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AGCO > SEC Filings for AGCO > Form 10-K on 28-Feb-2014All Recent SEC Filings

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Form 10-K for AGCO CORP /DE


28-Feb-2014

Annual Report


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, tillage, 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®. We distribute most of our products through a combination of approximately 3,100 dealers, distributors, associates and licensees. In addition, we provide retail financing through our retail finance joint ventures with Rabobank.

Results of Operations

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 linked to 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,
                                                         2013 (1)       2012     2011 (1)
Net sales                                                 100.0 %      100.0 %    100.0  %
Cost of goods sold                                         77.8         78.7       79.8
Gross profit                                               22.2         21.3       20.2
Selling, general and administrative expenses               10.1         10.5        9.9
Engineering expenses                                        3.3          3.2        3.1
Impairment charge                                             -          0.2          -
Amortization of intangibles                                 0.4          0.5        0.2
Income from operations                                      8.4          6.9        7.0
Interest expense, net                                       0.5          0.6        0.4
Other expense, net                                          0.4          0.3        0.2
Income before income taxes and equity in net earnings of
affiliates                                                  7.4          6.0        6.4
Income tax provision                                        2.4          1.4        0.3
Income before equity in net earnings of affiliates          5.0          4.6        6.1
Equity in net earnings of affiliates                        0.4          0.5        0.6
Net income                                                  5.5          5.1        6.7
Net loss (income) attributable to noncontrolling
interests                                                     -          0.1          -
Net income attributable to AGCO Corporation and
subsidiaries                                                5.5 %        5.2 %      6.6  %


____________________________________
(1) Rounding may impact summation of amounts.

2013 Compared to 2012

Net income attributable to AGCO Corporation and subsidiaries for 2013 was $597.2 million, or $6.01 per diluted share, compared to net income for 2012 of $522.1 million, or $5.30 per diluted share.

Net sales for 2013 were approximately $10,786.9 million, or 8.3% higher than 2012, primarily due to sales increases in all of our geographical segments, partially offset by the unfavorable impact of currency translation. Income from operations was $900.7 million in 2013 compared to $693.2 million in 2012. The increase in income from operations during 2013 was a result of the increase in net sales as well as improved gross margins resulting from factory efficiency and cost control


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initiatives, favorable pricing and relatively low levels of material cost inflation. Higher engineering expenses associated with new product development and engine emission requirements partially offset gross margin improvements.

In our North America region, income from operations increased approximately $66.0 million in 2013 compared to 2012, primarily due to higher net sales, a favorable sales mix and margin improvement initiatives. Income from operations in our South American region increased approximately $51.1 million in 2013 compared to 2012, primarily due to higher sales volumes and the benefit of cost-reduction initiatives. In our Europe/Africa/Middle East ("EAME") region, income from operations increased approximately $83.3 million in 2013 compared to 2012, primarily due to higher net sales and improved factory efficiencies, partially offset by higher engineering expenses. Income from operations in the Asia/Pacific region decreased approximately $9.7 million in 2013 compared to 2012, as a result of increased manufacturing start-up costs and market development expenses in China, which offset the benefit of increased sales in the region.

Retail Sales

Worldwide industry equipment demand for farm equipment was relatively stable during 2013 in most major markets compared to 2012. Crop production improved to more normal levels and farm income remained relatively high across most of the developed farm markets during 2013. Improved yields in North America and high levels of farm income supported industry sales. Favorable exchange and financing rates, improved weather conditions and attractive commodity prices generated strong demand in South America. In Western Europe, favorable farm economics in France and Germany supported industry demand, while market conditions remained soft in the weather-impacted regions of the United Kingdom and parts of Northern Europe.

In the United States and Canada, industry unit retail sales of tractors and combines increased approximately 9% and 8%, respectively, in 2013 compared to 2012. Continued favorable farm economics resulted in the strength of retail sales, particularly for larger, high horsepower equipment. In South America, industry unit retail sales of tractors in 2013 increased approximately 17% compared to 2012. Industry unit retail sales of tractors increased approximately 17% and 59% in Brazil and Argentina, respectively, during 2013 compared to 2012. Industry unit retail sales of combines in South America increased approximately 35% during 2013 compared to 2012. In South America, supportive government financing programs in Brazil as well as favorable commodity prices and improved harvests all contributed to the market growth in Brazil and in Argentina. In Western Europe, industry unit retail sales of tractors and combines decreased approximately 1% and 10%, respectively, in 2013 compared to 2012. Growth in France was offset by declines in the United Kingdom and Finland due to poor weather conditions, while the German market remained relatively flat. Our net sales in our Asia/Pacific segment for 2013 were approximately 13% higher than 2012, primarily due to increases in China, East Asia and Australia.

