Item 2. Management’s Discussion and Analysis
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 are affected by, among other things, 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 largely are a function of the timing of the planting and harvesting seasons. As a result, our net sales historically have been the lowest in the first quarter and have increased in subsequent quarters.
The coronavirus (“COVID-19”) pandemic has created significant volatility in the global economy and has led to substantially reduced economic activity, employment disruptions and supply chain constraints and delays. In most areas, our business has been deemed essential, thereby allowing us to maintain operations. However, production has been severely impacted by component availability, particularly during late March and throughout April, and therefore net sales levels have been directly impacted. The affected plants, primarily in Europe and South America, all resumed production in late April and all of our production facilities are currently operational. The ability to maintain full-time production remains uncertain for the foreseeable future due to government restrictions, potential supply chain constraints, workforce limitations and safety equipment availability. We have been enacting cost saving measures, as well as managing our cash flows and capital deployment to respond to the volatile environment.
RESULTS OF OPERATIONS
For the three months ended June 30, 2020 , we generated net income of approximately $69.7 million , or $0.93 per share, compared to approximately $140.8 million , or $1.82 per share, for the same period in 2019 . For the first six months ended June 30, 2020 , we generated net income of approximately $134.4 million , or $1.78 per share, compared to approximately $205.9 million , or $2.66 per share, for the same period in 2019.
Net sales during the three and six months ended June 30, 2020 were approximately $2,006.8 million and $3,935.1 million , respectively, which were approximately 17.2% and 10.9% lower than the same periods in 2019 . These decreases were primarily the result of reduced production volumes caused by component availability and other impacts of the COVID-19 pandemic, as well as the negative impact of currency translation. The majority of our production facilities in Europe and South America were closed from late March through most of April caused by supply chain disruptions due to COVID-19 impacts. Regionally, net sales, excluding negative currency translation impacts, were higher in our South American region for the three and six months ended June 30, 2020 . These increases were offset by declines in net sales in our Europe/Middle East (“EME”), North American and Asia/Pacific/Africa (“APA”) regions.
Income from operations for the three months ended June 30, 2020 was approximately $97.3 million compared to approximately $199.6 million for the same period in 2019 . Income from operations for the six months ended June 30, 2020 was approximately $197.7 million compared to approximately $292.0 million for the same period in 2019 . These decreases were primarily the result of lower net sales and production volumes, partially offset by cost control initiatives as well as favorable material costs and sales mix compared to the same periods in 2019 .
Regionally, income from operations in our EME region decreased for the three and six months ended June 30, 2020 compared to the same periods in 2019 . These decreases were primarily due to lower net sales and production volumes, partially offset by a reduction in engineering and other operating expenses. In our North American region, income from operations increased for the three and six months ended June 30, 2020 compared to the same periods in 2019 . These increases were primarily due to a favorable sales mix, cost control initiatives and improved operating margins in the grain and protein business. In our South American region, income from operations increased in the three months ended June 30, 2020 while operating losses in the six months ended June 30, 2020 improved compared to the same periods in 2019 . These increases reflect increased net sales excluding negative currency translation impacts, a favorable product mix and cost containment efforts, partially offset by the negative currency impacts. In our APA region, income from operations increased for the three and six months ended June 30, 2020 compared to the same periods in 2019 , primarily due to a favorable sales mix and reduced expenses, partially offset by lower net sales and production volumes.
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Industry Market Conditions
The COVID-19 pandemic is projected to have minimal impact on global crop production. Most farm operations, which generally have been deemed essential (including our business), are operating at normal levels. However, the consumption of grain for food, fuel and livestock feed is being negatively impacted by the economic constraints caused by the pandemic. As a result, soft commodity prices have trended lower in the first half of the year. In addition, protein processing has been severely constrained, which pressures protein producers. Future demand for agricultural equipment will be influenced by farm income, which is a function of commodity and protein prices, crop yields and government support. Most of our dealers that sell and service our equipment and parts have also been deemed essential businesses. Those dealers are following government and health organization safety guidance, while continuing to provide sales and service to equipment users, especially farmers. The available digital tools and connected support abilities incorporated into several of our products have allowed the dealers to remotely service many customer machines while maintaining appropriate social distancing protocols. These measures have helped customers continue the essential work of promoting food security and providing critical infrastructure.
