191.6           3.1  %
Restructuring and other
infrequent income                                      -               -            (0.7 )           -
Amortization of intangibles                         36.9             0.5 %          14.1           0.2  %
Income from operations                         $   574.3             7.9 %     $   424.6           6.8  %

(1) Rounding may impact the summation of amounts.

Gross profit as a percentage of net sales increased during the three and nine months ended September 30, 2012 compared to the same periods in 2011, primarily due to pricing and an improved sales mix offsetting moderate increases in material costs. Margins also benefited from higher production levels during the nine months ended September 30, 2012. Unit production of tractors and combines during the first nine months of 2012 was approximately 4% higher than the comparable period in 2011. We recorded approximately $0.7 million and $1.9 million of stock compensation expense within cost of goods sold during the three and nine months ended September 30, 2012, respectively, compared to $0.4 million and $1.1 million for the comparable periods of 2011, respectively, as is more fully explained in Note 3 to our Condensed Consolidated Financial Statements.

Selling, general and administrative ("SG&A") expenses as a percentage of net sales increased during the three and nine months ended September 30, 2012 compared to the same periods in 2011, primarily due to higher expenses associated with new market expansion and product introductions. Engineering expenses increased during the three and nine months ended September 30, 2012 compared to the prior year periods, primarily due to increased investment levels of new product development, including costs to meet new engine emission standards in the United States and Europe. We recorded approximately $8.9 million and $27.1 million of stock compensation expense within SG&A during the three and nine months ended September 30, 2012, respectively, compared to $6.0 million and $17.0 million for the comparable periods in 2011, respectively, as is more fully explained in Note 3 to our Condensed Consolidated Financial Statements. Amortization of intangibles increased during the three and nine months ended September 30, 2012 as a result of acquisitions completed during 2011 and January 2012.

Interest expense, net was $15.8 million and $43.5 million for the three and nine months ended September 30, 2012, respectively, compared to $3.1 million and $21.1 million for the comparable periods in 2011, respectively. The increase in interest expense during the three and nine months ended September 30, 2012 is primarily due to increased debt levels associated with the funding of recent acquisitions, as is more fully explained in "Liquidity and Capital Resources."

Other expense, net was $13.8 million and $24.3 million for the three and nine months ended September 30, 2012, respectively, compared to $7.1 million and $17.3 million for the same periods in 2011, respectively. Losses on sales of receivables, related to our accounts receivable sales agreements with AGCO Finance in North America and Europe, were $5.8 million and $16.4 million for the three and nine months ended September 30, 2012, respectively, compared to $6.1 million and $13.5 million for the comparable periods in 2011, respectively. Approximately $0.8 million and $2.1 million of the losses on sales of receivables during the three and nine months ended September 30, 2011, respectively, were included within "Interest expense, net."

We recorded an income tax provision of $30.5 million and $131.0 million for the three and nine months ended September 30, 2012, respectively, compared to $31.6 million and $123.4 million for the comparable periods in 2011, respectively. Our effective tax rate was lower in the three and nine months ended September 30, 2012 as compared to the same periods in 2011 as a result of an increase in income in jurisdictions for which no tax provision is being recorded due to previously established valuation allowances against deferred tax assets and net operating loss carryforwards.

Equity in net earnings of affiliates, which is primarily comprised of income from our retail finance joint ventures, was $12.6 million and $39.9 million for the three and nine months ended September 30, 2012, respectively, compared to


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

$12.0 million and $37.2 million for the comparable periods in 2011, respectively. Refer to "Retail Finance Joint Ventures" for further information regarding our retail finance joint ventures and their results of operations.