Results of Operations

Net sales for 2013 were $10,786.9 million compared to $9,962.2 million for 2012,
primarily due to the positive impacts of market growth, partially offset by the
unfavorable impact of foreign currency translation. Foreign currency translation
negatively impacted net sales during 2013 as compared to 2012 by approximately
$121.5 million, or 1.2%, primarily due to the weakening of the Brazilian real,
which was partially offset by the strengthening of the Euro. The following table
sets forth, for the year ended December 31, 2013, the impact to net sales of
currency translation by geographical segment (in millions, except percentages):
                                                                           Change due to Currency
                                                          Change                 Translation
                             2013          2012         $         %             $              %
North America             $  2,757.8    $ 2,584.4    $ 173.4     6.7 %   $       (7.7 )      (0.3 )%
South America                2,039.7      1,855.7      184.0     9.9 %         (220.2 )     (11.9 )%
Europe/Africa/Middle East    5,481.5      5,073.7      407.8     8.0 %          115.9         2.3  %
Asia/Pacific                   507.9        448.4       59.5    13.3 %           (9.5 )      (2.1 )%
                          $ 10,786.9    $ 9,962.2    $ 824.7     8.3 %   $     (121.5 )      (1.2 )%

Regionally, net sales in North America increased during 2013 compared to 2012, primarily as a result of improved industry demand. The most significant increases in sales were in high horsepower tractors, sprayers, implements and grain storage equipment. Excluding the negative impact of foreign currency translation, net sales were higher in Brazil and Argentina with growth mainly in high horsepower tractors, sprayers and grain storage equipment. In the EAME region, net sales increased in 2013 compared to 2012, with the largest net sales increases in France and Germany, partially offset by lower net sales in


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Central and Eastern Europe. In Asia/Pacific, net sales increased in 2013 compared to 2012, primarily due to net sales increases in China, East Asia and Australia. We estimate that worldwide average price increases were approximately 2% and 3% in 2013 and 2012, respectively. Consolidated net sales of tractors and combines, which consisted of approximately 66% of our net sales in 2013, increased approximately 10% in 2013 compared to 2012. Unit sales of tractors and combines increased approximately 5% during 2013 compared to 2012. The unit sales increase and the increase in net sales can differ due to foreign currency translation, pricing and sales mix changes.

The following table sets forth, for the years ended December 31, 2013 and 2012, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages):

                                                               2013                       2012
                                                                      % of                       % of
                                                          $        Net Sales         $        Net Sales
Gross profit                                         $ 2,390.6         22.2 %   $ 2,123.2         21.3 %
Selling, general and administrative expenses           1,088.7         10.1 %     1,041.2         10.5 %
Engineering expenses                                     353.4          3.3 %       317.1          3.2 %
Impairment charge                                            -            - %        22.4          0.2 %
Amortization of intangibles                               47.8          0.4 %        49.3          0.5 %
Income from operations                               $   900.7          8.4 %   $   693.2          6.9 %

Gross profit as a percentage of net sales increased during 2013 compared to 2012, primarily due to favorable pricing, higher sales volume, low material cost inflation and purchasing and factory efficiency initiatives. Unit production of tractors and combines during 2013 was approximately 5% higher than 2012. We recorded approximately $2.3 million and $2.4 million of stock compensation expense within cost of goods sold during 2013 and 2012, respectively, as is more fully explained in Note 1 to our Consolidated Financial Statements.

Selling, general and administrative expenses ("SG&A expenses") as a percentage of net sales decreased slightly during 2013 compared to 2012, primarily due to the increase in net sales, which was partially offset by new market expansion expenses. We recorded approximately $32.6 million and $34.6 million of stock compensation expense within SG&A expenses during 2013 and 2012, respectively, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2013 compared to 2012, primarily due to increased investment levels for new product development and costs to meet new engine emission standards in the United States and Europe.

Interest expense, net was $58.0 million for 2013 compared to $57.6 million for 2012, which is more fully explained in "Liquidity and Capital Resources."

Other expense, net was $40.1 million in 2013 compared to $34.8 million in 2012. Other expenses net increased during 2013 compared to 2012, primarily due to increased losses on sales of receivables. Losses on sales of receivables primarily under our accounts receivable sales agreements, were approximately $25.6 million and $21.8 million in 2013 and 2012, respectively.

We recorded an income tax provision of $258.5 million in 2013 compared to $137.9 million in 2012. Our tax provision is 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, and losses in jurisdictions where no income tax benefit is recorded. Our 2012 income tax rate provision (as reconciled in Note 5 to our Consolidated Financial Statements) included the usage of approximately $54.7 million of valuation allowance resulting from income generated in the United States during 2012. The 2012 income tax provision also included a reversal of approximately $13.8 million of the remaining valuation allowance previously established against our U.S. deferred tax assets and the recognition of certain U.S. research and development tax credits of approximately $13.1 million.