In North America, industry unit retail sales of utility and high horsepower tractors for the first six months of 2020 increased approximately 2% compared to the same period in 2019 . Industry unit retail sales of combines for the first six months of 2020 decreased approximately 9% compared to the first six months of 2019 . Retail sales of low horsepower tractors increased in the first six months of 2020 compared to the prior year period and were partially offset by softer demand for higher horsepower tractors and combines. While the need to replace a relatively aged fleet in the large farm sector remains, lower commodity prices and a cautious farmer sentiment has pressured equipment demand during the first six months of 2020 compared to the same period in 2019 . The U.S. COVID-19 aid package for U.S. farmers and livestock producers could offset some of the impact of lower commodity prices.
In Western Europe, industry unit retail sales of tractors decreased approximately 14% compared to the same period in 2019 . Industry unit retail sales of combines for the first six months of 2020 decreased approximately 18% compared to the first six months of 2019 . During the first six months of 2020 , industry sales were weakest in the markets of Spain, the United Kingdom and France compared to the same period in 2019 . Industry sales declined due largely to production constraints caused by the COVID-19 pandemic. In addition, dry market conditions throughout Western Europe are expected to negatively impact wheat production, with stronger grain export demand and supportive wheat prices providing some positive offsets to producers. European dairy and livestock fundamentals have stabilized after weakening earlier in 2020.
In South America, industry unit retail sales of tractors for the first six months of 2020 decreased approximately 1% compared to the same period in 2019 . Industry unit retail sales of combines for the first six months of 2020 increased approximately 6% compared to the first six months of 2019 . Industry retail sales increased in Brazil and Argentina compared to the prior year, but significantly declined in most other South American markets.
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STATEMENTS OF OPERATIONS
Net sales for the three months ended June 30, 2020 were approximately $2,006.8 million compared to approximately $2,422.6 million for the same period in 2019 . Net sales for the six months ended June 30, 2020 were approximately $3,935.1 million compared to approximately $4,418.4 million for the same period in 2019 . The following tables set forth, for the three and six months ended June 30, 2020 , the impacts to net sales of currency translation by geographical segment (in millions, except percentages):
Three Months Ended June 30,
Change
Change Due to Currency Translation
2020
2019
$
%
$
%
North America
$
555.8
$
618.9
$
(63.1
)
(10.2
)%
$
(6.9
)
(1.1
)%
South America
178.5
185.8
(7.3
)
(3.9
)%
(46.7
)
(25.1
)%
Europe/Middle East
1,125.0
1,457.2
(332.2
)
(22.8
)%
(35.2
)
(2.4
)%
Asia/Pacific/Africa
147.5
160.7
(13.2
)
(8.2
)%
(6.6
)
(4.1
)%
$
2,006.8
$
2,422.6
$
(415.8
)
(17.2
)%
$
(95.4
)
(3.9
)%
Six Months Ended June 30,
Change
Change Due to Currency Translation
2020
2019
$
%
$
%
North America
$
1,107.7
$
1,115.1
$
(7.4
)
(0.7
)%
$
(9.3
)
(0.8
)%
South America
332.4
341.9
(9.5
)
(2.8
)%
(70.5
)
(20.6
)%
Europe/Middle East
2,238.3
2,667.8
(429.5
)
(16.1
)%
(75.0
)
(2.8
)%
Asia/Pacific/Africa
256.7
293.6
(36.9
)
(12.6
)%
(12.5
)
(4.3
)%
$
3,935.1
$
4,418.4
$
(483.3
)
(10.9
)%
$
(167.3
)
(3.8
)%
Regionally, net sales in North America decreased during the three and six months ended June 30, 2020 compared to the same periods in 2019 . These decreases were primarily a result of negative currency translation and lower net sales of grain and protein equipment, high horsepower tractors and sprayers, partially offset by higher net sales of hay equipment and replacement parts. In our EME region, net sales were lower during the three and six months ended June 30, 2020 compared to the same periods in 2019 . These decreases were primarily due to lost production caused by the impacts from the COVID-19 pandemic and the negative impact of foreign currency translation. Net sales declines were experienced in virtually all major markets in the region. Net sales in South America, excluding the negative impact of foreign currency translation, increased during the three and six months ended June 30, 2020 compared to the same periods in 2019 . Net sales increased in Brazil and Argentina, partially offset by decreased net sales in other South American markets. In our APA region, net sales decreased during the three and six months ended June 30, 2020 compared to the same periods in 2019 , primarily driven by negative foreign currency translation, product availability and net sales declines in Africa, partially offset by net sales increases in China and Australia.
