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AGCO > SEC Filings for AGCO > Form 10-Q on 9-May-2014All Recent SEC Filings

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Form 10-Q for AGCO CORP /DE


9-May-2014

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, the 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 and 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 inventories. However, 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 March 31, 2014, we generated net income of $99.6 million, or $1.03 per share, compared to net income of $118.0 million, or $1.19 per share, for the same period in 2013.

Net sales during the three months ended March 31, 2014 were $2,333.4 million, which were relatively flat compared to the three months ended March 31, 2013, excluding the unfavorable impact of currency translation.

Income from operations for the three months ended March 31, 2014 was $155.7 million compared to $177.4 million for the same period in 2013. The decrease was primarily a result of lower production levels, a weaker product mix and the negative impact of currency translation.

Income from operations in our Europe/Africa/Middle East ("EAME") region increased in the three months ended March 31, 2014 compared to the same period in 2013 due to slightly higher net sales levels, improved factory productivity and the benefit of cost reduction initiatives. In the South American region, income from operations decreased for the three months ended March 31, 2014 compared to the same period in 2013 primarily due to lower net sales and production volumes as well as increased engineering expenditures. A weaker sales mix and lower production volumes contributed to the decline in income from operations in the North American region during the three months ended March 31, 2014 as compared to the same period in 2013. Income from operations in our Asia/Pacific region decreased in the three months ended March 31, 2014 compared to the same period in 2013 due to lower net sales and increased market development expenses in China.

Industry Unit Retail Sales
In North America, industry unit retail sales of tractors for the first three months of 2014 increased by approximately 5% compared to the first three months of 2013 with increases in low horsepower unit sales offsetting declines in high horsepower unit sales. Lower commodity prices favorably contributed to the income of dairy and livestock farmers, which supported the increased demand for lower horsepower tractors. Industry unit retail sales of combines for the first three months of 2014 decreased by approximately 7% compared to the first three months of 2013 due to declining levels of farm income in the row crop segment.

In Western Europe, industry unit retail sales of tractors for the first three months of 2014 decreased by approximately 1% compared to the first three months of 2013. Industry unit retail sales of combines for the first three months of 2014 increased by approximately 2% compared to the first three months of 2013. Market results by country remained mixed during the first three months of 2014, with declines in France and Finland partially offset by improved demand in the United Kingdom and growth in Germany.

South American industry unit retail sales of both tractors and combines in the first three months of 2014 decreased approximately 23% compared to the same period in 2013. The decline was most pronounced in Brazil where reduced funding for the government subsidized financing program negatively impacted sales. Brazilian sales were also negatively impacted by dry weather conditions and weaker demand from sugarcane producers in the first three months of 2014 compared to the same period in 2013.

STATEMENTS OF OPERATIONS
Net sales for the three months ended March 31, 2014 were $2,333.4 million compared to $2,403.1 million for the same period in 2013. Foreign currency translation negatively impacted net sales by approximately $49.3 million or 2.1%, in the three months ended March 31, 2014.


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


The following table sets forth, for the three months ended March 31, 2014, the
impact to net sales of currency translation by geographical segment (in
millions, except percentages):
                                                                                          Change Due to Currency
                               Three Months Ended March 31,            Change                   Translation
                                   2014              2013           $          %             $                %
North America                $         647.5     $    624.2     $  23.3       3.7  %   $      (9.5 )         (1.5 )%
South America                          353.6          465.7      (112.1 )   (24.1 )%         (68.8 )        (14.8 )%
Europe/Africa/Middle East            1,235.9        1,193.2        42.7       3.6  %          32.7            2.7  %
Asia/Pacific                            96.4          120.0       (23.6 )   (19.7 )%          (3.7 )         (3.1 )%
                             $       2,333.4     $  2,403.1     $ (69.7 )    (2.9 )%   $     (49.3 )         (2.1 )%

Regionally, net sales in North America increased during the three months ended March 31, 2014 compared to the same period in 2013 primarily due to increased demand in the dairy, protein, and professional hay markets. Increases in sales of combines, hay tools and lower horsepower tractors were partially offset by sales declines of sprayers. In the EAME region, net sales were relatively flat during the three months ended March 31, 2014 compared to the same period in 2013, excluding the impact of currency translation, due to sales growth in Germany and Scandinavia which mostly were offset by declines in France and Eastern European markets. Net sales in South America decreased during the three months ended March 31, 2014 compared to the same period in 2013 primarily due to lower sales volumes in Brazil as well as the impact of currency translation. In the Asia/Pacific region, net sales decreased during the three months ended March 31, 2014 compared to the same period in 2013. We estimate the worldwide average price increase was approximately 1.5% during the three months ended March 31, 2014. Consolidated net sales of tractors and combines, which comprised approximately 63% of our net sales in the three months ended March 31, 2014, decreased approximately 7% in the three months ended March 31, 2014, compared to the same period in 2013. Unit sales of tractors and combines decreased approximately 9% during the three months ended March 31, 2014, compared to the same period in 2013. The difference between the unit sales decrease and the decrease 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 March 31,
                                                            2014                          2013
                                                                    % of                        % of
                                                     $          Net Sales (1)        $       Net Sales
Gross profit                                   $   514.9              22.1 %     $ 533.1         22.2 %
Selling, general and
administrative expenses                            267.0              11.4 %       255.7         10.6 %
Engineering expenses                                82.2               3.5 %        88.0          3.7 %
Amortization of intangibles                         10.0               0.4 %        12.0          0.5 %
Income from operations                         $   155.7               6.7 %     $ 177.4          7.4 %