A valuation allowance is established when it is more likely than not that some portion or all of a company's deferred tax assets will not be realized. We assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. At December 31, 2013 and 2012, we had gross deferred tax assets of $423.2 million and $478.0 million, respectively, including $69.7 million and $94.9 million, respectively, related to net operating loss carryforwards. At December 31, 2013, we had total valuation allowances as an offset to the gross deferred tax assets of $77.2 million, primarily related to net operating loss carryforwards in Brazil, China and Russia. At December 31,


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2012, we had total valuation allowances as an offset to the gross deferred tax assets of approximately $74.5 million, primarily related to net operating loss carryforwards in Brazil, Switzerland, China and Russia. Realization of the remaining deferred tax assets as of December 31, 2013 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 will be realized.

As of December 31, 2013 and 2012, we had approximately $122.2 million and $94.5 million, respectively, of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2013 and 2012, we had approximately $61.9 million and $23.5 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 within our income tax provision. As of December 31, 2013 and 2012, we had accrued interest and penalties related to unrecognized tax benefits of approximately $14.4 million and $11.9 million, respectively. See Note 5 to our Consolidated Financial Statements for further discussion of our uncertain income tax positions.

Equity in net earnings of affiliates, which is primarily comprised of income from our retail finance joint ventures, was $48.2 million in 2013 compared to $53.5 million in 2012. The reduction in income was primarily a result of lower income in our manufacturing joint ventures. Refer to "Retail Finance Joint Ventures" for further information regarding our retail finance joint ventures and their results of operations.

2012 Compared to 2011

Net income attributable to AGCO Corporation and subsidiaries for 2012 was $522.1 million, or $5.30 per diluted share, compared to net income for 2011 of $583.3 million, or $5.95 per diluted share.

Net sales for 2012 were approximately $9,962.2 million, or 13.6% higher than 2011, primarily due to sales increases 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 was $693.2 million in 2012 compared to $610.3 million in 2011. The increase in income from operations during 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 engineering and SG&A expenses and a non-cash goodwill and other intangible asset impairment charge related to our Chinese harvesting business.

In our North America region, income from operations increased approximately $169.0 million in 2012 compared to 2011, primarily due to the positive impact of acquisitions, higher net sales and margin improvement initiatives. Income from operations in our South American region increased approximately $18.5 million in 2012 compared to 2011, primarily due to higher sales and improved margins from cost control efforts. In our EAME region, income from operations decreased approximately $12.0 million in 2012 compared to 2011, primarily due to a weaker mix of products, the negative impact of currency translation and the impact of lower production and start-up costs associated with our new Fendt assembly facility in Germany in the second half of the year. Income from operations in the Asia/Pacific region decreased approximately $13.7 million in 2012 compared to 2011, primarily due to increased market development costs in China, partially offset by acquisition benefits and improved gross margins.

Retail Sales

Worldwide industry equipment demand for farm equipment was relatively stable during 2012 in most major markets compared to 2011. Global commodity prices remained at higher levels due to weather-related production difficulties across many of the developed markets. In North America, industry demand was strong in 2012 compared to 2011. Despite an extensive drought in the United States, higher crop prices and extensive crop insurance resulted in near record farm income levels in the region. In South America, industry demand improved in the second half of 2012 from lower levels in the first half of the year as a result of better weather conditions. Improved crop yields, attractive government financing subsidies in Brazil and favorable commodity prices also helped to strengthen industry demand. Industry conditions in the key Western European markets of Germany and France remained stable while adverse weather negatively impacted market conditions in Southern Europe, Scandinavia and Finland.

In the United States and Canada, industry unit retail sales of tractors increased approximately 10% in 2012 compared to 2011. Industry unit retail sales of combines were relatively flat in 2012 compared to 2011. Continued favorable farm economics resulted in the strength of retail sales, particularly for larger, high horsepower equipment. In South America, industry unit retail sales of tractors in 2012 increased approximately 3% compared to 2011. Industry unit retail sales of tractors in the major market of Brazil increased approximately 7% and were relatively flat in Argentina during 2012 compared to 2011.


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Industry unit retail sales in Brazil remained at high levels due to attractive farm economics and supportive government subsidized financing programs. Industry unit retail sales of combines in South America during 2012 were relatively flat compared to 2011. In Western Europe, industry unit retail sales of tractors decreased approximately 3% while industry unit retail sales of combines increased approximately 5% in 2012 compared to 2011. Growth in the key markets of France and Germany was offset by declines in Southern Europe due to dry weather and weak economic conditions, as well as declines in Scandinavia and Finland due to wet weather conditions and a late harvest. Our net sales in our Asia/Pacific segment for 2012 were approximately 58% higher than 2011, primarily due to increases in Australia, New Zealand and China.