We estimate worldwide average price increases were approximately 0.3% and 0.4%, respectively, during the three and six months ended June 30, 2020 compared to the same prior year periods. Consolidated net sales of tractors and combines, which combined comprised approximately 53.9% and 55.3% of our net sales for the three and six months ended June 30, 2020 , respectively, decreased approximately 24.4% and 16.2% compared to the same periods in 2019 , respectively. Unit sales of tractors and combines decreased approximately 21.9% and 14.7%, respectively, for the three and six months ended June 30, 2020 compared to the same periods in 2019 . The difference between the unit sales change and the change in net sales was primarily the result of foreign currency translation, pricing and sales mix changes.
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The following tables set forth, for the periods indicated, the percentage of net sales of certain items in our Condensed Consolidated Statements of Operations (in millions, except percentages):
Three Months Ended June 30,
2020
2019
$
% of
Net Sales (1)
$
% of
Net Sales (1)
Gross profit
$
432.7
21.6
%
$
563.9
23.3
%
Selling, general and administrative expenses
219.5
10.9
%
260.7
10.8
%
Engineering expenses
75.8
3.8
%
87.5
3.6
%
Amortization of intangibles
14.9
0.7
%
15.4
0.6
%
Goodwill impairment charge
20.0
1.0
%
—
—
%
Restructuring expenses
3.8
0.2
%
—
—
%
Bad debt expense
1.4
0.1
%
0.7
—
%
Income from operations
$
97.3
4.8
%
$
199.6
8.2
%
Six Months Ended June 30,
2020
2019
$
% of
Net Sales (1)
$
% of
Net Sales (1)
Gross profit
$
883.2
22.4
%
$
1,020.6
23.1
%
Selling, general and administrative expenses
467.1
11.9
%
522.9
11.8
%
Engineering expenses
160.7
4.1
%
172.0
3.9
%
Amortization of intangibles
29.9
0.8
%
30.7
0.7
%
Goodwill impairment charge
20.0
0.5
%
—
—
%
Restructuring expenses
4.6
0.1
%
1.7
—
%
Bad debt expense
3.2
0.1
%
1.3
—
%
Income from operations
$
197.7
5.0
%
$
292.0
6.6
%
(1) Rounding may impact the summation of amounts.
Gross profit as a percentage of net sales decreased for both the three and six months ended June 30, 2020 compared to the same periods in 2019 . These decreases were primarily due to lower net sales caused by the impacts of the COVID-19 pandemic, partially offset from the benefits of increased pricing and improved material costs.
Global production hours declined approximately 19.2% and 14.0%, respectively, in the three and six months ended June 30, 2020 compared to the same periods in 2019 . These decreases were primarily due to the suspension of production in our European and South American production sites in late March and throughout April due to component supply disruptions and government-mandated closures of facilities caused by the COVID-19 pandemic. These factory closures resulted in significantly lower production hours. The impacts of the COVID-19 pandemic continue to be unpredictable, and a range of factors could impact our future sales, including additional production constraints, government mandates and changing industry conditions impacted by commodity prices, farmer sentiment and the other factors that we discuss below under “Risk Factors.”