RETAIL FINANCE JOINT VENTURES
Our AGCO Finance retail finance joint ventures provide retail financing to end customers and wholesale financing to our dealers in the United States, Canada, Germany, France, the United Kingdom, Austria, Ireland, the Netherlands, Denmark, Italy, Sweden, Brazil, Argentina and Australia. The joint ventures are owned 49% by AGCO and 51% by a wholly-owned subsidiary of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank"), a financial institution based in the Netherlands. The majority of the assets of the retail 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 are obligated to provide financing to the joint venture companies, primarily through lines of credit. We do not guarantee the debt obligations of the joint ventures. As of September 30, 2012, our capital investment in the retail finance joint ventures, which is included in "Investment in affiliates" on our Condensed Consolidated Balance Sheets, was approximately $345.4 million compared to $322.2 million as of December 31, 2011. The total finance portfolio in our retail finance joint ventures was approximately $8.0 billion and $7.5 billion as of September 30, 2012 and December 31, 2011, respectively. The total finance portfolio as of September 30, 2012 included approximately $6.8 billion of retail receivables and $1.2 billion of wholesale receivables from AGCO dealers. The total finance portfolio as of December 31, 2011 included approximately $6.4 billion of retail receivables and $1.1 billion of wholesale receivables from AGCO dealers. The wholesale receivables were either sold directly to AGCO Finance without recourse from our operating companies or AGCO Finance provided the financing directly to the dealers. For the nine months ended September 30, 2012, our share in the earnings of the retail finance joint ventures, included in "Equity in net earnings of affiliates" on our Condensed Consolidated Statements of Operations, was $35.8 million compared to $32.9 million for the same period in 2011.

The retail finance portfolio in our retail finance joint venture in Brazil was approximately $1.9 billion and $2.0 billion as of September 30, 2012 and December 31, 2011, respectively. As a result of weak market conditions in Brazil in 2005 and 2006, a substantial portion of this portfolio had been included in a payment deferral program directed by the Brazilian government relating to retail contracts entered into during 2004, where scheduled payments were rescheduled several times between 2005 and 2008. The impact of the deferral program resulted in higher delinquencies and lower collateral coverage for the portfolio. While the joint venture currently considers its reserves for loan losses adequate, it continually monitors its reserves considering borrower payment history, the value of the underlying equipment financed, and further payment deferral programs implemented by the Brazilian government. To date, our retail finance joint ventures in markets outside of Brazil have not experienced any significant changes in the credit quality of their finance portfolios. However, there can be no assurance that the portfolio credit quality will not deteriorate, and, given the size of the portfolio relative to the joint ventures' levels of equity, a significant adverse change in the joint ventures' performance would have a material impact on the joint ventures and on our operating results.

LIQUIDITY AND CAPITAL RESOURCES
Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels. 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:
• Our $201.3 million of 11/4% convertible senior subordinated notes, which mature in 2036 and which may be required by holders to be repurchased on December 15, 2013 or could be converted earlier based on the closing sales price of our common stock (see further discussion below).

•         Our €200.0 million (or approximately $257.1 million as of September 30,
          2012) 41/2% senior term loan, which matures in 2016 (see further
          discussion below).


•         Our $300.0 million of 57/8%  senior notes, which mature in 2021 (see
          further discussion below).


•         Our revolving credit and term loan facility, consisting of a $600.0
          million multi-currency revolving credit facility and a $385.0 million
          term loan facility, which expires in December 2016. As of September 30,
          2012, $215.0 million was outstanding under the multi-currency revolving
          credit facility and $385.0 million was outstanding under the term loan
          facility (see further discussion below).


•         Our accounts receivable sales agreements with our retail finance joint
          ventures in the United States, Canada and


Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

Europe. As of September 30, 2012, approximately $929.5 million of cash had been received under these agreements (see further discussion below).

In addition, although we are in complete compliance with the financial covenants contained in these facilities and currently 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.

Current Facilities
Our $201.3 million of 11/4% convertible senior subordinated notes due December 15, 2036, issued in December 2006, provide for (i) the settlement upon conversion in cash up to the principal amount of the notes with any excess conversion value settled in shares of our common stock, and (ii) the conversion rate to be increased under certain circumstances if the notes are converted in connection with certain change of control transactions occurring prior to December 15, 2013. Interest is payable on the notes at 11/4% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The notes are convertible into shares of our common stock at an effective price of $40.73 per share, subject to adjustment. This reflects an initial conversion rate for the notes of 24.5525 shares of common stock per $1,000 principal amount of notes. Beginning December 15, 2013, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest, as well as settle any excess conversion value with shares of our common stock. Holders of the notes may require us to repurchase the notes at a repurchase price of 100% of their principal amount, plus accrued interest, on December 15, 2013, 2016, 2021, 2026 and 2031, as well as settle any excess conversion value with shares of our common stock. Refer to our Form 10-K for the year ended December 31, 2011 for a full description of these notes.

As of September 30, 2012 and December 31, 2011, the closing sales price of our common stock had not exceeded 120% of the conversion price of $40.73 per share for our 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending September 30, 2012 and December 31, . . .

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