____________________________________
(1) Rounding may impact summation of amounts.

Gross profit as a percentage of net sales was relatively flat during the three months ended March 31, 2014 compared to the same period in 2013. Increased pricing was offset by lower production levels as well as a weaker product mix and modest material cost pressures. Unit production of tractors and combines decreased 9% during the three months ended March 31, 2014 compared to the same period in 2013. We recorded approximately $0.5 million of stock compensation expense within cost of goods sold during the three months ended March 31, 2014 compared to $0.6 million for the comparable period in 2013, as is more fully explained in Note 2 to our Condensed Consolidated Financial Statements.

Selling, general and administrative ("SG&A") expenses as a percentage of net sales increased during the three months ended March 31, 2014 compared to the same period in 2013 primarily due to the decline in net sales and increases in marketing expenses during the quarter. Engineering expenses were relatively flat as a percentage of net sales during the three months


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

ended March 31, 2014 compared to the same period in 2013. We recorded approximately $5.9 million of stock compensation expense within SG&A expenses during the three months ended March 31, 2014 compared to $7.9 million for the comparable period in 2013, as is more fully explained in Note 2 to our Condensed Consolidated Financial Statements.

Interest expense, net was $13.9 million for the three months ended March 31, 2014 compared to $12.6 million for the comparable period in 2013 due to the increase in the amount of debt outstanding under our credit facility.

Other expense, net was $11.2 million for the three months ended March 31, 2014 compared to $3.7 million during the same period in 2013 due to increased losses on the sale of receivables and foreign exchange losses. Losses on sales of receivables, related to our accounts receivable sales agreements with AGCO Finance in North America and Europe, were $7.5 million for the three months ended March 31, 2014 compared to $5.6 million for the comparable period in 2013.

We recorded an income tax provision of $46.4 million for the three months ended March 31, 2014 compared to $52.9 million for the comparable period in 2013. Our effective tax rate was slightly higher during the three months ended March 31, 2014 compared to the same period in 2013.

Equity in net earnings of affiliates, which is primarily comprised of income from our retail finance joint ventures, was $15.0 million for the three months ended March 31, 2014 compared to $8.9 million for the comparable period in 2013. The increase was the result of higher income in both our retail finance joint ventures and our manufacturing joint ventures. 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, Brazil, Europe, 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 provide financing to the joint ventures, primarily through lines of credit. We do not guarantee the debt obligations of the joint ventures. As of March 31, 2014, our capital investment in the retail finance joint ventures, which is included in "Investment in affiliates" on our Condensed Consolidated Balance Sheets, was $408.0 million compared to $390.2 million as of December 31, 2013. The total finance portfolio in our retail finance joint ventures was approximately $9.7 billion and $9.4 billion as of March 31, 2014 and December 31, 2013, respectively. The total finance portfolio as of March 31, 2014 included approximately $8.0 billion of retail receivables and $1.7 billion of wholesale receivables from AGCO dealers. The total finance portfolio as of December 31, 2013 included approximately $7.8 billion of retail receivables and $1.6 billion of wholesale receivables from AGCO dealers. 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. For the three months ended March 31, 2014, 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 $13.6 million compared to $10.2 million for the same period in 2013.

The total finance portfolio in our retail finance joint venture in Brazil was approximately $1.9 billion and $1.8 billion as of March 31, 2014 and December 31, 2013, 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.


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

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 $151.6 million of 11/4% convertible senior subordinated notes, which mature in 2036, but could be converted earlier based on the closing sales price of our common stock (see further discussion below).

•         Our €200.0 million (or approximately $275.5 million as of March 31,
          2014) 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 $355.0 million
          term loan facility, which expires in December 2016. As of March 31,
          2014, $82.3 million was outstanding under the multi-currency revolving
          credit facility and $355.0 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 Europe. As of March 31, 2014,
          approximately $1.3 billion 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 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 $40.36 per share, subject to adjustment, including to reflect the impact to the conversion rate upon payment of any dividends to our stockholders. The current effective price reflects a conversion rate for the notes of 24.7799 shares of common stock per $1,000 principal amount of notes.

Holders of our 11/4% convertible senior subordinated notes may convert the notes if, during any fiscal quarter, the closing sales price of our common stock exceeds 120% of the conversion price of $40.36 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. As of March 31, 2014, the closing sales price of our common stock had exceeded 120% of the conversion price of the 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending March 31, 2014, and, therefore, the holders of the notes may convert the notes during the three months ending June 30, 2014. As of March 31, 2014 and December 31, 2013, respectively, we classified the notes as a current liability due to the ability of the holders of the notes to convert the notes during the three months ending June 30, 2014 and March 31, 2014, respectively. Future classification of the notes between current liabilities and long-term debt will be dependent on the closing sales price of our common stock during future quarters, until the fourth quarter of 2015, unless we choose to redeem the notes. The notes currently are redeemable at our option.