We recorded approximately $0.3 million and $0.4 million of stock compensation expense within cost of goods sold during the three and six months ended June 30, 2020 , respectively, compared to approximately $0.5 million and $1.0 million for the comparable periods in 2019 . See below and refer to Note 3 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
Selling, general and administrative expenses (“SG&A expenses”), as a percentage of net sales, were higher for the three and six months ended June 30, 2020 compared to the same periods in 2019 . The increase was a result of the significant decline in net sales in 2020 compared to 2019 despite substantial reductions in expenses achieved through actions such as delayed merit compensation increases, reduced travel expense and the temporary furloughing of certain employees. We recorded approximately $10.1 million and $12.6 million of stock compensation expense within SG&A expenses during the three and six
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months ended June 30, 2020 , respectively, compared to approximately $12.2 million and $24.2 million during the same periods in 2019 . Refer to Note 3 to our Condensed Consolidated Financial Statements for additional information. Engineering expenses, as a percentage of net sales, increased slightly for both the three and six months ended June 30, 2020 compared to the same periods in 2019 .
During the three months ended June 30, 2020 , we recorded a non-cash goodwill impairment charge of approximately $20.0 million related to a tillage and seeding joint venture in which we own a 50% interest. The impairment charge was recorded as “Goodwill impairment charge” within our Condensed Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included within “Net loss attributable to noncontrolling interests.” Refer to Note 4 to our Condensed Consolidated Financial Statements for additional information.
Our goodwill impairment analysis conducted as of October 1, 2019 indicated that the carrying value of net assets of our grain storage and production systems business in Europe/Middle East was in excess of the fair value of the reporting unit, and therefore, we recorded a non-cash impairment charge of approximately $173.6 million in the fourth quarter of 2019 to write down the reporting unit to its indicated fair value. The impairment charge was a substantial portion of the reporting unit’s goodwill balance as of October 1, 2019. If weak market conditions persist in the Europe/Middle East market for grain storage equipment, or if our planned strategies to improve the business are not successful, we may incur an additional impairment charge related to this reporting unit in the future.
The restructuring expenses of approximately $3.8 million and $4.6 million recorded during the three and six months ended June 30, 2020 , respectively, primarily related to severance and related costs associated with the rationalization of certain manufacturing operations and administrative offices located in the United States, Europe and South America. Refer to Note 2 to our Condensed Consolidated Financial Statements for additional information.
Interest expense, net was approximately $6.1 million and $9.5 million for the three and six months ended June 30, 2020 , respectively, compared to approximately $6.0 million and $9.5 million for the comparable periods in 2019 . See “Liquidity and Capital Resources” for further information on our available funding.
Other expense, net was approximately $10.0 million and $22.5 million for the three and six months ended June 30, 2020 , respectively, compared to approximately $11.6 million and $26.2 million for the comparable periods in 2019 . Losses on sales of receivables, primarily related to our accounts receivable sales agreements with our finance joint ventures in North America, Europe and Brazil and included in “Other expense, net,” were approximately $4.3 million and $12.4 million for the three and six months ended June 30, 2020 , respectively, compared to approximately $11.0 million and $19.7 million for the comparable periods in 2019 . The decreases in losses was primarily as a result of lower interest rates in 2020 as compared to 2019.
We recorded an income tax provision of approximately $31.3 million and $60.7 million for the three and six months ended June 30, 2020 , respectively, compared to approximately $53.2 million and $72.6 million for the comparable periods in 2019 . Our effective tax rate varies from period to period due to the mix of taxable income and losses in the various tax jurisdictions in which we operate. We maintain a valuation allowance to fully reserve against our net deferred tax assets in the United States and certain other foreign jurisdictions. Our effective tax rate for the three and six months ended June 30, 2020 include the impact of valuation allowances against certain of our Brazilian and U.S. net deferred tax assets and, accordingly, we recorded no tax benefit against our Brazilian and U.S. losses.
Equity in net earnings of affiliates, which is primarily comprised of income from our AGCO Finance joint ventures, was approximately $10.1 million and $21.3 million for the three and six months ended June 30, 2020 , respectively, compared to approximately $11.6 million and $22.4 million for the comparable periods in 2019 , primarily due to slightly lower net earnings from our AGCO Finance joint ventures. Refer to “Finance Joint Ventures” for further information regarding our finance joint ventures and their results of operations.