Results of Operations

Net sales for 2012 were $9,962.2 million compared to $8,773.2 million for 2011, primarily due to the positive impacts of market growth and acquisitions, partially offset by the unfavorable impact of foreign currency translation. Acquisitions positively impacted net sales by approximately $774.3 million, or 8.8%, during 2012 compared to 2011. Foreign currency translation negatively impacted net sales during 2012 as compared to 2011 by approximately $672.7 million, or 7.7%, primarily due to the weakening of the Euro and the Brazilian real. The following table sets forth, for the year ended December 31, 2012, the impact to net sales of currency translation and acquisitions by geographical segment (in millions, except percentages):

                                                                                   Change due to         Change due to Currency
                                                              Change               Acquisitions                Translation
                             2012          2011            $           %            $           %             $              %
North America             $ 2,584.4     $ 1,770.6     $   813.8      46.0  %   $   475.7      26.9 %   $      (11.6 )      (0.7 )%
South America               1,855.7       1,871.5         (15.8 )    (0.8 )%        87.5       4.7 %         (295.5 )     (15.8 )%
Europe/Africa/Middle East   5,073.7       4,847.2         226.5       4.7  %       104.7       2.2 %         (357.7 )      (7.4 )%
Asia/Pacific                  448.4         283.9         164.5      57.9  %       106.4      37.5 %           (7.9 )      (2.8 )%
                          $ 9,962.2     $ 8,773.2     $ 1,189.0      13.6  %   $   774.3       8.8 %   $     (672.7 )      (7.7 )%

Regionally, net sales in North America increased during 2012 compared to 2011, primarily as a result of our acquisition of GSI Holding Corp. ("GSI") and improved industry demand. The most significant increases in sales, excluding acquisitions, were in high horsepower tractors, hay equipment and sprayers. Excluding the negative impact of foreign currency translation, net sales were higher in Brazil and were partially offset by declines in Argentina. In the EAME region, net sales increased in 2012 compared to 2011, with the largest net sales increases in France, Germany and Russia, partially offset by lower net sales in Southern Europe and Finland. In Asia/Pacific, net sales increased in 2012 compared to 2011, primarily due to net sales increases in Australia, New Zealand and China. We estimate that worldwide average price increases were approximately 3% in both 2012 and 2011. Consolidated net sales of tractors and combines, which consisted of approximately 65% of our net sales in 2012, increased approximately 2% in 2012 compared to 2011. Unit sales of tractors and combines also increased approximately 2% during 2012 compared to 2011. The unit sales increase and the increase in net sales can differ due to foreign currency translation, pricing and sales mix changes.

The following table sets forth, for the years ended December 31, 2012 and 2011, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages):

                                                               2012                       2011
                                                                      % of                       % of
                                                          $        Net Sales         $        Net Sales
Gross profit                                         $ 2,123.2         21.3 %   $ 1,776.1         20.2 %
Selling, general and administrative expenses           1,041.2         10.5 %       869.3          9.9 %
Engineering expenses                                     317.1          3.2 %       275.6          3.1 %
Restructuring and other infrequent income                    -            - %        (0.7 )          - %
Impairment charge                                         22.4          0.2 %           -            - %
Amortization of intangibles                               49.3          0.5 %        21.6          0.2 %
Income from operations                               $   693.2          6.9 %   $   610.3          7.0 %

Gross profit as a percentage of net sales increased during 2012 compared to 2011. Favorable pricing, higher production volumes throughout most of 2012 and cost control initiatives helped to produce higher margins. Our gross margins


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were negatively impacted by the slow ramp of production and related start-up costs experienced in the fourth quarter of 2012 associated with our new German tractor assembly facility. Unit production of tractors and combines during 2012 was approximately 3% higher than 2011. We recorded approximately $2.4 million and $1.6 million of stock compensation expense within cost of goods sold during 2012 and 2011, respectively, as is more fully explained in Note 1 to our Consolidated Financial Statements.

SG&A expenses as a percentage of net sales increased during 2012 compared to 2011, primarily due to increased market development and new system upgrade costs. We recorded approximately $34.6 million and $23.0 million of stock compensation expense within SG&A expenses during 2012 and 2011, respectively, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2012 compared to 2011, primarily due to higher spending for the development of new products and costs to meet new engine emission standards in the United States and Europe.

During the fourth quarter of 2012, we recorded a non-cash impairment charge of approximately $22.4 million related to goodwill and certain other identifiable assets associated with our Chinese harvesting business in accordance with the provisions of Accounting Standard Codification 350, "Intangibles-Goodwill and Other" ("ASC 350"). The operating results of our Chinese harvesting business from the date of acquisition in November 2011, combined with recently completed forecasts, resulted in our conclusion that it was more likely than not that the fair value of our Chinese harvesting reporting unit was less than its carrying amount. See Note 1 to our Consolidated Financial Statements for further discussion.

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