The 11/4% convertible senior subordinated notes will impact the diluted weighted average shares outstanding in future periods depending on our stock price for the excess conversion value using the treasury stock method. Refer to Notes 4 and 7 of our Condensed Consolidated Financial Statements for further discussion.

Our €200.0 million 41/2% senior term loan with Rabobank is due May 2, 2016. We have the ability to prepay the term loan before its maturity date. Interest is payable on the term loan at 41/2% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The term loan contains covenants restricting, among other things, the


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

incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of default. We also must fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio.

Our $300.0 million of 57/8% senior notes due December 1, 2021 constitute senior unsecured and unsubordinated indebtedness. Interest is payable on the notes semi-annually in arrears on June 1 and December 1 of each year. At any time prior to September 1, 2021, we may redeem the notes, in whole or in part from time to time, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date at the treasury rate plus 0.5%, plus accrued and unpaid interest, including additional interest, if any. Beginning September 1, 2021, we may redeem the notes, in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any.

Our revolving credit and term loan facility consists of a $600.0 million multi-currency revolving credit facility and a $355.0 million term loan facility. The maturity date of our credit facility is December 1, 2016. We are required to make quarterly payments towards the term loan of $5.0 million that will increase to $10.0 million commencing March 2015. Interest accrues on amounts outstanding under the credit facility, at our option, at either (1) LIBOR plus a margin ranging from 1.0% to 2.0% based on our leverage ratio, 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 US dollars plus 1.0% plus a margin ranging from 0.0% to 0.5% based on our leverage ratio. The credit facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of a default. We also must fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio. As of March 31, 2014, we had $437.3 million of outstanding borrowings under the credit facility and availability to borrow approximately $517.7 million. As of December 31, 2013, we had $360.0 million of outstanding borrowings under the credit facility and availability to borrow approximately $600.0 million.

Our accounts receivable sales agreements in North America and Europe permit the sale, on an ongoing basis, of a majority of our receivables to our 49% owned U.S., Canadian and European retail finance joint ventures. The sales of all receivables are without recourse to us. We do not service the receivables after the sale occurs, 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 both March 31, 2014 and December 31, 2013, the cash received from receivables sold under the U.S., Canadian and European accounts receivable sales agreements was approximately $1.3 billion.

Our AGCO Finance retail finance joint ventures in Brazil and Australia also provide wholesale financing to our dealers. The receivables associated with these arrangements are also without recourse to us. As of March 31, 2014 and December 31, 2013, these retail finance joint ventures had approximately $63.2 million and $68.2 million, respectively, of outstanding accounts receivable associated with these arrangements. These arrangements are accounted for as off-balance sheet transactions. In addition, we sell certain trade receivables under factoring arrangements to other financial institutions around the world. These arrangements are also accounted for as off-balance sheet transactions.

Cash Flows

Cash flows used in operating activities were approximately $511.0 million and $261.3 million for the first three months of 2014 and 2013, respectively. 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 $1,610.6 million in working capital at March 31, 2014, as compared with $1,705.1 million at December 31, 2013 and $1,691.5 million at March 31, 2013. Accounts receivable and inventories, combined, at March 31, 2014 were $697.0 million and $525.8 million higher than at December 31, 2013 and March 31, 2013, respectively. The increase in inventories during the first three months of 2014 was a result of softer order volumes in certain markets, higher replacement parts inventory to support seasonal requirements, an increase in inventory levels in part to support the transition of production to Tier 4 emission complaint products and seasonality.

Capital expenditures for the first three months of 2014 were $101.2 million compared to $94.0 million for the first three months of 2013. We anticipate that capital expenditures for the full year of 2014 will be in the range of $400.0 million to $425.0 million and will primarily be used to meet new engine emission requirements, support the development and enhancement of new and existing products, and establish assembly capabilities in China.


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

Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders' equity, was 24.9% and 23.6% at March 31, 2014 and December 31, 2013, respectively.

Share Repurchase Program

In July 2012, the Company's Board of Directors approved a share repurchase program under which the Company can repurchase up to $50.0 million of its common stock. This share repurchase program does not have an expiration date. In December 2013, the Company's Board of Directors approved an additional share repurchase program under which the Company can repurchase up to $500.0 million of its common stock through an expiration date of June 2015.

During the three months ended March 31, 2014, the Company entered into accelerated repurchase agreements ("ASRs") with a financial institution to repurchase an aggregate of $290.0 million of shares of the Company's common stock. The Company has received approximately 4,178,915 shares during the three months ended March 31, 2014 related to these ASRs. All shares received under the ASRs were retired upon receipt, and the excess of the purchase price over par value per share was recorded to "Additional paid-in capital" within the Company's Condensed Consolidated Balance Sheets. Of the $550.0 million in approved share repurchase programs, the remaining amount authorized to be repurchased is approximately $241.4 million.

COMMITMENTS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES . . .

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