FINANCE JOINT VENTURES
Our AGCO Finance joint ventures provide both retail financing and wholesale financing to our dealers in the United States, Canada, Europe, Brazil, Argentina and Australia. The joint ventures are owned by us and by a wholly-owned subsidiary of Rabobank. The majority of the assets of the finance joint ventures consist of finance receivables. The majority of the liabilities consist of 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 June 30, 2020 , our capital investment in the finance joint ventures, which is included in “Investment in
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affiliates” on our Condensed Consolidated Balance Sheets, was approximately $343.9 million compared to $339.0 million as of December 31, 2019 . The total finance portfolio in our finance joint ventures was approximately $9.5 billion and $9.6 billion as of June 30, 2020 and December 31, 2019 , respectively. The total finance portfolio as of June 30, 2020 included approximately $7.8 billion of retail receivables and $1.7 billion of wholesale receivables from our dealers. The total finance portfolio as of December 31, 2019 included approximately $7.7 billion of retail receivables and $1.9 billion of wholesale receivables from our 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. During 2020, we made a total of approximately $1.9 million of additional investments in our finance joint venture in the Netherlands. For the six months ended June 30, 2020 , our share in the earnings of the finance joint ventures, included in “Equity in net earnings of affiliates” within our Condensed Consolidated Statements of Operations, was approximately $21.0 million compared to approximately $22.3 million for the same period in 2019 .
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 facilities 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 (in millions):
June 30, 2020
Credit facility, expires 2023
$
461.6
1.002% Senior term loan due 2025
280.3
Senior term loan due 2022
168.1
Senior term loans due between 2021 and 2028
736.5
Other long-term debt
10.6
On April 9, 2020, we entered into an amendment to our $800.0 million multi-currency revolving credit facility to include incremental term loans (“2020 term loans”) that allow us to borrow an aggregate principal amount of €235.0 million and $267.5 million , respectively (or an aggregate of approximately $530.9 million as of June 30, 2020 ). Amounts can be drawn incrementally at any time prior to maturity, but must be drawn down proportionately. Amounts drawn must be in a minimum principal amount of $100.0 million and integral multiples of $50.0 million in excess thereof. Once amounts have been repaid, those amounts are not permitted to be re-drawn. The maturity date of the 2020 term loans is April 8, 2022. Interest accrues on amounts outstanding under the 2020 term loans, at our option, at either (1) LIBOR plus a margin based on our credit rating ranging from 1.125% to 2.125% until April 8, 2021 and ranging from 1.375% to 2.375% thereafter, 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 U.S. dollars plus 1.0% , plus a margin based on our credit rating ranging from 0.125% to 1.375% until April 8, 2021 and ranging from 0.375% to 1.375% thereafter. On April 15, 2020, we borrowed €117.5 million and $133.8 million (or an aggregate of approximately $265.5 million as of June 30, 2020) of 2020 term loans. We simultaneously repaid €100.0 million (or approximately $108.7 million ) of our revolving credit facility from the borrowings received. There were no other borrowings on the 2020 term loans subsequent to the initial borrowings in April during the three months ended June 30, 2020 . As of June 30, 2020 , we had the ability to borrow approximately $265.4 million of 2020 term loans. Refer to Note 5 to the Condensed Consolidated Financial Statements for additional information regarding our current facilities.
In October 2018, we entered into a multi-currency revolving credit facility of $800.0 million . The maturity date of the credit facility is October 17, 2023. Interest accrues on amounts outstanding under the credit facility, at our option, at either (1) LIBOR plus a margin ranging from 0.875% to 1.875% based on our credit rating, 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 U.S. dollars plus 1.0% , plus a margin ranging from 0.0% to 0.875% based on our credit rating. As of June 30, 2020 , we had approximately $196.1 million of outstanding borrowings under the revolving credit facility and the ability to borrow approximately $603.9 million under the revolving credit facility.
In December 2018, we entered into a term loan agreement with the European Investment Bank (“EIB”), which provided us with the ability to borrow up to €250.0 million . The €250.0 million (or approximately $280.3 million as of June 30,
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2020 ) of funding was received on January 25, 2019 with a maturity date of January 24, 2025. We are permitted to prepay the term loan before its maturity date. Interest is payable on the term loan at 1.002% per annum, payable semi-annually in arrears.
In October 2018, we entered into a term loan agreement with Rabobank in the amount of €150.0 million (or approximately $168.1 million as of June 30, 2020 ). We are permitted to prepay the term loan before its maturity date on October 28, 2022. Interest is payable on the term loan quarterly in arrears at an annual rate, equal to the EURIBOR plus a margin ranging from 0.875% to 1.875% based on our credit rating.
In October 2016, we borrowed an aggregate amount of €375.0 million through a group of seven related term loan agreements. These agreements had maturities ranging from October 2019 to October 2026. In October 2019, we repaid an aggregate amount of €56.0 million (or approximately $61.1 million ) of two of these term loans. In August 2018, we borrowed an additional aggregate amount of indebtedness of €338.0 million through a group of another seven related term loan agreements. Proceeds from the borrowings were used to repay borrowings under our former revolving credit facility. The provisions of the term loan agreements are identical in nature with the exception of interest rate terms and maturities. In aggregate, as of June 30, 2020 we have indebtedness of approximately €657.0 million (or approximately $736.5 million ) under a total group of twelve term loan agreements with remaining maturities ranging from August 2021 to August 2028.
As of June 30, 2020 and December 31, 2019 , we had short-term borrowings due within one year of approximately $102.6 million and $150.5 million , respectively.
Interest on U.S. dollar borrowings under our credit facility and the 2020 term loans is calculated based upon LIBOR. In the event that LIBOR is no longer published, interest will be calculated based upon a base rate. The credit facility and 2020 term loans also provide for an expedited amendment process once a replacement for LIBOR is established.
We are in compliance with the financial covenants contained in these facilities and 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.
Our available funding as of June 30, 2020 was approximately $1,269.0 million , consisting of unrestricted cash of approximately $399.7 million and available borrowing capacity of approximately $869.3 million . The addition of the new term loan facility on April 9, 2020 increased our borrowing capacity by approximately $530.9 million as of June 30, 2020 . Our available funding stabilized during the second quarter of 2020, and we are confident that we have sufficient available funding provided the length and severity of the pandemic on our operations is not more significant than currently estimated. While we currently expect to maintain the payment of our quarterly dividend, we have suspended share repurchases until business visibility improves.
Our accounts receivable sales agreements in North America, Europe and Brazil permit the sale, on an ongoing basis, of a majority of our receivables to our U.S., Canadian, European and Brazilian finance joint ventures. The sales of all receivables are without recourse to us. We do not service the receivables after the sales occur, 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 June 30, 2020 and December 31, 2019 , the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.5 billion and $1.6 billion , respectively.
Our finance joint ventures in Europe, Brazil and Australia also provide wholesale financing directly to our dealers. The receivables associated with these arrangements are also without recourse to us. As of June 30, 2020 and December 31, 2019 , these finance joint ventures had approximately $77.3 million and $104.3 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.
In order to efficiently manage our liquidity, we generally pay vendors in accordance with negotiated terms. To enable vendors to obtain payment in advance of our payment due dates to them, we have established programs in certain markets with financial institutions under which the vendors have the option to be paid by the financial institutions earlier than the payment due dates. When vendors receive early payments they receive discounted amounts and we then pay the financial institutions the face amounts of the invoices on the payment due dates. We do not reimburse vendors for any costs they incur for participation in the programs. Amounts owed to the financial institutions are presented as "Accounts payable" in our Condensed
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Consolidated Balance Sheets. Should we not be able to negotiate extended payment terms with our vendors, or should financial institutions no longer be willing to participate in early payment programs with us, we would expect to have sufficient liquidity to timely pay our vendors without any material impact on us or our financial position.
Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders’ equity, was 38.7% and 30.4% at June 30, 2020 and December 31, 2019 , respectively.
Cash Flows
Cash flows used in operating activities were approximately $221.6 million for the first six months of 2020 compared to approximately $212.9 million for the same period in 2019 . Our normal seasonal requirements for working capital, as well as the impacts of factory shutdowns, production cuts and supply chain constraints, resulted in negative cash flow from operations during the six months ended June 30, 2020 .
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 $1,263.2 million in working capital at June 30, 2020 as compared to $844.6 million at December 31, 2019 and $932.7 million at June 30, 2019 . Accounts receivable and inventories, combined, at June 30, 2020 were $193.1 million higher and $363.2 million lower than at December 31, 2019 and June 30, 2019 , respectively. Accounts receivable and inventories, combined, at June 30, 2020 were lower than June 30, 2019 primarily due to lower sales and production levels, as well as negative currency translation.
Capital expenditures for the first six months of 2020 were $117.5 million compared to $114.9 million for the same period in 2019 . We anticipate that capital expenditures for the full year of 2020 will be approximately $225 million and will be used primarily to support the development and enhancement of new and existing products, upgrade our system capabilities and improve our factory productivity.
Share Repurchase Program
During the three months ended June 30, 2020 , we did not purchase any shares directly or enter into any accelerated share repurchase (“ASR”) agreements as a result of our suspension of share repurchases until business visibility improves. During the three months ended March 31, 2020, we entered into ASR agreements with a financial institution to repurchase an aggregate of $55.0 million of shares of our common stock. We received approximately 970,141 shares during the three months ended March 31, 2020 related to the ASR agreements. The specific number of shares we ultimately repurchased was determined at the completion of the term of the ASR agreements based on the daily volume-weighted average share price of our common stock less an agreed upon discount. Upon settlement of the ASR agreements, we were entitled to receive additional shares of common stock or, under certain circumstances, were required to remit a settlement amount. All shares received under the ASR agreements were retired upon receipt, and the excess of the purchase price over par value per share was recorded to a combination of “Additional paid-in capital” and “Retained earnings” within our Condensed Consolidated Balance Sheets.
COMMITMENTS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES
We are party to a number of commitments and other financial arrangements, which may include off-balance sheet arrangements. At June 30, 2020 , we guaranteed indebtedness owed to third parties of approximately $25.4 million , primarily related to dealer and end-user financing of equipment. In addition, we had accrued approximately $21.5 million of outstanding guarantees of residual values that may be owed to our finance joint ventures in the United States and Canada due upon expiration of certain eligible operating leases between the finance joint ventures and end users. The maximum potential amount of future payments under the guarantee is approximately $56.3 million . We also sell a majority of our wholesale receivables in North America, Europe and Brazil to our U.S., Canadian, European and Brazilian finance joint ventures. At June 30, 2020 , we had outstanding designated and non-designated foreign currency contracts with a gross notional amount of approximately $2.7 billion . Refer to “Liquidity and Capital Resources” and “Item 3. Quantitative and Qualitative Disclosures about Market Risk-Foreign Currency Risk Management,” as well as to Notes 11 , 13 and 17 to our Condensed Consolidated Financial Statements, for further discussion of these matters.
Contingencies
As part of routine audits, the Brazilian taxing authorities disallowed deductions relating to the amortization of certain goodwill recognized in connection with a reorganization of our Brazilian operations and the related transfer of certain assets to our Brazilian subsidiaries.
Refer to Note 17 to our Condensed Consolidated Financial Statements for further discussion of these matters.
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OUTLOOK
Global industry demand for farm equipment is expected to decline due to impacts of the COVID-19 pandemic, weaker farmer sentiment and lower agricultural commodity prices in 2020 compared to 2019. Our net sales are expected to decline in 2020 compared to 2019, reflecting lower global market demand and negative foreign currency translation, offset by modest positive pricing impacts. Operating margins, excluding goodwill impairment charges in both 2020 and 2019, are expected to be below 2019 levels with the impact of lower sales and production volumes partially offset by the benefits of pricing and expense reductions.
Although not contemplated in the above outlook, the COVID-19 pandemic may continue to negatively impact our operations. Additional factory closures or other production constraints as a result of government mandates, supply chain disruptions or other factors could significantly negatively impact our net sales and earnings. In addition, a considerable amount of uncertainty exists for the balance of 2020 relating to industry demand and other macroeconomic impacts of the COVID-19 pandemic. Our focus is on employee safety, serving customers and operating as effectively as possible under these challenging conditions. Refer to “Risk Factors” in Item 1A of Part II of this Form 10-Q for further discussion of the COVID-19 pandemic.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates estimates, including those related to discount and sales incentive allowances, deferred income taxes and uncertain income tax positions, pensions, goodwill, other intangible and long-lived assets, and recoverable indirect taxes. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of critical accounting policies and related judgments and estimates that affect the preparation of our Condensed Consolidated Financial Statements is set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 .
FORWARD-LOOKING STATEMENTS
Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q are forward-looking, including certain statements set forth under the headings “Liquidity and Capital Resources” and “Outlook.” Forward-looking statements reflect assumptions, expectations, projections, intentions or beliefs about future events. These statements, which may relate to such matters as earnings, net sales, margins, industry demand, market conditions, commodity prices, farm incomes, foreign currency translation, general economic outlook, dividends, share repurchases, availability of financing, product development and enhancement, factory productivity, production and sales volumes, benefits from cost reduction initiatives, tax rates, compliance with loan covenants, capital expenditures, working capital and debt service requirements and the impacts of COVID-19 are “forward-looking statements” within the meaning of the federal securities laws. These statements do not relate strictly to historical or current facts, and you can identify certain of these statements, but not necessarily all, by the use of the words “anticipate,” “assumed,” “indicate,” “estimate,” “believe,” “predict,” “forecast,” “rely,” “expect,” “continue,” “grow” and other words of similar meaning. Although we believe that the expectations and assumptions reflected in these statements are reasonable in view of the information currently available to us, there can be no assurance that these expectations will prove to be correct.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in or implied by the forward-looking statements. Adverse changes in any of the following factors could cause actual results to differ materially from the forward-looking statements:
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general economic and capital market conditions;
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availability of credit to our retail customers;
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the worldwide demand for agricultural products;
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grain stock levels and the levels of new and used field inventories;
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cost of steel and other raw materials;
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energy costs;
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performance and collectability of the accounts receivable originated or owned by AGCO or our finance joint ventures;
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government policies and subsidies;
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uncertainty regarding changes in the international tariff regimes and their impact on the cost of the products that we sell;
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recent suspension of agricultural products into China and the impact to global agricultural equipment demand, if any;
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weather conditions;
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interest and foreign currency exchange rates;
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pricing and product actions taken by competitors;
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commodity prices, acreage planted and crop yields;
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farm income, land values, debt levels and access to credit;
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pervasive livestock diseases;
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production disruptions, including due to component availability;
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production levels and capacity constraints at our facilities, including those resulting from plant expansions and systems upgrades;
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integration of recent and future acquisitions;
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our expansion plans in emerging markets;
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supply constraints;
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our cost reduction and control initiatives;
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our research and development efforts;
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dealer and distributor actions;
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regulations affecting privacy and data protection;
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technological difficulties; and
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the impact of COVID-19.
Any forward-looking statement should be considered in light of such important factors. For additional factors and additional information regarding these factors, see “Risk Factors” in Item 1A of Part II of this Form 10-Q and “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 .
We have joint ventures in the Netherlands and Russia with an entity that currently is operating under a time-limited general license from the U.S. Department of the Treasury authorizing the maintenance or wind down of operations and existing contracts. In the event that the license expires without further relief being granted or without other authorization from the U.S. Department of the Treasury, we may no longer be able to continue the joint ventures’ commercial operations and we would be required to assess the fair value of certain assets related to the joint ventures for potential impairment.
New factors that could cause actual results to differ materially from those described above emerge from time to time, and it is not possible for us to predict all of such factors or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and we disclaim any obligation to update the information contained in such statement to reflect subsequent developments or information except as required by law.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.